Editor’s note: We hope you’re enjoying some time with your loved ones this week…
That’s what we’re doing at Chaikin Analytics. Our offices are closed through the new year.
But the markets are open this week. So in the Chaikin PowerFeed, we still want to make sure we’re empowering our readers with the tools they need to succeed every day.
To that point, we’re running a special holiday series over the next four days…
The first essay comes from Marc Gerstein, our director of research. It originally appeared in the PowerFeed on May 10, 2022. But as you’ll see today, Marc’s advice is timeless…
Index investors suffer from what I call “Harrison Bergeron syndrome”…
Harrison Bergeron is the title character in a short story from American writer Kurt Vonnegut’s Welcome to the Monkey House collection. It was first published in 1961.
The short story is set in 2081. In this dystopian future, the government forces smarter, more attractive, and stronger people to deal with “handicaps” to make everyone equal.
For example, intelligent folks are forced to wear little earpieces that emit sharp noises to disrupt their thoughts. The smarter the person, the more frequent the noise.
In Harrison Bergeron’s world, thinking is bad. Fortunately, that’s not often the case in our world. However, as I’ll explain today, it is a problem when it comes to index investors…
The stock market sometimes goes into a tailspin. When that happens, folks with a broad-based, index-investing approach often say things like, “Don’t think about it, there’s nothing you can do.”
I’m likely not the first person who has mentioned indexing to you…
Over the years, Vanguard legend John Bogle and countless other gurus preached the benefits of a portfolio that touches all corners of the investment universe. You can’t predict the future, they would reason. So to avoid standing out as a loser, invest in everything.
Now, I might be the first person to call out the fine print. If the market falls 80% when you’re invested in everything through an index, then your portfolio will also fall 80%.
“No problem,” index-investing loyalists would say. “Big problem,” I say.
Let’s say you noticed that the Federal Reserve slashed the benchmark interest rate to nearly zero in early 2020. Since bond prices and rates move inversely, you might’ve realized that this move likely left no place for prices to go but down as rates rose off their bottom.
That’s exactly what happened…
For example, the iShares 20+ Year Treasury Bond Fund (TLT) fell about 34% from its early 2020 peak through early May 2022.
Should you have been scorned if you reduced your stake in fixed income in early 2020?
Backing away from fixed income would’ve been a no-brainer choice. But many folks still didn’t do that…
They suffered from Harrison Bergeron syndrome.
They had the intelligence to do the right thing, knowing that bond prices were due to fall. But they bought into the idea that it would’ve been wrong to do so.
After all, it would’ve meant not being invested in everything.
Or with the S&P 500 hitting its all-time high at the end of 2021, let’s suppose you noticed that only five stocks (just 1% of the index) accounted for 21% of the index’s value. Indexing with the SPDR S&P 500 Fund (SPY) was tantamount to a very active bet on Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), and Tesla (TSLA).
Should you have been scorned if you decided to cut back or get out of the S&P 500?
Again, most investors had more than enough intelligence to know to retreat. That is, if only they hadn’t been brainwashed into refusing to act on their knowledge.
My point is… don’t let Wall Street make you into Harrison Bergeron.
You’re not forced to wear little earpieces to suppress your thoughts. You don’t need to have investments pushed on you. Instead, you can think for yourself and use what you know…
You know growth is good. You know overpaying is bad. You know financial strength is important. You know when giant institutions put money to work, it will swing stock prices. And the list goes on.
It’s all about observations and common sense.
The world’s biggest financial firms spend a lot of time and money trying to convince you to avoid thinking for yourself. According to them, you’re bound to fail if you do that. They’d rather you plow your money into their generic, “fully diversified” index-focused portfolios.
But when you think about it, you know a lot more about investing than you realize.
Good investing,
Marc Gerstein
