Are you rational or irrational?

[mickeyd]

Though we may consider ourselves rational investors, many of us are really irrational when it comes to short-term situations.

Once you understand and accept that you really are an irrational investor when it comes to short-term decisions, then you can set up some rational long-term ground rules for your portfolio. And here is a summary of the only six reasonable guidelines that we know work for irrational investors:

Never attempt to time the markets; it's impossible

Live below your means and save regularly

Asset allocation is the key to a winning portfolio

Buy and hold quality, and buy intending never to sell

Compounding guarantees long-term wealth-building

Do it yourself; millions do, especially millionaires.

Bottom line: Nobody wants to think of themselves as an irrational investor. But the chances are four out of five that you are, and that you're probably in denial if you still believe you're rational.

Not only should the 75 million "Irrational Investors" use these 6 strategies but also many of the assets of the 20 million "Rational Investors" are already invested using the same 6 strategies. Why? Because they're long-term investors and they know their brains will react irrationally to short-term market conditions.

Bottom line No. 2: Paradoxically, the biggest secret of the "Rational Investor" is that they know they're irrational! So they use the six rules to protect their portfolio from their own worst enemy, their brains.

Like Pogo famously says: "We have met the enemy and he is us."

 

[Nords]

Sweeping generalizations...

Flags immediately fly when I see words like "impossible". I could agree with "harder than most are willing to work for", perhaps, but certainly not impossible.

And I wonder how many millionaires do their own investments or their own tax returns. Of course many do here, but I doubt it's anywhere near a significant minority of the millionaire population-- let alone "many".

 

[wabmester]

mickeyd, I think you're confusing rational with indoctrinated.

It'd be nice if we lived in a world where simple compounding of interest would make us rich, but at 2%, it ain't gonna happen.

It'd also be nice if the future market were to behave just like the past, and historically uncorrelated assets remain uncorrelated, but there is no law that makes it so.

And as far as holding "quality", surely you've heard about the persistent risk premium in junk and "value"....

Thinking: the thinking man's sport

 

[unclemick]

"You're a Blockhead! Charlie Brown." I think of that when I remember DCA investing thru the minor flat in the market 1966-1982 or so.

Pogo and Yogi are good also.

"Don't just stand there, do nothing."(Bogle) --- heh,heh -- in my more serious moments. Of course if the computers have hickups and stop rebalancing - hmmmm - now that would be serious.

 

[Cut-Throat]

mickeyd,

I happen to agree with you, I have been irrational.

If I would have been thinking this year, I would have invested in stocks about 3 times, then gold, then oil, then real estate. No wait! - Sell the real estate! Buy the stocks! - Yes Healthcare stocks ! Dump a bunch in Healthcare it's sure to go up in the future. TIPS yes, No get rid of TIPS the CPI is corrupt!

The thinking route changes its mind so often, that I get a headache.

Like Unclemick, my best moves have been to do nothing!

I may not get rich at 2% per year, but I can certainly live a great life without returning to work. Actually with a 1% real return, I can live just fine to a very old age of 100! Even the most conservative investors think this is very, very doable!



I read a post about a year ago and tend to believe its wisdom.

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1   Early retirement planning / Investment Strategies / Re: Need Suggestions on Investment strategy  on: Jan 6th, 2004, 1:02am  
Started by phoneguy |  Post by wabmester
phoneguy, there are three basic types of investors:

1) Those who don't want to deal with investing.  The best approach for them is to find a fee-based CFP who can move their money into DFA funds.  Like this guy:
http://tamasset.com

2) Those who think they can beat the market.  There are 100's of strategies employed, and a few of them actually work.   Most of us who think this way currently have a large cash (or gold) position because we think everything is overvalued and/or that a perfect storm is brewing that will cause everything to become much more fairly valued real soon.

3) The smart ones who realize you can't time the market, and you can't even figure out which sectors will outperform others, so you fully invest all of your money, but you spread your bets around so that when some sector is crashing, hopefully another is running, so you end up winning, and who cares by how much.

The latter camp typically invests directly in low-cost Vanguard index funds (or ETFs) based on allocations suggested by Modern Portfolio Theory, e.g.:
http://www.efficientfrontier.com/t4poi/t4poi.htm  
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[John Galt]

I also subscribe to the "Do Nothing" school of thought, and while I can appreciate unclemick's fondness for
"hobby stocks", it holds no romance for me. Now, you would think since I am mostly into long term bonds
and real estate that "do nothing" would fit perfectly.
Not so. Bonds get called if not mature, and sometimes
I have to decide where the interest should go. And the
real estate..............there is not much, but always maintenance issues, tenant issues, insurance issues, tax issues,
etc. Standing outside looking at my situation, many would think that it would take up no time at all.
In fact, it's way more than I wish to deal with (lazy),
but can't see how to get much simpler and still feel
good about where I am invested. SS is the ultimate
"do nothing". Sit on your ass and cash the checks.
I give the Dems their just applause on that program as I would be in
deep doo-doo without it.

JG

 

[shanna]

I would be considered irrational by those who stick to the 100- your age allocation in stocks/ bonds. I got tired of wondering what the market will do in the next 10-15 years and pulled out recently, after regaining nearly all (but not quite all) what I lost in the bear market. I am content to realize 1-2% (1% now; should be 2-3% as interest rates rise) returns on bonds and CDs, and compensate for the equity risk premium of an additional 2% or so (forecast for near future) by simply saving more of my income.

Perhaps it's irrational- I need to save 1.5-2 times as much as I would if I were invested in equities (and equities actually made consistent gains over the next 10-15 years)... but I consider my investment behavior to be quite rational, as I am betting on a sure thing.

 

[RockMiner]

Perhaps it's irrational- I need to save 1.5-2 times as much as I would if I were invested in equities (and equities actually made consistent gains over the next 10-15 years)... but I consider my investment behavior to be quite rational, as I am betting on a sure thing.  

It's not irrational if it works!

Your plan would not have yielded the best results over many 15 year periods in the past, but to call it irrational (along with various other "politically incorrect" approaches) implies an understanding of markets we do not have.  Much of what passes for "scientific truth" today will be found lacking tomorrow.

That said, most believe a certain amount of diversification does make sense as long as it doesn't put your goal at great risk.

 

[haha]

It's not irrational if it works!

That isn't much of a test for rationality. By that test, it was rational for Japan to attack Pearl Harbor up until the Battle Of Midway. Afterward, irrational.

Rational is a process, not a result.

I agree 100% with everything else you said. (As if my agreement were important to you )

Especially the part about how much of what we accept as self evident truth today, we will reject tomorrow. Neither the acceptance nor the rejection are any more rational than whether one's wife or girl friend wears hip hugger jeans or thinks they are gross. In either case, just fashion!

Mikey

 

[John Galt]

Hi Mikey! Yep, it's "just fashion". I think hip hugger jeans are
"gross", but I also think libs are "gross".
There is no accounting for taste

Getting back to "rational", I agree with Rock's post in the context it was offered. For example, my "no stocks"
portfolio is split roughly in half. One part insures me a
stream of income which I have concluded is quite safe
and adequate for our needs.
The other part (real estate) provides inflation protection
and adds a bit to the income stream at the same time.
For me, it's all quite "rational", but my aversion to equities make it look irrational to some who post here.
Aside from an academic exercise, I don't care what
stocks have done over the past 100 years. Completely
irrelevant in my investment planning.

JG

 

[unclemick]

Here's my irrational take on rational.

Real estate gets no respect - the location thing and the academic's inability to put it neatly on a spreadsheet in a manner that suits their calculation methods.

Post 1946 inflation has not treated fixed investments kindly.

Ben Graham pointed out that real estate did not suffer from Mr Markets daily quotations but never the less could experience fluctuations in value.

P.S. - 10% side bet on Vanguard's REIT Index.

I recognize that I suffer from a pro stock bias(brainwashed) and have to struggle with fixed securities and real estate.

Inflation protected securities may created a new ballgame but I'm not there yet - except to the extent of looking at Vanguard's Target Retirement Series which overweight's Inflation Protected (in retirement).

 

[wabmester]

Speaking of rational thinking, how do you like your new ThinkPad, unclemick2? Lightyears ahead of that WebTV thing you were using, isn't it?

 

[unclemick]

Yep

Still on the low end of the learning curve though. Haven't downloaded anything much yet - afraid I'll become a 'born again' SWR'er and a pain in my own ass.

Perhaps after the holidays. First will be the spreadsheet of my hobby stocks on the step daughter's computer. Will try to send it thirty feet across the house from her AOL to mine.

 

[hocus]

I'm an irrational investor.

But I know it. That makes it OK.

I think.