Nobel laureate William Sharpe, a professor emeritus of finance at Stanford Graduate School of Business, says “anyone who tells you the exact amount you can earn investing in the stock market for the next 20 years or 30 years is either crazy or intentionally misleading you.”
That said, Sharpe says online retirement planning software has improved, but risks are always inevitable with investing.
Interviewed at the Stanford Graduate School of Business website, where his picture appears holding a little fluffy white ragamuffin dog that’ll make you say “aaww,” Sharpe takes a strong stand in favor of low-cost index funds over managed mutual funds that charge hefty fees. For more on the erosive impact of these fees, see Sharpe’s article for the Financial Analysts Journal.
The economist is a strong proponent of diversification in a portfolio. But he also strongly advises people not to invest heavily in their own companies or industries.
“Suppose an investor works and owns a home in Silicon Valley,” he says. “Personalizing her portfolio might well mean underweighting technology stocks, since a downturn in the Valley could cost her her job and knock a big percentage off the value of her home. Why risk having the retirement portfolio go down as rapidly as the other ships?”
Now that the market’s hitting all-time highs, some people may be reluctant to get their feet wet, but Sharpe says:
“I wish I knew whether in a year, we will look back and say that the current level of the market was an all-time high. But I don’t, and would warrant that few, if any, do. Better to assume the equities market is somewhat more likely to go up than down and act accordingly.”
Investors also need to avoid hubris (ticker: PRIDE).
“You may think your opinion is superior, but it pays to be humble, investing in the market rather than trying to beat it,” he says.
More About Mutual Funds
Sometimes it’s hard to avoid putting money in mutual funds, especially if your workplace offers a 401(k) plan stacked with them. To learn more about how to pick the best funds, it’s not too late to sign up for BetterInvesting’s All About Mutual Funds webinar, a free four-part webinar series that continues with “Making Money With Mutual Funds” on Thursday, April 25, from 8:30 – 9:30 p.m.
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