Resisting the Siren Songs

"In investing, what is comfortable is rarely profitable."
Robert Arnott

Resisting the Siren Songs
Aug 17, 2010           By: Mark T. Hebner, IFA President
 


 

I am pleased to share with you my latest painting and subsequent video titled "The Siren Songs of Active Management", based on Homer's epic poem The Odyssey. I commissioned the painting as part of my ongoing efforts to protect recovering active investors from heeding the sometimes overwhelmingly alluring temptations to trade. 

In the heat of a struggle, such as that which we experienced from the end of 2007 through the beginning of 2009, we frequently fail to recall that we have faced and dealt with adversity before, and have been well-rewarded for our conviction.

Homer's poem is particularly relevant to this message. In The Odyssey, Greek hero Odysseus suffered trials and tribulations as he spent a decade trying to reach his home in Ithaca after he successfully battled the Trojan War. There, his wife Penelope faithfully awaited his return while his son Telemachus vainly attempted to hold interloper suitors at bay as they consumed their food, pillaged their home, and curry favor with his mother.

During his long journey, Odysseus faced turmoil as he was nearly thwarted by the siren songs which beckoned him to surrender to their beauty, but Odysseus knew their deception would cause him to crash his ship upon the rocks if he heeded their message. He was curious to hear their songs, but he also knew they would lead him and his crew to certain death. He therefore ordered all his crewmen to stuff their ears with beeswax and tie him to the mast so he would be able to hear their alluring songs without being able to act upon their tempting messages. When he heard their beautiful song, he demanded to be untied. But remembering the orders he gave before he was influenced by the siren's song, his crewmen bound him tighter. In the end, and after much turmoil over those ten years, Odysseus triumphantly returned home to his wife and son. He killed all of the suitors who invaded his home and took advantage of his family's situation in his absence.

Investors can learn a lot from this story. While the tale was written some 2,300 years ago, it remains strikingly relevant today in the wake of what many call their "lost decade" and as Wall Street sirens sing the songs of buying and selling; selling and buying, and opportunistic suitors pillage the profits of the unsuspecting. 

Indeed, the last decade has been filled with trials and tribulation for many investors, but those who kept their eyes fixed on the long-term reward of the journey, kept their wits about them, even tying themselves to the mast to avoid painful mistakes that might have given short-term relief, but would have ended in disaster, have emerged better off for their valor and sheer stick-to-itiveness.

Just as it was a painful and perilous decade for Odysseus, so too has it been for investors. The oft-quoted S&P 500 Index finished the 10-year period ending December 2009 with a total return of -9.1%, making it a favorite siren song for active managers who seek to besmirch indexing in a failed attempt to deflect from their own poor track records. But those who globally diversified their portfolios, bought, held and rebalanced  risk-appropriate index portfolios that kept fees low and styles pure, emerged from the last decade far better off than they started. In fact, a globally diversified index portfolio with similar risk to the S&P 500 Index earned more than 75% during the same period that witnessed the S&P 500 Index turn negative (see chart below). This is the power of diversification and the long-held, time-honored virtue of indexing.

The Lost Decade? IFA Index Portfolios versus Simulated SP500

 
Like Odysseus, successful investors need to fill their ears with wax or tie themselves to the mast so the siren songs of Wall Street cannot have the opportunity to crash their retirement savings onto the rocky shores or pillage the profits that were intended for family, not commissioned interlopers.

 


Click to see the full painting