“Buy index funds to get exposure to broad asset classes, hold them for a long time, and plan your sales to match your needs,” common personal finance advice goes. Knowing yourself is more important than the stock market’s ups and downs, and once your general investing plan is put in place — usually all pivoting around how much cash do you need and when — you can go live your life.
Maybe check your portfolio every month just to make sure no one’s lost your money, but don’t worry about the market too much and delete your investing apps.
This is generally what the personal finance orthodoxy will tell you.
“Investing is a problem that has been solved,” Barry Ritholtz, founder of Ritholtz Wealth Management told me Tuesday afternoon.
That same morning, Goldman Sachs (GS) rolled out a new investing platform with its Marcus brand that allows customers to use Goldman’s managed portfolios of ETFs representing various asset classes. No stock picking! Boring stuff that conspicuously eschewed the day-trading mania best represented by the GameStop (GME) affair that got so wild that Congress has dragged its cast of characters in for a hearing on Feb. 18.
“Good investing is not supposed to be exciting,” Ritholtz said of the asset class approach that his firm has used for years.
Ritholtz says that people are terrible stock pickers — which is backed up by piles of research — and that knowing what to buy and more critically, when to sell, are incredibly difficult and that even long-term blue chips that can seem immovable can rot over time, like the once-dominant GE or Sears. (“I wouldn’t bet my house that Facebook will be here in 20 years,” he said.)
For a broad indexed product, it doesn’t even really matter to most folks when you buy it.
“You can’t say the same thing about individual stocks because they’re so much more volatile than the market as a whole,” said Ritholtz. “It makes regular saving much more difficult.”
But if you feel an urge to buy shares of Apple or Tesla or some bitcoin, he has a way to do it.
The ‘fun’ portfolio
Some people find investing in companies interesting — and like having skin in the game. Even if Warren Buffett advises an approach similar to Ritholtz’s (he tells everyone who will listen to invest in a low-cost S&P 500 index fund), he is obviously the man behind Berkshire Hathaway (BRK-A, BRK-B) and a legendary stock picker. If you hear him talk about this stuff, it’s clear he loves it.
If that’s you, maybe you should buy stocks for educational or entertainment purposes.
“If you want to set up a side account with 10% of your money, you can buy all the Tesla and bitcoin,” Ritholtz said. “Go buy yourself a boat if it works out.”
Ritholtz considers the “fun” portfolio or “play” basket of stocks to trade a reasonable way to scratch the itch instead of doing it with your whole portfolio or even worse, using the markets as a casino. If you’re going to do that, use casino rules and don’t put your car keys on the table.
“If you’re taking money you can afford to lose and you think Apple or Amazon is the greatest thing ever — or when Lucid becomes public through a SPAC or whatever — it doesn’t matter if it underperforms,” Ritholtz said.
This approach actually has a nice benefit, the firm has found. When people put 5 or 10% of their portfolio into a fun basket and buy stocks that go up — a lot — they don’t feel a pressure many lucky investors feel to sell to lock in the gains.
“You can afford to let it ride because it’s not going to matter since it’s relatively minor,” he said. “You tend to perform better when it’s a smaller, less meaningful portfolio because you won’t start to freak out either way.”
Perhaps the best way to think about all this, and specifically speculation versus investing, is who is on the other side of a trade. For long-term investors, stocks usually go up. This is not the case for the GameStop frenzy.
“Here’s a thing I think a lot of people don’t stop to think about: Trading is a zero-sum game,” Ritholtz said. “Over a short period of time, there’s a winner, a loser, that’s it. Net-net, everything ends up the same dollar amount. But over 10, 20 years, the pie gets bigger and there can be more winners.”
