It’s possible to successfully pick stocks, says Nobel Prize winner and Yale economist Robert Shiller in a new interview, but like any game it’s competitive and hard — and best left alone by most.

Shiller himself favors value investing, buying the stocks of “boring” companies whose valuations seem temporarily depressed. Nevertheless, he admits that he doesn’t know his own track record as an investor, and he personally advises hiring an investment advisor as a first step.

In a wide-ranging discussion of housing, bubbles and market psychology, it’s interesting to note that Shiller’s views of stock-picking closely echo those of Charley Ellis, author of the investment classic Winning the Loser’s Game, a book that grew out of a 1975 financial journal article that set the intellectual stage for a generation of passive investing theory.

In the book, Ellis compares investing to tennis. Unless you play at the level of a top-seed pro, Ellis contends, you’re much better off just trying to avoid mistakes. Retirement investors, he says, should not even attempt to compete against “hardball” pro money managers.

Shiller compares investing to a somewhat more cerebral but no less competitive sport — tournament chess. A trained chess player, Shiller explains, at least knows that he has a shot. A novice player walking in off the street doesn’t belong at the table.

“For most people, trying to pick among major investments might be a mistake because it’s an overpopulated market. It’s hard,” Shiller said. “You have to be realistic about how savvy you are.”

Ego marketing

The illusion that you can and should be out there in the markets, running with the big dogs, is a powerful marketing tool. Wall Street constantly plays to our egos with tantalizing visions of exorbitant profits at the click of a mouse.

The secondary pitch from the financial industry plays not to ego but fear. What if the market declines again? Or some external event — war, inflation, currency collapse, and so on — changes the rules of the investment game itself?

The end is always near, it seems, yet the results for individual investors paint a completely different picture. Market research firm Dalbar looked at two decades of retail investor behavior and concluded that the cost of going it alone is steep indeed: The average equity mutual fund investor lagged the S&P 500 by 3.96% on an annualized basis, while average fixed-income investor lagged the Barclay’s Aggregate Bond Index by 5.36%

“But, but,” you might argue, “I’m not average!” Frankly, you’d be lucky to be average. When small investors seek trouble, they usually find it. You might be able to rack up a few years of returns above the benchmarks, but memory is selective. If even Robert Shiller isn’t sure of his real investment performance, chances are you aren’t either.

Are you counting the year you liquidated those dot-com holdings that never recovered? The year you sat in cash for eight months and missed a double-digit run in stocks?

You know perfectly well how much money you have saved over the years. Online calculators are not hard to find. Did you compound that money successfully, taking into account every year and every investment and all the fees you paid and continue to pay?

The real cost

Here’s what underperformance really costs: A 60/40 stock-and-bond split had a weighted average return of 7.46% over the 20 years ending in 2012, according to Dalbar’s numbers. The typical retail investor experienced a weighted return of just 2.94% — well below long-term inflation.

Pretty big gap, right? But consider the effect of compounding. Invest $10,000 and add $10,000 a year for 30 years and you end up at $1,213,943 in a weighted, market-return portfolio. The typical retail investor, however, came in at $505,962.

Over three decades, inflation will ensure that even a half-million won’t spend like it used to. It doesn’t take a Nobel Prize to understand the pain such a gap represents.

What should you do as a retirement investor? First and foremost, know thyself. Battle through the ego-driven marketing blizzard and come to grips with your real investing skills. In time, Shiller’s other piece of advice — hire an advisor — will begin to resonate.

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