Sorry, Darlene: Not everyone should learn to invest

I’m a huge fan of David Lazarus, the personal finance columnist at the LA Times. In fact, I’m a fan of most personal-finance columns. The genre is not, at heart, complex: you generally just find different ways to recapitulate the same common-sense bromides. As a result, then, it’s rare that I’ll disagree almost entirely with something like Lazarus’s latest column, which appears under the headline “Starting to invest: It’s not as tough as you might think”.

Lazarus is responding to a letter from Darlene, who, he says, “probably speaks for a lot of people” with this question:

“I don’t have a lot of money, but I’d like to learn how to invest. Any suggestions?”

Lazarus has a simple reply: “First of all, props to you, Darlene.” But that’s not the reply I would give. Not at all. There are certainly a lot of people who think that they would “like to learn how to invest”. But how many of them are right? How many of them actually should learn how to invest? The message from Lazarus is “nearly all of them”; the message I’d like to give, on the other hand, is “very few of them.”

Lazarus, in other words, dives straight in. “Your first step should simply be learning the lingo. What’s market capitalization? What’s a price-to-earnings ratio?” For me, however, that step comes way down the line – if it ever comes at all. Your first step should, instead, to be to ask whether you’re really in a position to start investing. And if you “don’t have a lot of money,” there’s a very good chance that the answer is no.

Here’s a simple quiz:

• Do you have any credit-card debt?
• Do you have any personal loans?
• Do you owe money to anybody?
• Do you have any other debt (like student loans or auto loans) with an interest rate higher than 6%?
• Do you have savings which are less than about 4 months’ worth of your expenditures?
• Would losing a significant chunk of the money you’re investing hurt you or hurt your standard of living?
• Is there something you could buy with the money instead (a new computer, perhaps?) which would significantly improve your standard of living?

If the answer to any of these questions is yes, then you should not be investing your money. Investing is a game for rich people; if you’re not a rich person, investing will probably not do you much good, and might do you real harm. Yes, investing is one of the main ways that rich people get richer. But it’s not a way that poor people get richer. In fact, a case can be made that investing is a way of making poor people poorer, as they pay fees to rich money managers.

In other words, don’t just assume that investing your money is always a good idea: it isn’t. Especially not now, when both bonds and stocks are eye-wateringly expensive, and have much more downside than upside.

But let’s say you have a decent cash cushion, and no debts, and want to get started with investing. Lazarus is absolutely right when he says that it’s good to start cautious – but it seems that his idea of being cautious is putting all your money into stocks. That’s not cautious! A 100%-stocks asset allocation is a very high-risk strategy.

And then Lazarus’s advice gets even worse. Once you’ve made your investment, he says, you should “watch how it performs day to day, week to week.” No! There is abundant evidence that the more you look at how your investments are doing, the lower your overall returns. Anybody looking for returns over the space of a day or a week or even a few months really shouldn’t be investing in the first place. Only invest money which you don’t expect to need for at least a couple of years. And then, don’t look at how it’s doing. The value will go up and down, and that will make you nervous, and you will make bad decisions. Just leave it alone. It’s a lot easier to “ride out the hills and valleys,” in Lazarus’s words, if you’re not even aware of them in the first place.

Finally, Lazarus advises that you use “a discount broker, such as Charles Schwab, Fidelity, or E-Trade.” Again, bad idea. This is real in-at-the-deep-end stuff, and there’s no need at all for it. If you’re just starting out, by far the best thing to do is to let the professionals do most of the work. The gold standard is a Vanguard target-date fund; if you want something a bit more user-friendly, then maybe take a look at Betterment. These are low-fee companies which will take your money, invest it sensibly according to your risk appetite, and don’t do anything stupid. Why spend loads of effort trying to be an investor yourself, and boning up on concepts like market capitalization, when there are huge companies which are much better investors than you are and which will do all of that for you?

Individuals will never outperform the market, so it’s not worth trying. If you have money you can afford to lose, then by all means put it into index funds in one way or another. But you don’t need to open a discount brokerage account to do that, and you certainly don’t need to start picking stocks or following portfolios. That’s just a recipe for losing money.