Balance is crucial for safer investing
TEXT OF INTERVIEW
TESS VIGELAND: To me, investing is akin to one of those awful SAT word problems. You know, a train traveling west at 60 miles per hour. Another train traveling east at 70 miles per blah blah blah… I have a headache already.
The stock market equivalent goes something like this: Economic recovery is likely if x equals y minus two-thirds the unemployment rate. Deeper recession is likely if y equals sugar cubes and pigs fly. I came across a couple of word problem-like articles this week that basically made my head explode.
So we asked Wall Street Journal columnist Jeff Opdyke to come in and explain his piece which starts: “Inflation or deflation? Even the experts can’t agree whether rising or falling prices lie in our future.”
I asked him: Why not just stop right there?
Jeff Opdyke: You know, this gets to something I’ve been trying to address a little bit in my “new” coverage. I’ve been writing personal finance for 16 or so years. And one of the things that I think is kind of missing is an open-ended approach to reporting personal financial news and investment news. You often end up with stories that are “OK, this person says it’s inflation, so we’re going to write this story about inflation and somewhere in the body of the story we’re going to throw a paragraph or two in that says, ‘To be sure, it could be deflation. If so, all bets are off.'”
And I wanted to say, wait a minute. Let’s realize that first off, that the folks that think it’s going to be inflation are wrong and the folks who think it’s going to be deflation are wrong. Nobody knows what it’s going to be; they’re all guessing. So the best thing you can do is basically build a portfolio that is designed to do OK, no matter what happens. That’s the way it should’ve always been. Unfortunately, it hasn’t always been that way and I kind of wanted to bring it back to that.
Vigeland: So this is all advice for people who are still in the market. What is your current advice for all those folks, who after last fall, after the economy collapsed, the stock market collapsed, just said, “You know what? I’m done”?
Opdyke: I would caution them to step back and unemotionally view that statement. Because, investors — individual investors and even pros, I’ve got to say — have a habit of being very very giddy and excited at the top of the market and then think it can only go higher and they’re pumping all their money into it. And then, when it cracks and goes to the bottom, they hold on and hold on and hold on and just pray and hope and do all kinds of rain dances to try and get the market to go back up.
Vigeland: Can we have you demonstrate one of those on our Web site? That would be great.
Opdyke: And then the market hits bottom and, “That’s it. I’m done with the stock market. I don’t want anything to do with this anymore.” And what they’ve done is completely the opposite of what they need to be doing. They should’ve been very cautious at the top and they should be getting increasingly more optimistic at the bottom.
In times of displacement, like we’ve had, in its wake is going to be left a lot of really good companies, a lot of really good bonds, a lot of really good whatever in that asset class. Now is the time to sort of look for those opportunities that exist in the market.
Vigeland: I guess the question there though really is, how much knowledge do you have to have to make all of those decisions to look at different asset classes and then decide which one is going to work for you and which one isn’t?
Opdyke: That answer goes across a very, very broad spectrum from you don’t need a whole lot of knowledge to you need an MBA. It just depends on what kind of asset class you’re talking about.
When I’m talking about opportunities, I’m talking about the opportunities that the average investor has access to information. Potentially, the real estate market, that is the stock market, that is the corporate bond market and the local muni bond market in your particular state or hometown.
But again, it gets back to that same overriding point, which is, you have to have an opinion on something. I mean, you can’t just blindly go out there and hope for the best. You kind of sort of look at your own personal life, you own personal experiences and you take a side.
Vigeland: And so what you’re saying when you tell people, decide whether you think there’s going to be inflation or deflation, is that no matter which way you go, no matter how you kind of try to predict the future, you have to protect yourself on the back side.
Opdyke: Right. It’s like that with everything in life. That’s sort of the genesis of that story is that you’ve got to be out there. You have two choices as investors these days: You can stick to cash and hope for the best or you can put your money to work and hope for the best. And I know that sticking in cash maybe safe, but it’s not going to generate the return over time that you want.
Most people want their money to go to work for them. And if you want your money to go to work for you, that means investing. You have to make a decision as an investor, do I believe in scenario A? Do I believe in scenario C? Or scenario C, as the case may be. Pick one of those and then determine what the opposite case could possibly and invest a little bit on the side for that as your insurance policy. Maybe 10 or 15 percent of your portfolio built in as insurance, so that if A, B and C is wrong, you’ve got something behind you to provide that protection.
Vigeland: And then if you guess inflation and we have rampant inflation, you look like a genius.
Opdyke: Exactly.
Vigeland: Jeff Opdyke is a personal finance and investments reporter for the Wall Street Journal. He’s got a new blog starting there in a few weeks. Jeff, we’ll look forward to that. Thanks for coming on the show again.
Opdyke: I appreciate it. Thanks a lot.
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