Own Worst Enemy

IF YOU’RE LIKE ME, you’re always tempted to do something with your portfolio.

How should I invest if inflation stays high? What if interest rates come down? Am I well-positioned for that? Do bonds offer a better risk-reward than stocks right now and, if so, should I adjust my long-held stock-bond mix?

There’s been recent research and commentary, including two pieces from HumbleDollar’s Adam Grossman that you can find here and here, about how doing less is usually better and how to recognize when making a change makes sense.

But why is standing pat usually better than acting on our latest ideas? Among other things, we can get thrown off track by fear, greed and the news. Sometimes, that fear is the fear of losing money. Sometimes, it’s fear of missing out on a big market rally. I’m feeling that these days, with all the rage over tech stocks because of AI, or artificial intelligence.

Here’s an obvious example of fear at work: selling when the stock market is down big. At such times, the headlines will be scary and the prophets of doom will seem prescient. You have no way of knowing whether the market will keep falling. In the short term, it’s a coin toss. The stock market certainly can and likely will fall 30%-plus multiple times during your investment career.

But it’s a bad decision to sell. How do I know? Because the odds are overwhelming that you’re reacting to fear and that you’ll miss the rebound. If that happens, you’ve lost an opportunity to make money that can’t be recovered. That happens to many investors over and over.

Similarly, in many other situations, the urge to act should also be resisted. The fact is, the information environment is stacked against you. Truly insightful journalism—especially that which provides good and actionable information for investors—is more difficult to produce than you might imagine, especially on a daily or weekly deadline.

Journalists need someone to quote. Folks with an ax to grind or an expensive fund to promote are always available and usually quite articulate. Their bloviating makes for good copy but often bad advice.

In most circumstances, the right action is to buy and hold low-cost funds. Yet few in the Wall Street ecosystem will get rich off that advice. The media don’t want to say or print it every day, and people don’t want to hear or read it every day.

Think of the difference between gaining knowledge from a classic investment book and getting caught up in the hyperventilation that often characterizes our daily discourse. Think Stocks for the Long Run versus “How to Inflation-Proof Your Portfolio” or “Five Stocks to Cash in on AI—and Five to Dump.”

I’m not immune. I monitor my portfolio closely. Too closely. I get an itch when I’m caught wrong-footed. With my value bias and international diversification, I’m lagging this year as U.S. mega-cap tech stocks take off again. For me, that causes a lot of anxiety and insecurity. At age 61, I can’t afford another long stretch of paltry returns for foreign and value stocks.

When I’m tempted to trade, it’s almost always in response to headlines or to fear. It’s me kicking myself for missing out on something. It’s me trying to outsmart the market. I try to bottom fish—but often end up catching a falling knife instead—or I fall prey to performance chasing. I’ve invested on margin, meaning I’ve borrowed against my stocks to buy more stocks in an effort to make bigger bucks, with predictably disastrous results. I’ve made almost every mistake in the book. I have met the enemy of my financial future: It is me.

As I wrote in 2019, simply contributing modest amounts regularly to the first two diversified funds I bought in the 1980s would have made me a millionaire today. The two funds were rarely lionized in the press. They were low-cost, actively managed Vanguard Group funds that, in the go-go 1990s, bored me to tears. Now, remembering how I gave up on them practically brings me to tears.

The information environment is even stacked against the experts, despite the billions they spend trying to get a performance edge. They’re subject to the same psychological forces as amateurs, and the company research and technical analysis they use have been shown not to provide a bankable advantage.

Moreover, you have an edge over most money managers: You can play for the truly long haul. It’s okay to lag in one market environment or another. My old Vanguard Windsor II and Vanguard STAR funds certainly did, but they still delivered wealth-building returns over the decades. No one is looking over your shoulder daily, quarterly or annually. That gives you the freedom to do nothing, nothing at all.

William Ehart is a journalist in the Washington, D.C., area. 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 and check out his earlier articles.

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