By John Wasik
CHICAGO, July 5 Bill Bernstein is both a
neurologist and a money manager, which gives him a unique
perspective on the human impulses that he says typically
short-circuit people's portfolio decisions. Author of six books,
including "The Four Pillars of Investing," he says we need to
rewire our brains to do the right things at the right times.
Long a rare voice of wisdom in an increasingly bi-polar
market environment, Bernstein says the trick to smart investing
is "learning how to behave. You have to fight your worst
Here are some behavioral guidelines he suggests:
1. Be careful with advisers.
It's perfectly understandable if you don't want to go it
alone in investing because there's a lot to know and only a few
people are experts. If you choose an adviser, make sure that
they are a fiduciary; they must put your interests above that of
their firm. They also shouldn't overcharge you, meaning annual
fees of less than 1 percent.
And if they aggressively push loaded (sales commissions
charged), hedge funds, alternatives or actively managed funds?
"Make a 180-degree turn and run," says Bernstein.
2. Buy and hold is okay - then rebalance.
With market volatility soaring in this young century, you
have to evaluate how much risk you can take. You need an
investment policy statement, which is a roadmap to what kind of
stocks/bonds/alternatives allocation is best for your time of
life, vocation and personal goals.
Yet you also need flexibility. Maybe a 60 percent stocks, 40
percent bonds allocation is too risky for you. If your plan is
working, keep it and rebalance every year to stick to your
allocation goals. At the very least, be flexible if your plan
"Anyone who says buy and hold is dead should have a neon
sign on their head that says `I don't know what I'm talking
about," Bernstein says. "It's not buy and hold, it's buy, hold
and rebalance. Anyone who's done that over the past 20 years has
been mightily pleased with the results, since that person did a
lot of buying in the early 1990s, early and late 2000s; and
selling in the late 1990s and before the recent crisis."
3. Keep educating yourself.
History is important to Bernstein as he advises his clients.
His book "The Birth of Plenty," for example, provides an ample
history of capitalism and prosperity. He also posts a reading
list on his website. One of his favorites is Fred Schwed's
"Where are the Customers' Yachts?"
You should also sample basic online portfolios that employ a
handful of mutual or exchange-traded funds. One of the most
boiled-down portfolios, which Bernstein recommends, is Scott
Burns's "couch potato portfolio," which consists of one-half
Vanguard Inflation-Protected Securities and one-half
Vanguard Total Stock Market Index fund. There are
several other iterations at Assetbuilder.com, which are
combinations of low-cost index funds from the Vanguard group.
4. Avoid hot new stocks.
As the recent Facebook initial public offering
demonstrated, millions of investors got singed on the notion
that they could do a "quick flip" of the stock for easy gains.
"How many investors do you think have exerted the considerable
effort of estimating Facebook's future advertising revenues?
Using the word `investor' to describe these folks is akin to
calling Tony Soprano a 'Catholic,'" Bernstein wrote earlier this
year on his Efficient Frontier Web site. He figured that
Facebook would have to grow its per-share earnings of at least a
factor of eight to justify a triple-digit price-earnings ratio.
It pays to listen to analysts who sound warnings about stocks
and have done sober analyses.
"If neighbors are talking about a stock, stay away from it.
If everybody owns it, sell," he says. Bernstein has noticed that
the worst investors are empathetic - they feed off of other
people's emotions. Investing should be more analytical. Look at
the numbers: What's the stock's dividend growth rate? What's its
cash flow? What are its business prospects?
5. Admit your ignorance.
Perhaps the best emotional insight you can make is to admit
that there's a lot you don't know about investing. It's okay to
say this to yourself because you can avoid much stomach-knotting
financial anxiety. Make the time to learn what's best for you
and your family. Turn off the TV and try to ignore the
headlines. You can't be an expert at something that baffles even
the most seasoned professionals.
"We don't expect people to fly their own airplanes or take
out their kids' appendixes, and yet we expect them to manage
their retirement portfolios. In my careers I've done all three,
and investing is by far the hardest," he says.