Most investors are wired for action. They feel a need to buy or sell frequently. The financial media amplifies those instincts, with a constant stream of calls to buy or avoid a given stock. As an investment writer, I’m guilty of contributing to an environment encouraging investors to do something.
However, sometimes the smartest move for investors is to do nothing at all. A strong case can be made that now is such a time. Here’s why deliberate, disciplined inaction could be the best “action” in the current market dynamics.
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Waiting for the right pitch
Perhaps the best argument for doing nothing with your portfolio is that it’s exactly what Warren Buffett has often done during his long career as an investor. Buffett once said:
You do things when opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long, dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.
Buffett’s longtime business partner, the late Charlie Munger, shared the same philosophy. Munger summed it up well: “The big money is not in the buying and selling, but in the waiting.”
The “Oracle of Omaha” has also compared investing to baseball. Buffett stated, “I call investing the greatest business in the world, because you never have to swing.” He explained, “There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”
Buffett wasn’t referring to trying to time the market, by the way. Studies show this strategy almost always backfires. However, Buffett understands the psychology involved with investing. Fear can cause some to panic-sell stocks with strong long-term prospects. Fear of missing out (FOMO) can cause investors to buy stocks at unjustifiable valuations.
Why do nothing right now?
Why is doing nothing with your portfolio perhaps the smartest move right now? There’s a tremendous level of uncertainty.
No one knows how long the Iran war will last. If a peace agreement is reached, no one knows how long it will last. Concerns have risen about a resurgence of inflation. The Federal Reserve seems to be paralyzed about what to do with interest rates. Meanwhile, the S&P 500 (^GSPC +0.84%) is near its all-time high.
Running for the hills isn’t a prudent choice. Uncertainty doesn’t always lead to dismal stock market performance. There’s even an adage about stocks “climbing a wall of worry,” describing a phenomenon in which the market often rises despite multiple headwinds.
Betting the farm on stocks in this environment could be foolhardy, though. Buffett and his successor, Greg Abel, have built a record-high cash stockpile of nearly $400 billion for Berkshire Hathaway (BRKA +0.16%) (BRKB +0.18%) because valuations are too high. Several key valuation metrics indicate the market is priced for perfection — a state rarely attained.
In this kind of environment, what’s the best option for investors? Do nothing.
Two important caveats
Don’t confuse doing nothing with your portfolio with ignoring your portfolio, though. You should still pay attention to your investments. Make sure your original premises for buying the stocks you own remain intact.
There’s also another key caveat to the “do-nothing” strategy: It doesn’t apply to every investor. If your portfolio isn’t diversified, you need to take action. If you have too much exposure to highly risky holdings, you may need to trim those positions. If you need cash in the near term, selling some stocks could make sense.
However, for most investors, staying the course could be the best option. Oftentimes, the most money is made by simply sitting tight.
