Dangerous Investment World Generalizations

“Diversify”

“Think long-term”

“Buy and hold”

“Passive investing”

“Stocks for the long-run”

These are all common and seemingly harmless terms that are thrown about by financial people on a regular basis.  And I hate most of them because they are often used as dangerous oversimplifications of something that is in fact personal and complex.  The problem is, when we spread these terms without being specific we are often just making matters worse even if they’re spread with the right intentions.

For instance, I constantly see articles about how you have to “diversify”.  Lots of smart people think that a diverse portfolio is crucial to meeting your financial goals.  But these articles almost never define what your financial goals are and they almost never define what they mean by “diversification”.  Do they mean owning lots of different types of stocks?  Do they mean lots of different asset classes?  Do they mean lots of different strategy styles?  And how true is this as a generalization to begin with?  Should a 75 year old with no risk tolerance really be that “diversified” at all?   Most definitely not.  So the vague generalization leads to even more vague implementation.

My favorite terms are “think long-term”, “buy and hold” or “stocks for the long-run”.  This is all great in theory.  In fact, the concept is generally sold to investors using long-term performance data ranging from 30-200 years.  As if any of us have an investing time horizon that is actually that long.  Worse, it overlooks the fact that most of us don’t really have much of a “long-term” at all.  Much of our savings is not necessarily “long-term” at all.  It’s constructed around the need to purchase a home, send kids to college and other not-so-long-term spending needs.  So the concept of “think long-term” often results in investors thinking they can just “ride out” the stock market ups and downs which leads them to take on more risk than is appropriate for them and then when 2008 comes along they realize they made a huge mistake and that their “long-term” wasn’t really so “long-term”.  This textbook “long-term” is sold using a largely unrealistic presentation of our actual financial lives.

I’ve deconstructed the marketing pitch known as “passive investing” in some detail in past posts so I won’t regurgitate my thoughts there.  Plus, I am starting to ramble.  But the point is, be wary of people who oversimplify portfolio construction to the point where they constantly rely on these vague generalizations to make their points.  They’re often coming from a good place, but that place is often so nondescript that it becomes counterproductive to a large degree.