Consistency: On Parenting and Investing

Regular readers know that we have two little girls, now ages 9 months and not-quite-three-years.

The toddler can be….difficult.  We’ll just say she is not a good sleeper. Never has been.  When she was a newborn, we spent about as much time trying to get her to sleep as she spent sleeping. Recently we were nearing a pull-your-hair-out period with the toddler not wanting to go to bed and getting up at 5:00am every day.

We have read all of the sleep books.  All of them. There is a near-infinite number or philosophies on children’s sleep.  Some swear you will do mortal damage to a child by allowing her to cry for a microsecond.  Others will convince you a child will never be independent as an adult if you come to their aid in any situation. And every philosophy in between.

Here’s what I think: if one of these philosophies was “correct,” there would only be one philosophy. So what’s a parent to do?

Pick one.  It doesn’t have to be the “right” one or the one that your favorite celebrity endorsed.  It doesn’t have to be the one your parents used or your neighbor uses or the one that Oprah just talked about.  The single most important thing is that you pick a method and remain consistent.    So we picked our method for the toddler, buckled down and went for it.  And now?  Now she loves bedtime, goes without a complaint and (most nights) sleeps until morning.  Was the method we chose the “right” one?  Who knows.  But it worked because we worked it.

Ok, this isn’t a parenting blog. But there are important lessons here for investors. Some of us professionals like to discuss the merits of one particular asset allocation strategy over another.  We debate how much to have in small caps vs. large caps, how much to have in foreign stocks vs. US, whether or not REITs have a place in the portfolio, and whether or not there is persistence in the small cap and value risk premiums.  And this is fun! But the fact is that we can’t know in advance who is right in these debates, and compared to the value of actually having a plan and sticking to that plan, they matter very little.

So go ahead and have a home bias in your US/Foreign mix, or take a market weight.  Take the argument that the small and value premiums are persistent, or just buy a total-market index. Throw some REITs in the mix for a slightly lower correlated asset, or don’t.  And then Don’t Mess With It. As I’ve mentioned before there is no way for us to know in advance which asset allocation will be the “most right” over the next twenty or thirty years.  What you can control is the consistency of your behavior. I can tell you right now that you will be much more successful in sticking with a long-term asset allocation than you will convincing yourself you can “just make a little tweak here and there” and changing your portfolio a little each year. So quit looking at last year’s returns and second guessing the allocation decisions you’ve made and focus instead on the things actually under your control: your costs, tax exposure and your consistent behavior.

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