Please don’t shoot the messenger, but I’m here to tell you that, while setting it and forgetting it (SIFI) can sometimes be a generally helpful strategy, it is not ALWAYS best. In this article, I’ll describe how SIFI works and seven ways it falls short, especially if you manage your portfolio on your own. I’ll finish by showing how a fiduciary advisor can provide the benefits of SIFI without the downsides.

What Is Set It and Forget It Investing?

Infomercial inventor Ron Popeil is widely known for his Showtime Oven where you, “SET IT AND FORGET IT”. This is not that! SIFI investing involves buying securities and holding them until the apocalypse, often referred to as Buy to Die or Buy and Hope. Once you own an investment, you let it (hopefully!) grow and compound without selling it. This strategy is simple, reduces trading costs, and is often successful. 

Large-index funds are the most appropriate vehicles for SIFI investing because they provide automatic diversification, require no decision-making, and are economical. They fit well with a dollar-cost averaging investment strategy.

The problem is that SIFI is not the best investment strategy for everyone at all times. Indeed, it’s not wise or necessary to always buy and sell assets, but doing nothing is not always the best path to success.

What Might Go Wrong If You Adopt This “Strategy”?

From time to time, SIFI can produce undesirable results. What are those times? Here is a sampling of seven reasons you must go beyond setting and forgetting your investments.

1. You May Lock in Inferior Returns

You may do excellent research and have a good track record for picking winners, but what should you do with the dogs? SIFI would have you hold them until the rest of the market shares the insights you developed when you purchased the stock. 

Unfortunately, they all can’t be winners, and circumstances may evolve that jeopardize the stock’s future growth despite your earlier analysis. And in the worst case, you may have an Enron on your hands. Rather than sitting on stinkers, you might do better selling them, recognizing the tax loss and reinvesting the money where it can do you some good.

2. Your Appreciated Stocks Might Be Overpriced

Don’t become the victim of your own success. A stock that was a screaming buy at $15/share might now be horribly overpriced at $60. You might do better than simply forgetting it. Instead, consider selling some or all and reinvesting the proceeds in more promising securities. 

3. You Could Be Paying Too Much

Suppose you purchased a good-looking managed (as opposed to indexed) mutual fund despite its high operating fees. A similar fund may be available (or newly available) that provides the similar results despite much lower costs. Alternatively, the fund manager may have left since your original purchase, leaving you with perhaps a less stellar captain navigating the ship. You can’t fix these problems if you forget about the initial investment. Oblivion can be costly.

4. Your Risks May Become Intolerable

The key to successful long-term investing is to seek the best returns after adjusting for risk. There are numerous ways to measure this, including the famous Sharpe ratio and its variants. The problem with SITI is that it doesn’t account for:

• Changes in risk tolerance: As you age and your wealth grows, your attitude toward risk may evolve. You might no longer have decades to recover from mistakes, and your circumstances may prompt a reassessment of your risk tolerance and objectives.
• An investment’s risk characteristics might change: This can happen for internal and external reasons. Internally, the company’s fortunes may have undergone significant setbacks that alter its risk/reward trade offs. External events might also modify an investment’s characteristics, everything from financial shocks to socio political shifts.

An investment that once made sense might now be too risky for your portfolio, and you should replace it with a more suitable candidate.

“Will your money be there when you need it?  We’re here to help make sure it is.”

Paul Schatz, Heritage Capital

5. You Might Need to Respond to Unforeseen Events

Life events may overtake your plans. For example, sudden medical costs may require you to liquidate part of your investment portfolio. SIFI gives no insight on how to do so with minimal impact on your long-term plans. By contrast, the advice of a fiduciary advisor can help you explore your options and guide you to the best solution.

6. Set and Forget Often Encourages Apathy

The worst result of the “forget it” part is that it may induce an apathetic attitude to your investments. True, you don’t want to overreact to events, but neither should you be oblivious to long-term economic changes that can profoundly impact your portfolio. 

7. You May Be Underinvested in Alternative Assets

Don’t become complacent because you’ve diversified your stock and bond holdings. Many other asset classes (e.g., real estate, precious metals, collectibles, commodities, foreign currencies, private placements, etc.) can benefit your portfolio by reducing the risk that they’ll all go south at the same time. 

Improve Upon SIFI

At the very least, your portfolio must be monitored so that it continues to match your goals. Rebalancing is required to keep your asset allocations on track. A registered investment advisor in Connecticut provides the tools and expertise to get the benefits of SIFI without all the risks. A financial advisor can:

• Determine your goals and how to reach them by developing a personalized, custom plan
• Schedule periodic reviews to compare planned and actual results.
• Take actions to keep you on your path to reach your goals, including rebalancing your assets when necessary, making adjustments due to changing market conditions and asset attributes, and expanding your portfolio to include new asset classes 

The best wealth managers will always be available to address your questions or concerns about the market, the economy, and how these might impact your plan. Hiring professionals to manage your assets is close to a set it and forget strategy  —  they will do the work for you, and you get the best of both: Less hassle for you, with expert management of your assets.

Get a second opinion in New Haven

If your current financial advisor is not meeting your needs, you don’t really know how your portfolio is performing. At Heritage Capital you can “Invest for Tomorrow. Live for Today. ™” We offer a no-obligation six-month free trial. Call today!

If you’d like to learn more about how to switch investment advisors, please click here to read our Quick Guide “Switching Investment Advisors”.