No, that’s not a good guide to life. But shutting out the din of current events is a reasonable approach when investing.
To be clear, I’m not recommending that anyone ignore Russian’s brutal invasion of Ukraine. It would be outrageously callous to disregard the suffering of Ukrainians, simply because the facts on the ground are so disturbing. If you are moved to take action that can make life better for someone in Ukraine — or for a relative or neighbour who has gotten bad news — by all means, do it.
And, of course, it’s impossible to ignore the news if you’re a financial pro who must constantly think about the markets — or a reporter who writes about them, as I do.
But I’m also a working man who has saved money for a child’s college education, a house and retirement, and I’ve come to realise that the news of the day shouldn’t affect what I do as an investor.
In fact, when I’m in investing mode, I try to tune out the noise in the world and focus only on the long-term commitments I can afford to make in stocks and bonds, which I hold in low-cost, broadly diversified index funds.
Sorry for the Confusion
Total immersion in the news and calm isolation from it are very different approaches. Keeping them in separate mental compartments can be difficult, to say the least. Some perceptive readers have noted that I seem to be more worried than usual about the state of the world, and they say those concerns have been seeping into my columns on investing.
For that, I apologise.
In my life, if not in all of my columns, I do try to keep those compartments separate and watertight. Nor am I alone in that approach.
It’s a lesson taught by leading economists, including Richard H. Thaler, a University of Chicago professor who won the Nobel Memorial Prize in Economic Sciences in 2017 for his pioneering work in behavioural economics.
“Sometimes you’ve got to just turn off the news,” he said in a telephone conversation. “Don’t pay any attention to it.”
Thaler, who was an author of the book “Nudge” and appeared as himself in the movie “The Big Short,” is one of the world’s great authorities on how humans behave when they make financial decisions. I got to know him well in the dozen years when he wrote Economic View columns for The New York Times, and on Wednesday night I called him.
I wanted to help the readers I’ve perplexed, and asked what advice he would give.
A Story About Market Timing
“You can tell the following story,” Thaler said. “I was interviewed by one of the financial news networks on one of their morning shows, and they asked me, ‘What should people do the next time the markets are getting very volatile?’ I said my advice would be to turn off this channel and switch to ESPN.”
That’s not a great thing to say to financial journalists, I said.
“Right,” he said. “They switched immediately to a commercial.”
But while he was kidding, he added, he was also serious.
Follow the news, of course, and let your emotions flow. But don’t let them affect your investment decisions, he said. For that, be calm and stick to a plan. If you don’t have a good plan, then build one dispassionately.
“My thing is, that we know that any sudden moves by individual investors are certainly no more likely to be right than wrong,” Thaler said. “If anything, they’re more likely to be wrong than right because our instinct is to sell when markets go down and to buy when they go up — and buying high and selling low is just not a good strategy.”
The news right now is worrisome. But is it a good time to sell — or to go against the tide and search for bargains? It’s hard to tell, and while there are a lot of opinions out there, no one really knows.
That’s why moving in and out of financial markets — “timing the market,” as the jargon goes — is impossible to do well consistently and over long periods, much academic research shows.
“Just stick to your plan,” Thaler said. “That’s not the same as ‘Buy on the dips.’ It means stick to your plan and don’t think you’re a genius and you can beat the market. Because you probably can’t.”
So what constitutes a good plan? You will need to figure that out on your own or with the help of a trusted adviser, but here are some basics.
Start With an Emergency Fund
First, put away enough money to take care of an emergency. Once you have stashed some survival money in a checking or savings account, Thaler said, consider buying inflation bonds, also known as I bonds.
You may not hear about these from a bank or a brokerage: They can’t make money from the bonds, which the Treasury issues directly. At the moment, the bonds are paying 7.12% interest. That’s not a typo. They have drawbacks but not major ones.
“These I bonds are perfect for this purpose because they’re very safe and in a real emergency, you could liquidate them,” he said.
Look to Low-Cost Index Funds
When you’re really ready to invest, use low-cost index funds as your core holdings. Most people should plan on investing for decades, even if you’re entering retirement, Thaler said.
“People in their 60s these days have many years of life expectancy,” he said.
I’m in my 60s and betting on my own longevity, investing regularly in the stock market as well as in bonds. I’m also following a recommendation that appeared in a Thaler column in 2011: doing whatever it takes to delay Social Security until I’m 70. “Waiting is the best investment you can make,” he reminded me.
Beating the market consistently by picking individual stocks or bonds is rare, especially after fees. It’s not impossible: Warren Buffett did it for years, but even his returns faltered, and that great investor recommends holding an S&P 500 index fund and Treasury bonds as core retirement holdings.
Despite wars and trade conflicts, markets are global now, so holding global stock and bond funds is probably the best approach.
Asset Allocation and Risk
Figuring out how much to hold in stocks and how much in bonds is the next step. There’s no one-size-fits-all answer.
No risk, no return, is an old investing adage. Stocks historically have returned more than bonds precisely because there is more risk in owning them.
Historical returns provide no guarantee for the future, but they may serve as a guide. Vanguard posts returns for nine stock-bond portfolios based on US index funds, and they are informative. From 1926 to 2020, for example, the worst year for the S&P 500 stock index was 1931, when it lost 43.1%; the best was 1982, when it gained 54.2%. The worst year for the pure bond portfolio was 1969, when it fell 8.1%; the best was also 1982, with a gain of 45.5%.
Stock and bond mixtures fell somewhere between these extremes. My portfolio is about 60% stock and 40% bonds. Find an asset allocation that works for you.
If the current stock downturn is already ruining your sleep, you may hold too much stock. But try not to let the news get to you. You’re in this for the long haul. Don’t sell just when you’re worried and buy just when the market has risen. That’s not a plan. It’s a problem.
“Do something fun,” Thaler said. Get away from the news.
As a journalist, that doesn’t work for me. But as an investor, sure. I take brief vacations from the news. I’m going out for a run now.
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