Page 155 - Morgan Housel - The Psychology of Money_ Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)

319,000% from 1995 to 2018—among the highest returns in history—but
traded below its previous high 95% of the time during that period.
COBACOBA

Now here’s the important part. Like the car, you have a few options: You
can pay this price, accepting volatility and upheaval. Or you can find an

asset with less uncertainty and a lower payoff, the equivalent of a used car.
Or you can attempt the equivalent of grand-theft auto: Try to get the return
while avoiding the volatility that comes along with it.

Many people in investing choose the third option. Like a car thief—though
well-meaning and law-abiding—they form tricks and strategies to get the
return without paying the price. They trade in and out. They attempt to sell
before the next recession and buy before the next boom. Most investors
with even a little experience know that volatility is real and common. Many

then take what seems like the next logical step: trying to avoid it.

But the Money Gods do not look highly upon those who seek a reward
without paying the price. Some car thieves will get away with it. Many
more will be caught and punished.

Same thing with investing.

Morningstar once looked at the performance of tactical mutual funds,
whose strategy is to switch between stocks and bonds at opportune times,

capturing market returns with lower downside risk.⁵⁰ They want the returns
without paying the price. The study focused on the mid-2010 through late
2011 period, when U.S. stock markets went wild on fears of a new

recession and the S&P 500 declined more than 20%. This is the exact kind
of environment the tactical funds are supposed to work in. It was their
moment to shine.

There were, by Morningstar’s count, 112 tactical mutual funds during this
period. Only nine had better risk-adjusted returns than a simple 60/40 stock-
bond fund. Less than a quarter of the tactical funds had smaller maximum
drawdowns than the leave-it-alone index. Morningstar wrote: “With a few

exceptions, [tactical funds] gained less, were more volatile, or were subject
to just as much downside risk” as the hands-off fund.