If you make the mistake of watching the stock market on cable TV, the drumbeat of nearly every minute of airtime is this: Anyone can pick stocks. It’s easy.
It’s not a surprising message. The bulk of advertising on financial TV is from big Wall Street firms and brokerage houses. They too rely heavily on the “you can do it” argument. It’s a means of selling you online tools and services once only professionals needed.
Real-time stock quotes? Got it. Analyst reports by the truckload? Just log in. You don’t need an advanced degree in finance to make money, just an Internet connection and an appetite for risk.
The result, unfortunately, is a huge of amount of unnecessary and costly trading, all of which helps the bottom line for brokers, of course, but does very little good for your retirement. In fact, it often does great damage.
“There is a lot of opportunism here: Advisers or whoever saying you should get out of health care and into technology or into financials,” Vanguard Founder John Bogle recently said in an interview. “That’s a way to manage money that doesn’t work. Who knows what will do best? I don’t even know anybody who knows anybody who does.”
Big-time pension fund and endowment managers often explain this with an illustration that looks like a colorful periodic table of elements. Each asset class — domestic stocks, foreign stocks, bonds, commodities, real estate and so on — is given a distinct box and a matching hue.
Looking back a few years, it’s obvious how wildly each type of investment can move up or down. One year, emerging market stocks absolutely kill. The next year they’re at the bottom of the heap. Same goes for foreign equities, commodities, blue chips and so on. It’s a vast and illogical game of musical chairs.
Judging from the illustration, you reach one of two conclusions: Either you fall in love with the idea that it’s possible to predict the next winning hand. Or you accept that even attempting to guess is a huge risk that no one should take.
Where do endowment and pension folks land on this question? They look to lower risk. Naturally, they have opinions about what might happen next week or next year, but experience has taught them that “guessing wrong” is far too easy to do and can wipe out a lot of unrecoverable money.
Buy low, sell high
Instead, institutional money managers own a carefully designed collection of all of these investments and rebalance them periodically. The result is a portfolio that provides solid, repeatable results and one that compounds over time.
Burton Malkiel, the Princeton professor who wrote the investing classic A Random Walk Down Wall Street, explains rebalancing this way: “We all wish that we had a little genie who could reliably tell us to ‘buy low and sell high.’ Systematic rebalancing is the closest analogue we have.” Malkiel is a member of the Investment Committee of my firm, Rebalance.
Rebalancing a portfolio brings investors a higher return at a lower risk. Over the long run of a retirement investment plan, that’s the kind of outcome we all want. Our egos might prefer to “right” about a given investment idea, but our wallets benefit more when we accept that being wrong is an unacceptable retirement risk.