The topic for this quarter’s Insights is investment activity.  As in, how does one know when to make some changes or when to stay put?

Our default instincts prefer more activity to less.  Action sounds better than inaction, and being active seems preferable to remaining passive.  In so many facets of life, taking action beats standing still.  When it comes to investing, this instinct is reinforced by financial media.  Pick up any financial publication or turn on a cable TV investment show, and you will most often find the promotion of one investment action after another.

But investing is not like many other aspects of life.  Yesterday’s investment laggards often become tomorrow’s star performers and vice versa.  Randomness can look like trends and patterns.  Investments that appear risky might actually be the most worthwhile, whereas the seemingly sure thing can be far riskier in reality.  In other words, our instincts regarding investment “action” can lead us astray.  Consider the following study from Morningstar[1], which will probably look familiar to you.

The chart on the right compares the asset-weighted average fund return over the past 10 years for all U.S. mutual funds (bar on the left) versus the return achieved by the investors in those very same funds (bar on the right).  A “buy and hold” investor in all U.S. mutual funds would have achieved a 10-year compound annualized return of 8.2 percent, more than doubling their money.  Yet, the “investor return” was only 7.0 percent, leaving a “returns gap” of 1.2 percent (compound).

Average Annual Return for All U.S. Mutual Funds

How did investors manage to miss out on the returns generated by these mutual funds?  In a word, activity.  Investors tend to add money after periods of positive returns and pull money after suffering price declines.  Investors also sell mutual funds that have underperformed and rotate towards past outperformers, only to see the fates of these funds subsequently flip-flop.

The motivation for some investment activity is to avoid experiencing investment losses.  If it was possible to consistently avoid losses, we would see evidence of professional investors demonstrating the ability to do so.  However, the evidence suggests the opposite.  The majority of actively-managed funds fail to outperform their index or benchmark.

Unfortunately for our “activity” instincts, the right move in investing is often to do nothing.  Having the patience to stand pat comes from a recognition that the returns we seek by investing are compensation we earn for bearing risk.  We have to live with risk and discomfort to earn financial returns.  And, yes, a link exists between the degree of risk and discomfort and the level of expected return (although the relationship isn’t perfect).  More risk and discomfort correlate with higher expected returns.  That part is like life.  No pain, no gain.

We raise this topic in light of the conflict in Iran and the recent move lower in US stocks (down approximately -4 percent for the quarter).  Geopolitical risks are inherent in stock investing.  The war in Iran may come to a swift conclusion, or it may drag on for some time.  The ripple effects, such as the impact of higher energy prices and inflation, may not yet be fully evident.  Guessing what will happen next or what the second and third-order effects might be is not a sound investment strategy.  These risks are part of what we deal with as stock investors.

Private Credit

Now let’s contrast the preceding commentary with another important headline from the first quarter.  You may have read reports of pressure mounting in a part of financial markets known as private credit.  This term refers to the provision of loans to medium-sized private companies.  In terms of borrower size, think smaller than giants such as Amazon or Home Depot but much larger than your local mom and pop business.  Loans for these companies previously came from banks.  Regulatory restrictions triggered banks to pull back from this market, which caused investment companies to fill this need for capital.

We began making investments for clients in private credit roughly five years ago.  Over that time, private credit greatly outperformed corporate bonds, which are like loans but to larger, publicly-traded companies.  However, we began to observe changes in the private loan market, mostly related to a substantial influx of new money.  With more money to put to work, competition was heating up amongst lenders.  To make new loans, lenders reduced the rate of interest charged and weakened the protections in loan agreements.  For our clients, these developments translated to lower expected returns and greater risk.  We decided last year to exit the fund that we used in this category (called Cliffwater Corporate Lending Fund).

We were pleased with the results of this fund and with the timing of our action to sell.  So, what makes this investment “activity” different?  Our sell decision was based on a forward-looking assessment of risk and return, sound research, and a dash of contrarianism.  Our decision distinguished between the investment risks and uncertainties that we must live with from those that we do not.  While we won’t get all of those decisions right, we are grateful for the opportunity to make them for you now and in the future.

PRINT Quarterly Insights – April 2026

[1] “Mind the Gap 2025”, published by Morningstar.  Data for the 10-year period ending December 2025.  Another study on excessive investment activity is the 2000 classic from Barber and Odean called “Trading is Hazardous to your Wealth”.  The authors found that frequent traders substantially underperformed the broad market return.