Jeremy Siegel has written good books. One of them is “The future for Investors.”

Morgan Housel in one of his recent pieces has quoted an interesting data from Jeremy Siegel’s book ‘The future for investors’.

As you may be aware, constituents in an index change periodically. For example, Sensex does not have the same 30 companies today as it had ten years ago. Some stayed, some went out and some new ones came in.

The S&P 500 index in U.S. contains 500 companies. Jeremy Siegel took the 500 companies which were in the index in 1957. He also assumed that someone bought those 500 companies and never changed his portfolio in tune with subsequent changes happened to S&P 500 index. After 1957, till he wrote his book, around thousand companies went out of index and another thousand got added.

The investor who stuck with original 500 companies in 1957, allowing dying companies to die and reinvesting proceeds from buyouts to the surviving companies beat the investors whose portfolio changed along with the index. Not only the surviving companies beat the index, it beat most other active fund managers as well.

$1 invested in ever changing S&P 500 portfolio grew to $93 in 2003. Whereas $1 invested and never churned portfolio, despite the death of some companies, grew to $124.

Sensex, Nifty, CNX Midcap, BSE-500 etc. all keep changing periodically. Mutual funds which have these indices as bench mark also keep changing their portfolio regularly. The mandate of these mutual funds is to outperform their respective benchmarks.

I’m not asking you to get stuck with the same set of companies like the example given above. That is an extreme scenario. You are investing in mutual funds whose portfolio changes when the schemes’ management team feel it’s apt. Their benchmark constituents also change regularly. In addition to these changes, some of you ask me as to why your portfolio is not changed regularly.

I believe that we are amongst the tiny minority of advisors who churn their clients’ portfolio only rarely and that too only when there is a strong reason to do so. Once we make you buy right, we then focus on making you sit tight. Already indices are changing and mutual funds portfolios are also changing periodically. There is absolutely no need to add one more layer of change from our side; unless it is required, which is not often.

I like to reproduce part of an email which I sent to a client recently. He is a very disciplined and long term oriented investor and had a query.

“Each fund has a benchmark. For large cap fund, it would be Nifty; for multi-cap fund, it would be CNX 500 etc.

What we continuously monitor is that whether the funds beat their respective benchmarks consistently and whether they are in the first or second quartile amongst their peer group.

We do not worry about temporary under performance. As long as we are convinced that the fundamentals (in terms of process, fund management, stocks selection, portfolio change etc.) are intact, we don’t churn even if the performance falls.

In the market, many advisors and their clients lose money by always chasing recent performance. Couple of good quarters, there is a huge inflow and after couple of bad quarters, there is a huge outflow. We look for consistency running into 10 years, over different market cycles. That is why our churn ratio would probably be the least among advisors.

We not only look at returns but see how they are obtained.

You can search the net. There are studies which show how chasing performance is a losing proposition.

Of the investors who were lucky to get Peter Lynch himself as fund manager, 50% of them lost money because they invested after few good quarters and withdrew after few bad quarters.

“My primary role is not to keep changing your portfolio. My role is to select a right portfolio and make you stick with it through good and bad times. Not that I would not suggest change, but that would be less frequent.

As an advisor, my focus is on influencing your investing behaviour, make you do few right things and avoid doing lot of wrong things.”

So don’t tinker. Allow it to grow.


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