(PUB) Morningstar FundInvestor

June 2 014

Morningstar FundInvestor

15

where you’re headed if you can’t save.” Better yet, don’t live alone; find a roommate.

Or, more colorfully, “Human nature turns out to be a virtual petri dish of financially pathologic behavior.”

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.

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

Lesson #4: Just Say No We have met the enemy, and he is us.