f you think it is hard to stick to your New Year’s resolutions, consider how some of the investing world’s leading experts don’t always take their own advice.
Often, they diversify by the seat of their pants, fail to adjust their portfolios to changing values, ignore tax issues and take a flier on individual securities even when they know better. Nobody — and I mean nobody — is perfect.
I once asked Harry Markowitz, who shared the Nobel Prize in economics in 1990 for his mathematical explorations of the relationship between risk and return, how he diversified his portfolio.
Dr. Markowitz first got to choose how to divide his assets between a stock fund and a bond fund not long after publishing his pioneering article ‘Portfolio Selection’ in the prestigious Journal of Finance. Following his own breakthroughs, he should have made intricate calculations, based on historical averages, to find the optimal trade-off between risk and return. But, Dr. Markowitz told me, that isn’t what he did: ‘Instead, I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. My intention was to minimize my future regret.’
Dr. Markowitz paused, then added wryly: ‘So I split my contributions 50/50 between bonds and equities.’
He is just the tip of the iceberg.
John C. Bogle, founder of the Vanguard funds, believes investors should rebalance their portfolios on a regular schedule by selling a portion of whatever has gone up the most or buying some of whatever has gone down. ‘I think rebalancing makes a substantial amount of sense,’ Mr. Bogle recently said on the Jean Chatzky radio show. With his own money, however, ‘I don’t rebalance … I leave it alone. I have not touched my asset allocation since March of 2000.’
Don Phillips, managing director at research firm Morningstar Inc., recommends putting tax-inefficient assets in retirement accounts. But somehow Mr. Phillips has never put his own inflation-protected Treasury bonds and real-estate investment trusts in his tax-deferred 401(k), where he knows they belong because they throw off taxable income. So he pays entirely preventable taxes year after year. ‘I still think of my retirement assets as meeting long-term goals and have trouble putting anything but equities in them,’ says Mr. Phillips, ‘even though I know that I should think of my portfolio as a whole, not as pools of money tied to independent goals.’
In the classic 1973 book, ‘A Random Walk Down Wall Street,’ Princeton economist Burton Malkiel argued that a blindfolded chimpanzee throwing darts at the stock tables of The Wall Street Journal could pick a portfolio as well as a money manager can.
That made Dr. Malkiel one of the intellectual godfathers of index funds, the low-cost, autopilot portfolios that dispense entirely with stock-picking. Surely, as the man who wrote the book on it, he has all of his money in index funds. ‘Actually, I have a quarter to a third of my money in individual stocks and actively managed funds,’ he says.
He adds with a laugh: ‘I call myself a random walker with a crutch.’ Why doesn’t his belief in efficient markets determine every step he takes with his own money? ‘It’s not necessarily because I think I’ll be any better off than with indexing,’ Dr. Malkiel says, ‘but I still want to buy a few individual stocks because it’s fun.’ Late in 2008, for instance, he invested in Templeton Dragon when shares of this closed-end fund momentarily fell to a 20% discount from net asset value.
My point here isn’t that these financial luminaries are hypocrites but, rather, that they are human. We all need help living up to our best intentions.
It is easy to make a resolution to research your investments more, trade less, cut your costs, sell your underperformers, put your money into index funds or take no risk you don’t understand. But intention is a lot easier than implementation.
To turn a resolution into resolve, write down exactly what you plan to do, along with the time and place when you will implement that intention (‘next Sunday morning at 10:30, at the desk in my study, right after we get home from church’). Include a mental ‘packing list’ of any information or resources you will need to implement your plan of action.
Finally, make a point of telling someone else what you have resolved and when and how you will enact it. Going public makes going through with it easier.
-By Jason Zweig
Copyright (c) 2009 Dow Jones & Company, Inc.