Why You Should Keep Most of Your Assets in Your Lockbox


Like the one that Al Gore wanted to create for the Social Security surplus, a lockbox is a place where investment returns can pile up without interference from their owner. With a lockbox you make a plan and stick to it, regardless of what is going on in the stock market.

A lockbox is a great approach for these reasons:

  • Using a lockbox prevents you from making the worst mistake that plagues most investors – letting emotions dictate investment strategy. As a whole, we have seen that individual equity investors significantly underperform the market. A major reason for this poor performance is the human tendency to look around at the crowd and buy what everyone else is buying and sell what everyone else is getting rid of. In other words, we buy assets that have recently appreciated and sell those that have recently depreciated. Thus, people rushed to get their money into technology stocks in 2000 at the peak of the com bubble and rushed out in 2002 at the low. The same story played out with real estate stocks a few years later. By keeping a lockbox, you will be immune to this “buy high sell low” destructive tendency, and thus automatically outperform the average investor.
  • Using a lockbox keeps you from over-trading. People who trade frequently think they can outsmart the stock market. But even most professional investors and traders don’t outperform the market average. The majority of professionally managed mutual funds underperform the stock market averages every year. Without taking time to do huge amounts of research, there is little reason to think that you will be any more successful with your own trades.
  • Using a lockbox minimizes the transaction costs that eat away at the returns generated by active strategies. Every time you buy or sell a stock, you rack up trading costs. You can minimize these costs by trading infrequently.

Creating a lockbox is relatively simple. Choose your asset allocation, pick good assets, and keep your account on autopilot going forward. Ignore the talking heads on CNBC and refrain from changing your strategy or investment mix unless at designated times and for very good reasons.

Here is how to build your personal lockbox:

  1. Create a target asset allocation plan and change it infrequently (perhaps never).
  2. Implement your plan with either index funds or ETFs. Choose one fund (or absolutely no more than two) for each asset class in your plan.
  3. Rebalance your portfolio to return it to your target asset allocation at a set schedule of once or twice every year. No changes should be made outside of that schedule. Rebalancing is important because some asset classes will grow faster than others over time, and thus come to dominate a larger portion of your portfolio’s assets.