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Dealing with Investment Confusion

I often receive emails from investors expressing a mixture of confusion and panic. That confusion can come in several forms:

  • “My portfolio isn’t doing nearly as well as I’d hoped. What am I doing wrong?”
  • “I just started to learn about investing, and I’m lost! Help!”
  • “I read previously that I should invest by doing X, but now I’m reading that I should be doing Y instead. Who should I believe? What should I do?”

Step 1: Do Nothing.

I’ve written before about my version of the 30-day rule:

Every time you’re tempted to adjust your portfolio in some way, don’t. Instead, write down your idea, your reasoning behind it, and the date. 30 days later, if the reasoning still makes sense, then (perhaps) give it a go.

I still think that’s a good idea. Even if you’re in a truly dire situation, making major investment decisions a) while you’re panicked or b) before you’ve fully researched all your options is unlikely to work out well.

Step 2: Consider Both Sides.

One of the reasons investors get so confused is that the people giving investment advice all seem to disagree with each other.

For example, my friend Neal is a CFP with more than 20 years of experience, and I have no doubt that he intends the very best for his clients. Yet he and I disagree adamantly on some investment topics:

So here’s a person with credentials, experience, and ethics recommending a very different approach to investing than what I’d recommend.

If we then consider the fact that there are many people/parties in the investment services industry who don’t have your best interests in mind, it’s no surprise that you see conflicting advice everywhere you turn.

But that doesn’t have to be a problem. If you take your time and research both sides of an issue, you’ll be able to decide for yourself who presents a more compelling argument. For example:

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Comments

  1. The problem is, Mike, that if one reads these six books – or even the comments on Amazon.com – one is more likely to be confused than the reverse. There are passionate advocates of both active and passive investing, and each is dead certain the other is wrong. But the typical man in the street is not likely to have the ability to determine which approach is more sound, 30 days or no, and it’s entirely possible that both approaches could be successful if applied correctly.

    Sorry to say this, but I don’t think this is one of your better opening articles. It really looks like a sketch for what needs to be a far more detailed discussion. I would have preferred at least a brief summary of the basic arguments of each book and the pros and cons of each, as perhaps then the layman could better make up his mind.

  2. “It really looks like a sketch for what needs to be a far more detailed discussion.”

    Yes. It is. In my opinion, each of those topics is best addressed by two or three book’s-worth of reading. :)

    “The problem is, Mike, that if one reads these six books – or even the comments on Amazon.com – one is more likely to be confused than the reverse.”

    Comments on Amazon should hopefully have nothing to do with how one manages one’s portfolio, no?

    As to the effect of reading several books, all I can say is that I disagree wholeheartedly. I’m of the opinion that the only sound way to develop (and have confidence in) an investment plan is to fully educate yourself about it — both the pros and the cons. And to do so, it’s essential to read the other side of each argument as well.

    Yes, you’ll encounter conflicting information and conflicting recommendations. But, in my opinion, that’s far better than only exposing oneself to one viewpoint.

    Edited to add: I now realize that my above statement about Amazon comments is perhaps hypocritical of me, as I use Amazon reviews as one of the ways I promote my own books. Heh.

    Also, as a writer and avid book lover, I admit that I’m probably more optimistic about the power of a book than many other people.

  3. Can you beat the market by actively trading? Maybe. Are you the next Warren Buffett? Maybe. Are you the next Michael Jordan? You’ll probably say no given the obvious fact that you can’t touch the bottom of the net.
    I’ve always told my clients that if they have the time, the resources, and the knowledge then be my guest and go for it. But before you do you might want to review the story of Long Term Capital Management (2 nobel prize winning economists, head of risk arbitrage at Salomon Brothers, former Fed governor). They didn’t just underperform they wreaked havoc on the entire global system. Think you’re smarter than those guys? How about the fund managers at Bear Stearns?
    Listen to who you want and read who you want. Buffett, Ellis, Malkiel, Solin, Bogle and on and on.-many years of experience saying that most investors are better off in low cost indexed funds. But it’s not only individuals in index funds it is also most of the largest pension funds in the country as well. And they have highly paid staffs to bring the best and brightest to their trustees.
    If you’re picking active funds you’ve got a 2 in 10 chance of picking a long term winner. If you’re picking individual stocks good luck !

  4. Niklas Smith says:

    I think both steps are useful, especially “Do Nothing” (for a time, not for ever, obviously!). Hasty decisions are often regretted later. I do find that I can understand a topic better if I read books that disagree on it, so long as none of them are completely foreign to some of my basic assumptions. I suppose it partly depends on the writing style – I’m willing to read something I disagree with so long as the writer is not convinced that everyone who disagrees with him/her is evil!

  5. Niklas Smith says:

    By the way, the first post by Neal you link to is very interesting – he reminds us that an investor who wants to be active shouldn’t (necessarily) invest in the same index funds or ETFs as a passive investor.

    Or to reduce his argument to a sentence: passive investors should choose passive funds, active investors should choose whatever their system/strategy says is best right now.

    I have to say I would put myself largely in the passive investor camp (not that I have any significant investments outside a bank account yet!), but I am tempted towards shifting portfolio allocations in a Ben Graham way in response to changing valuations. (A subject of a previous post of yours.)

  6. Great advice. One of the most common mistakes is to trade too much. An investor or even a trader needs to spend 99% of his time researching. Not trading.

  7. After 20 years of investing and studying investing I’ve concluded index funds will let you sleep at night. The problem is most of the professional stock pickers get it wrong most of the time. With all there computers and MBA’s , how do you think you can do it? If thats not bad enough Wall Steet always has there hand out trying to take as much as a third of the money you make with there commissions and fees. Buy your Index mutual funds and ETFs at your favorite Brokerage house with no commission. Like Schwab, Fidelity and Vanguard. And read up on John Bogle.

  8. I don’t think anyone claims passive investing doesn’t work- the claim is that active investing could beat it. The problem is the “could” part. The chances are really bad, however most people’s feel it is easy.

    Anyone considering active investing should read
    A Random Walk Down Wall Street: The Best and Latest Investment Advice Money Can Buy by Burton G. Malkiel as it has excellent arguments based on research that shows just how hard it is to actively manage a portfolio.

    -Rick Francis

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