15
Morningstar FundInvestor
June 2
014
where you’re headed if you can’t save.” Better yet,
don’t live alone; find a roommate.
Many employees believe that they can invest their
way to retirement, by overcoming inadequate savings
with terrific investment results. Expecting alpha is
a lot easier than socking away cash. That is living a
dream—and Bernstein correctly delivers the
wake-up call.
Lesson #2: Know What You Own
Finance isn’t rocket science, but you’d better under-
stand it clearly.
This claim I dispute. Among this past decade’s most
successful mutual fund owners have been the most
clueless—those who defaulted into target-date funds
in their
401
(k) plans. As a group, they rode out the
2008
bear market with remarkably few redemptions
while still contributing, putting themselves in posi-
tion to recoup all their losses and then some.
Lesson #3: Learn Market History
Those who ignore financial history are condemned
to repeat it.
Bernstein continues, “There is no greater cause of
mischief to the small investor than the confusion
between the health of the economy and stock returns.
It’s natural for people to assume that when the
economy is in good shape, future stock returns will be
high, and vice versa. The exact opposite is in fact
true: Market history shows that when there’s econo-
mic blue sky, future returns are low, and when the
economy is on the skids, future returns are high.”
There is also the related paradox that the more enthu-
siastic people are about stocks, the worse that
stocks tend to perform.
Whereas the fundamentals of expected returns can
wait, understanding market psychology cannot.
The sooner investors learn to ignore what they hear,
and just let the portfolio run its course, the better
off they will be.
Lesson #4: Just Say No
We have met the enemy, and he is us.
Or, more colorfully, “Human nature turns out to be a
virtual petri dish of financially pathologic behavior.”
This is the booklet’s behavioral-economics section,
carrying warnings about how people instinctively
crave action; see patterns that do not exist; are
“comically” overconfident; falsely extrapolate lessons
from the recent past; and perceive sense in technical
analysis where only nonsense exists. If the wisest
man is the man who knows that he does not know,
then it follows that the wisest trader is the trader
who does not trade.
As with the knowledge of market history, a basic
understanding of behavioral issues will save investors
from self-inflicted wounds.
Learning how to avoid errors in decision-making is
a lifetime skill and applicable to far more topics than
merely investing.
Lesson #5: Hold That Wallet!
The financial-services industry wants to make you
poor and stupid. Wait now, Mr. Bernstein, are you
not a financial advisor, and do you not put your clients
into investments than are managed by a financial-
services firm (
DFA
)? Well yes he is, and yes he does.
But Bernstein didn’t mean those members of the
financial-services industry.
The rest of the industry he beats with a large, metal-
studded stick. Bernstein writes, “It’s sad but true:
By the time you’ve completed the reading for the pre-
vious four hurdles, you’ll know more about finance
than the average stock broker or financial advisor. ...
In fact, the prudent investor treats almost the entirety
of the financial industry landscape as an urban-
combat zone. Most mutual fund companies spew
more toxic waste into the investment environment
than a Third World refinery.”
One can argue with the severity of the message,
but not its conclusion: Keep costs low. Wall Street
encourages investors to spend more. The savvy
investor will realize that most of those arguments
are wrong and will accept higher costs only rarely
and reluctantly. With investing, less is more.
œ
