Needing to Know

William Ehart

YEARS AGO, WHEN THE kids were teenagers, single Dad here was cooking dinner. You guessed it, hot dogs.

I skillfully picked one up from the hot pan with my fingers and tossed it in a bun.

When my daughter began to imitate me, I nearly shrieked. She lacked my years of experience in gauging exactly how hot the sides of the dog would be, how far from the splattering grease I needed to position my fingers, how many milliseconds I had to release the dog into the waiting bun.

But something else was behind my horror and sense of guilt.

It wasn’t just that my hands already had been cut and smashed and scalded many a time and that I wanted better for my little girl’s precious fingers. Rather, it’s that we make decisions differently when loved ones are involved. By ourselves, we may jaywalk, drive aggressively and invest with borrowed money. I’m guilty on all counts. We are willing to take greater risks for ourselves than for our children.

The hot dog incident came to mind as I helped my daughter with her Roth IRA. I was recommending a 2060 target-date fund comprised of index funds, but thought about mixing it up a bit. How about a modest small-cap value stake, like Daddy has? That would reduce her exposure to the foreign stocks I’m skeptical of and to the runaway mega-cap tech stocks that scare me, both heavily represented in the target-date fund.

But in my effort to guide her financial future, I fell into old, bad habits of thought. I was tempted to act like a know-it-all. Since I wanted to protect her, I had to know what small caps would do next, didn’t I?

I wanted to trot out the charts, look at the moving averages, gauge the distance from the 52-week highs and lows. Are the small-cap value exchange-traded funds (ETFs) still red hot as they rebound from the March lows—or have they pulled back for a better buying opportunity? Are they the worst possible investment ahead of a potential pandemic-induced depression?

I felt all the destructive emotions, the angst of uncertainty, the fear of being wrong and the lust for the illusion of control. It was all nonsense.

Experience teaches us that we can succeed as investors—in fact, we must proceed as investors—without knowing how things will turn out. The more we realize we don’t know, the more prudent and balanced our decisions are likely to be.

What did I need to know to recommend small caps to her? I needed to know not the 50-day moving average, but the 40-year body of research showing that shares of undervalued, lesser-known companies have been the best investments over the long term and should continue to be. I needed to know, as I do from my own experience with multiple bear markets, that a slug of small-cap value could position her for big gains when the overly popular large-cap growth stocks—which today dominate the major market indexes—inevitably fall to earth.

But rather than just encouraging her to buy the ETF on my say-so, which she did, I should have explained the rationale more fully to her. Daddy’s little girl has to “grow up” in her investing experience someday. That means getting her fingers burned, her heart broken, and finding out whether she can watch an investment plunge 50% and stick with it. She needs to know that’s likely to happen several times in her investing career. She needs to know that risk is the price we pay for the chance at a 2,000%-plus return over 40 years. She needs to know that it’s a mistake to sell when the market breaks because such a move is almost certainly driven by fear—the fear that keeps us out of the market until after it rebounds and starts hitting new highs, as the U.S. market has always done.

She’s old enough for “the talk,” even though my talk will be far more boring than the one her mother gave her as a teenager. Maybe I’ll just have her read this.

William Ehart is a journalist in the Washington, D.C., area. Bill’s previous articles include Played for FoolsRight from Wrong and Red Flags. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart.

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