Eric Schurenburg: You probably think of yourself when it comes to investing as being a totally rational being. Well, here's a news flash. You're probably not. And with me to talk about how sometimes when it comes to investing we are our own worst enemy is Alan Roth, a certificated financial planner and a columnist for Moneywatch.com. Alan, thanks for joining us. Alan Roth: Thanks, Eric. Thrilled to be here. Eric Schurenburg: I think I'm a totally rational investor because right now all I want to do is get out of the stock market. What's irrational about that? Alan Roth: Well, it's certainly a feeling that I have right now, that it would make the pain stop. Because I've seen my own portfolio fall. But it is rational now that the market has a half off sale, what if the sale is going to 75%. What it looks like. My crystal ball is broken. You know, it's never worked, so I really don't know what the market is going to do. But I do know that studies show that we consistently get into the market in years like 2006 and 2007 when U.S. stocks doubled and international stocks tripled. And now that the market is plummeting, more money is pouring out of stock mutual funds than ever before. It doesn't work. We time the market really poorly, as humans. Eric Schurenburg: What's the alternative is to own the whole market and set an asset allocation. And when it comes to the asset allocation, if it can't be right, at least be consistent. Let's say you have a 60% stock portfolio. Then in 2006 and 2007 you'd be selling to rebalance. And the hit that happened in 2008 and so far this year would not be nearly as painful. You'd actually have to be buying now. Eric Schurenburg: GM is flirting with bankruptcy, unemployment is soaring, the economy shrank 6% in the last quarter. I think you'd have to be irrational to want to buy stocks at this point. Alan Roth: Well, all of this is terrible news, and there's probably more terrible news coming. But do you really know something that the market already doesn't know. Don't you think all of that news and the fact that we lent money to people who had no prayer of paying it back is what caused the market to fall by half right now? Eric Schurenburg: So the market is participating worse times to come. And that's the price that you're paying for now. So if there's a surprise, and better times are to come, the stock market would head up. Alan Roth: Exactly. And by the way, research shows that the worse the news, the more the negative sentiment, the better the market tends to do going forward. Eric Schurenburg: Hard to imagine news worse than the news we've been reading right now, and the market has gone straight down. Alan Roth: It sure has. And I'm good at forecasting the past, it's the future I'm not so good at. Eric Schurenburg: But that said, why not find an expert, someone you really trust, someone who is really smart, and follow what they say. Alan Roth: Well, the track record of the experts is not so good. There are a handful of people who have consistently over a long period of time beaten the market. Like Warren Buffet. But it's probably a single digit number. A lot of that expert advice has actually been quite bad. Eric Schurenburg: Even Warren Buffet has had his worst year ever. Are there investments that people are making right now, that are very popular right now, that strike you as particularly irrational. Alan Roth: Well, people typically go to whatever has performed well. And about the only thing that's performed well recently are precious metals, and gold in particular. And gold can be a wonderful investment as a diversifier, but it is volatile as heck. Generally speaking, it only keeps up with inflation, and to get into their gold because it's doing real well right now, it's not the ticket. And I've made that mistake before, by the way, when I graduated college and thought I knew everything Eric Schurenburg: You invested in gold? Alan Roth: I bought gold at $600.64 an ounce in 1979 that has not come close to keeping up with inflation, and I would argue it's the best investment I ever made because it taught me I wasn't as smart as I thought I was. Eric Schurenburg: Surely there are better places to go. Treasury bonds have done very well over the past year. Why not there? Alan Roth: Well, treasury bonds are giving a real -- are giving a yield now of about 1.752%. So if we get into inflation from all of this money that we're printing, those bonds are going to get hammered, and hammered badly. So there's nowhere really to hide. There's nowhere really to hide, but as bad as investing has done, if you had done a 60% equity, 40% bond portfolio in low cost global funds for the ten years ending in 2008, you would have gained 36%, not great. But you wouldn't have lost. Because you would have been rebalancing and going the opposite of the herd, and buying when everyone else was selling, and reverse. It's simple, but it's not easy. Eric Schurenburg: Let's go back to the rebalancing. So basically, that means you sell your winners when they're up and force yourself to buy losers when they're down. Alan Roth: If you own the broad stock index fund, then when it goes up you've got to rebalance and sell after its gone up. And buy some of the things that didn't go up, like the bond funds. Eric Schurenburg: Well, it sounds great in hindsight, it sounds rather irrational and hard to do right now. Alan Roth: It goes against every human instinct. It just works. Eric Schurenburg: There's the secret of investing. Do what hurts. That's what works. Alan Roth: No pain, no gain. Eric Schurenburg: All right, Alan, thanks a lot. It's been a real pleasure having you. Alan Roth: Thanks, Eric. It's been fun. Eric Schurenburg: For more information about the topics we discussed here today visit Moneywatch.com.
Music
==== Transcribed by Automatic Sync Techologies ====
