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01/06/2012 7:00 am EST
Newer investors put too much emphasis on asset allocation instead of educating themselves, says author and trader Tadas Viskanta. He says some core financial knowledge is crucial in today’s world, and explains why many investors are approaching the situation inefficiently.
Kate Stalter: Today, I’m talking with Tadas Viskanta of the blog Abnormal Returns. Tadas, you also have a book of the same name coming out. You’re an experienced trader, and you have advised individual investors to tune out the conflicting array of opinions that we all hear constantly.
Tadas Viskanta: I think that’s right. For the vast majority of investors, I think they’re probably pretty safe to largely ignore them, especially around year-end when you have a raft of predictions and forecasts come out.
I think basing your investments on forecasts of investment strategists and pundits and gurus is probably a losing proposition for most people.
Kate Stalter: Is part of that because people have different investment horizons, different objectives, that sort of thing?
Tadas Viskanta: Well, I think that’s absolutely the case.
Every individual investor has essentially has one client, and that client is themselves. They know best what is their investment horizon, their risk tolerance, their education level, all of these things that you would take into account if you were discussing your finances with a financial professional. I think each individual has to take those things into account.
Anybody who’s making broad-based forecasts in the media or in the blogosphere knows nothing about your personal situation. Trying to shoehorn their forecast into your own financial plan or investment plan is a difficult proposition at best. I think it’s likely to take you away from the most important decisions that investors have to make, and it’s likely focusing more on things that are trivial or on the periphery.
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Kate Stalter: Let’s take a step back then, to the big picture. You were really alluding to this a moment ago. Where do you recommend that individuals begin to determine their own investing strategy and to know what the best approach for them?
Tadas Viskanta: Well, I think that’s an interesting challenge, because I think everybody comes to the process of investing with different expectations and different sorts of baggage.
I think some people are essentially very self-motivated and interested in the process of investing and are eager to kind of delve into the details of investing. For those people, they can kind of take a deep dive into whether it be books, the blogosphere, even some of the traditional mainstream media.
But the vast majority of investors really don’t have either the interest or the aptitude to kind of take that deep dive. So I think there’s different paths that people need to take. The one constant is that as adults and as adults who largely have responsibility for our own finances or investments, kind of a baseline level of understanding about investments is something that we all need to come to terms with.
I don’t know that I have a list of certain books or topics that people need to learn, but I think having some level of understanding I think on the basics of personal finances and investments is something that we all have come to need to, a core skill that we all need to have.
If you think about 40 or 50 years ago when people were...essentially their retirement was based upon their participation in the pension plan at their employer, which they were likely to stay with for their entire career. That’s a very different world than the one in which we live in today, where people are more prone to change jobs or roll over IRAs, and for a larger and increasing growing portion of the population, people are essentially freelancers or their own bosses.
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So that kind of raises a whole level of complexity, which wasn’t there just a couple of decades ago.
Kate Stalter: Let me move onto a question I had for you about asset allocation and strategies. I noticed in the blurb for your upcoming book, you mention various asset classes and various strategies. How should investors approach, say, equity vs. fixed income vs. ETFs. Does this maybe come back to what you were just saying?
Tadas Viskanta: Well, let me take one step back, because I think those are, in a certain respect, jumping the gun. Because I think for most people, the most challenging part of this process is actually just getting started.
Whether worrying about a precise asset allocation between equities and fixed income, whether it be 50/50 or 60/40 or 40/60, is far less important than people actually beginning the process of investing itself—getting organized, getting educated. The asset-allocation decision is really one of the last decisions you will make.
I think there’s a lot more steps that people have to take into account before they ever get there. So I think focusing on the sorts of, for a lack of a better term, technical decisions are far less important than all the other decisions, and all the other steps that people take to get there.
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Kate Stalter: OK. Describe what you mean by "abnormal returns." What does that phrase mean in the context of which you’re using it?
Tadas Viskanta: Well, abnormal returns is really a term broadly used in finance to describe the returns received hopefully above the expected returns on an asset. In a sense, anybody who is actively investing is in fact in the pursuit of abnormal returns.
In today’s day and age, it’s very easy to allocate to—essentially it’s very cheap to garner broad-based exposure to the financial markets these days, whether it be for ETFs or mutual funds. In fact, the expense ratio and the cost to do so have crept down year after year after year, and in part that has to do with the rise of ETFs.
So Abnormal Returns was really kind of a clever way to brand the blog a number of years ago, but I also think it makes a distinction between the decisions that investors have to make.
I think that comes back to what we were talking about in regard to asset allocations. The asset-allocation decision, the precise decision like I said, is probably less important because we’re able, in today’s investment environment, to get cheap exposure to beta, whether it be international equities, domestic equities, and fixed income. We can get it fast and easy.
Today, so many brokerage firms now offer commission-free trading of ETFs. One of the points that I make in the book is that investing is now cheaper and easier than in fact it’s ever been. In fact, there’s more information and there’s more data available than there’s ever been before.
So in a certain respect, it’s almost a golden age for the individual investor leaving the whole idea of market conditions, because obviously those change. And over the last year or so and even the past decade, you can argue it’s been a very difficult time for equities, which has been kind of the core asset class of many individual investors.
But I think in a certain respect in terms of cost and in terms of access and in terms of information and in terms of data, there’s really never been a better time to be an individual investor.
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