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Starting Over: The Investing Portfolio that Will Preserve Your Wealth and Your Sanity

In this introduction to his book, David Gaffen explains why you shouldn't go down the rabbit hole of constantly buying individual stocks or day-trading. There's a safer and easier way to invest your money, and Gaffen shows you how.
This chapter is from the book
  • "Managing money is difficult, time-consuming, draining, and a totally alien experience for almost everyone who has come out of the educational system of the United States, where, if you are lucky, you may have learned the difference between a stock and a bond."
  • Jim Cramer, Jim Cramer's Real Money: Sane Investing in an Insane World, 2005

Visitors to this planet from another galaxy in the late 1990s or through most of the last decade would have probably bet the national pastime was not baseball, football, or any other sport, or even reality television—but the stock market. Investing has long since ceased to be the boring activity your grandparents and parents engaged in (usually by purchasing safe securities like zero-coupon bonds) and a run-and-gun activity full of amusement for people willing to sit in front of the computer screen for hours at a time—and there are many such people.

That's because the 1996-2007 period featured two of the greatest bull market runs the U.S. market has ever seen, each of which carried stocks beyond most expectations—from 1996 to 2000 and the 2003-2007 market. With that came the ballooning of incredible expectations on the part of investors. The prowess of the market extended beyond its initial purpose of growing one's assets, but instead the investor class had come to believe that virtually all of the nation's problems could be solved through the wonders of financial markets. Unlike the post-Depression era, when mom-and-pop investors shunned stocks, investors in this era were conditioned to believe that stocks would always rebound after any and every kind of decline, no matter how precipitous.

This begets a serious misunderstanding of the reality of the risk in the equity market. The prevailing wisdom—that you could never lose money on stocks in the long run—coalesced into a few investing tenets that took over the psyche of the traditional investor. Think of the following three rules as the investor's mantra during this time:

  1. Buying and holding stocks is the only strategy.
  2. When stocks fall, buy more stocks. Selling is for losers.
  3. When confused, see rules #1 and #2.

Essentially, investors were instructed to buy, regardless of the economic situation or short-term fluctuations, because invariably, stocks would rebound. These precipitous drops were merely a buying opportunity (regardless of how much of one's capital was tied up in these supposedly amazing investments that had recently given up substantial value).

This type of learned behavior, which relies on a modicum of historical knowledge and a bit of hope, is difficult to change. Just as the post-Depression era investors missed out on substantial gains in markets because of ingrained prejudice against riskier investments, the reverse was the case with investors of this generation, conditioned to see every pullback as just another reason to keep hungrily buying stocks. Investing, generally thought of as a staid activity, captured the cultural zeitgeist.

In late 1996, Alan Greenspan, in testifying to Congress, used a phrase to describe the state of affairs regarding the financial markets that, for his remaining years as Federal Reserve chairman, would forever be associated with him, asking whether "irrational exuberance" had "unduly escalated asset values." His pessimistic "irrational exuberance" phrasing prompted a sell-off on Wall Street that day, and garnered him scathing criticism from just about everyone.

More than a decade and two harsh recessions later, it's clear the chairman was onto something—even though he had stepped back from those remarks later, by arguing that asset bubbles could not be identified, and therefore the Fed, the authority in charge of keeping interest rates at proper levels, could not do anything about it.

In those years investors enjoyed the fruits of easy credit and technological breakthroughs that caused stocks to skyrocket to new levels. This culminated with the ascent of the Dow Jones Industrial Average to top 14,000 in October 2007. (At the time of Greenspan's speech, the Dow was marking time at about 6,400.) And in that time, the Fed chairman became something of a minor celebrity himself, inspiring a "Get Exuberant!" fan Web site and being lauded with the moniker of "Maestro" for his seemingly impervious ability to navigate markets through troubled waters.

Oddly enough, between 1996 and June 2009, while stocks had put together a healthy 53 percent on a total return basis since Greenspan's ill-received remarks in 1996, it was dwarfed by another asset—a bit less risky one, the risk-free, three-month Treasury bill! An investor who bought treasury bills in 1996 and consistently reinvested them would, by the end of June 2009, have racked up a 56 percent return, according to Bespoke Investment Group, a research firm in Harrison, New York. That's about three percentage points better for an investment that couldn't be safer or more uncomplicated. And that 53 percent gain in stocks only came if one never pulled out of the market and then later picked a bad moment to put money back into stocks. Mis-timing the market is one of the hallmarks of the individual investor, and it's one that served them particularly poorly in the last 13 years. (Note: The subsequent outperformance of stocks in late 2009 and the first half of 2010 left the three-month bill in the dust, but it shouldn't really even be a race in the first place.)

During that period, a cottage industry of market mavens sprouted up. That's not surprising: After all, in 1983, just 19 percent of Americans owned stocks, most of those being direct investments in companies by the very wealthy. By 1998, that figure increased to about 63 percent (counting mutual funds and retirement accounts), and it was up to about 68 percent in 2007, though again, most of the growth has come from ownership of mutual funds and in retirement accounts.1

Through that period, the frequent refrain from investors, particularly those with only a cursory knowledge of equities, was that stocks were the best investment, bar none, and investors had to hold them ad infinitum. In doing so, you'd not only be helping yourself, you'd be doing a patriotic thing by buying into the great U.S. capital system, and you'd also be sure to have a great time as well.


The term "catharsis" is an ancient Greek word that means "purification" or "cleansing." It's that moment when a group of individuals, having finally exhausted their patience, reaches an emotional peak and collectively cries, "Enough!" For a time, it appeared that the 2000-2002 period, which featured the demise of the technology bubble, might serve as this moment for scores of investors. It was not, though, thanks to low interest rates that spurred a frenzy of borrowing—money that was put into the stock market.

The 2008 period seems more likely to serve as catharsis. The horrific debacle in the financial markets revealed a financial structure built on the shifting sands of borrowed money and assets that could not be valued. The likelihood is that the stock market has seen its best days for some time.

But the market's 2009-2010 rally suggests that old habits die hard. So this book is intended in part as catharsis—to jar you out of the thinking that has permeated the mind of the individual investor, mostly through osmosis and the droning of the litany of pundits on television mostly arguing the same thing: That you should leave your money alone and not worry, because in the end, it'll all work out. Does such advice make sense in any other aspect of life? Nobody expects automobiles to run in perpetuity without tune-ups and oil changes; houses that go without upkeep aren't so pretty when the grass is overgrown and the paint is peeling. But a portfolio of investments, somehow, should be set aside in the expectation that you can wake up, Rip Van Winkle-style, some three or four decades later with your retirement goals achieved and your worries cast away in the wind.

It doesn't work that way. That said, others like to take things to the other extreme. Financial television features a daily assault of commercials designed to convince you that your investments are somehow missing something without this new product, preferably one you can trade often. It's not the same thing as the relentless pumping of the new investments that cropped up during the technology bubble, but it is faddish in its approach, and in a way involves investment in the next hot money-maker.

In this book I suggest avoiding all that and instead advise concentrating on preservation of capital and realistic expectations. Most people say their expectations are modest: They expect returns of 8 to 10 percent each year. But a few years of outperformance, such as what existed in the late 1990s and middle part of this decade, has a way of upping one's need for greed. People become less satisfied with modest outcomes, particularly if they see others doing better.

The main point of this book is that most people should avoid buying individual stocks. It is a lot harder than it looks. The majority of small investors simply do not have the time or emotional make-up to pick individual stocks. A much better alternative is stock index funds or exchange-traded funds (ETFs). Not only are they cheaper, but you are much more likely to walk away having made money.

Investing is not like Wii Tennis or Sudoku: It's not a game. The decisions you make affect you for the rest of your life. A few people in the world have enough money to throw it around on every fad that comes up, but more than likely, they didn't get rich that way. Investing for one's later years or education for children cannot be done over if it doesn't work out the first time, which is why it is important to be prudent. It's why it is important not to allow hackneyed clichés to take the place of sound understanding of one's goals, how to achieve those goals, and avoid deviating from them just for a chance to play in what the popular media portray as a quizzical game where everyone wins. It's time to say, enough.

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