Stumbling blocks on the path to perfection

Posted by on February 12, 2009 @ 9:37 am in investing

Universal lessons are just that—they apply to everyone, or almost everyone. Sometimes, though, even the most knowledgeable people stray from what they know to be the better decision.

For example, asset allocation is critical, and rebalancing should be done periodically—particularly if your portfolio is more than 5% out of balance. At Vanguard, we promote these practices quite regularly. They’re good practices that disciplined investors should—and do—incorporate into their investing decisions.

What’s surprising (though maybe it shouldn’t be) is that, as a January Wall Street Journal article by Jason Zweig explains (subscription required), even some of the most well-known mavens of the investment world digress from their own investment philosophies.

Mr. Zweig related that Dr. Harry Markowitz (a Nobel Prize winner in economics), Jack Bogle (founder of Vanguard), Don Phillips (managing director at Morningstar), and Dr. Burton Malkiel (Princeton economist and former Vanguard board member) all ignored their own advice on topics such as portfolio construction, rebalancing, asset location, and active vs. passive investing.

The bottom line: Even the “experts” aren’t immune to the psychological factors that affect the rest of us investors. If you’re looking for perfection, you’re more likely to find it in a sunrise than in investing behavior.

Jason Zweig’s point was that implementing your investing strategy can be fraught with psychological obstacles. To help yourself reach your goals, you should create a plan, set a deadline to implement it, and advertise it to others as an incentive to live up to your own intentions. All good techniques.

And if there comes a time when you want to try something that doesn’t quite fit with your plan, go ahead—just don’t bet the ranch on it.

Notes:

Investments are subject to risks.

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We invite your comments on this Vanguard Blog entry. Comments will be monitored and published at Vanguard’s discretion. Comments received prior to July 7, 2009 will not be published.

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