Editor’s Note: Phil DeMuth is a psychologist and investment adviser who has written for The Wall Street Journal, Barron’s, the Louis Rukeyser Newsletter, the Journal of Financial Planning, and forbes.com, as well as Human Behavior and Psychology Today. He also co-authors the “Yes, You Can” series with Ben Stein. The pair’s most recent critically acclaimed book, Yes, You Can Supercharge Your Portfolio! released last year. WEALTH magazine asked DeMuth what makes a smart investor and what anyone should be doing with their assets now.
WEALTH: How is your own portfolio doing after last year’s crash? What do you see happening in the market now?
DeMuth: My clients and I are doing better than the corresponding market benchmarks for 2009. Starting March 9, a bull market began that reversed all the trends of the market panic of 2008. During the panic, there were only two types of assets: safe (Treasury bonds) and risky (almost everything else). Risky assets were being sold for market price in a massive global flight to safety.
Now normalcy is being restored. The equity risk premium has returned, and along with it the small-cap and value premiums. Correlations among and between asset classes have widened. Diversification is once again paying off. Meanwhile, Treasury bonds are down 20 percent. Emerging markets are up 40 percent. Everything is the opposite of last year.
WEALTH: What personality/character traits make a good investor, or is it a skill anyone can develop?
DeMuth: The best thing to have is Asperger’s Syndrome, so you approach investing completely without emotion. Our emotions are good contrary indicators: When we feel terrified, it’s probably a good time to invest; when we feel confident, the market is probably overpriced. I get the feeling that some people invest for entertainment: They are a little bored or restive, not that great at math, and are looking for a little action. This is a disastrous approach.
WEALTH: If you are already investing but need to ramp up a notch, where would you put your money right now? What would you do that’s new? (Get more educated? Try a new type of investment? Invest more?)
DeMuth: Ben Stein and I always tell people to put their assets into a diversified group of index funds. Vanguard’s new exchange-traded fund VT gives you the whole world of global equities in one low-expense wrapper. If you combine this with a bond fund like State Street’s WIP — global inflation-adjusted bonds—in some combination that fits your life situation, say 60/40 or 50/50, you have an astonishingly good two-fund portfolio.
WEALTH: What are you looking forward to in terms of investing in the next year? Five years?
DeMuth: With the proliferation of exchange traded funds and mutual funds in the alternative asset space, it is going to be possible to design portfolios that have excellent risk-return profiles. This will make it possible for ordinary retail investors to have institutional-like portfolios.
WEALTH: What are the biggest mistakes people make with their money? On the flip side, what is the most important thing you can do in each decade to end up with a great portfolio?
DeMuth: The biggest mistake almost everyone makes is not saving enough. The most brilliant investment plan is not going to make up for a lack of long-term steady saving that lets compound interest do most of the heavy lifting.
WEALTH: What does it take to successfully retire wealthy? Can anyone still retire early and live well?
DeMuth: It sounds funny to say it, but the best thing to have in retirement is a job. Golf and cocktails just won’t cut it for 35 years. People derive meaning and satisfaction from work, because all work is doing for others. As Ben Franklin said, “People who have nothing to trouble at will be troubled at nothing.” Given the indeterminacies of future tax rates and Medicare and Social Security solvency, I think that for most people part-time work in retirement is an excellent life vest as well.
WEALTH: Why is the “Yes, You Can!” series important today, and what is the next title?
DeMuth: The series provides basic texts on the topics involved: market valuation, income investing, retirement, financial planning, portfolio management. Our next book is part of Wiley’s prestigious “Little Books” investment series, and it’s called The Little Book of Investing Dos and Don’ts: Do get rich, Don’t go broke and will be out [later this] year.
WEALTH: What makes someone truly wealthy? How would you define wealth?
DeMuth: Being wealthy means loving what you have. Loving your wife, your family, your job, your home, and your country. Everyone in America has been incredibly blessed by the quality of life that we have been given by our ancestors and those who have fought to maintain our freedom.
Phil DeMuth was the valedictorian of his class at the University of California at Santa Barbara in 1972, then took his master’s in communications and Ph.D. in clinical psychology. His opinions have been quoted in theStreet.com, Yahoo! Finance, On Wall Street, and Fortune magazine, and he has been profiled in Research magazine and seen on Forbes on Fox and Wall Street Week. He is managing director of Conservative Wealth Management LLC in Los Angeles, a registered investment adviser to high net-worth individuals, institutions, and foundations.
Tags: bull market, exchange traded funds, INVESTING, market panic, Phil DeMuth, Yes You Can