dividends or earnings rather than by its market value. Fundamentally
weighted indexes have had higher returns and lower risks historically
than capitalization-weighted indexes.- Finally, establish firm rules to keep your portfolio on track, especially
if you find yourself giving in to the emotion of the moment. If you are
particularly anxious about the market, sit down and reread the first two
chapters of this book.
Swings in investor emotion almost always send stock prices be-
yond their fundamental values. The temptations to buy when everyone
is bullish and sell when everyone is bearish are hard to resist. Since it is
so difficult to stand apart from this market sentiment, most investors
who trade frequently have poor returns. Chapter 19 shows how behav-
ioral finance helps investors understand and avoid common psycholog-
ical pitfalls that cause poor market performance. Chapters 1 and 2 keep
investors focused on the big picture about risk and return.
IMPLEMENTING THE PLAN AND THE ROLE
OF AN INVESTMENT ADVISOR
I wrote Stocks for the Long Runto spell out what returns could be ex-
pected on stocks and bonds and to analyze the major factors influencing
those returns. Many investors will consider this book a “do-it-yourself
guide” to choosing stocks and structuring a portfolio. But knowing the
right investments is not the same as implementing the right investment
strategy. As Peter Bernstein so aptly indicates in his foreword to this edi-
tion, there are many pitfalls on the path to successful investing that pre-
vent investors from achieving their intended goals.
The first pitfall is trading frequently in an attempt to “beat the mar-
ket.” Many investors are not satisfied earning a 10 percent annual return
on stocks when they know there are always stocks that will double or
triple in price over the next 12 months. Finding such gems is extremely
gratifying, and many dream of buying the next corporate giant in its in-
fancy. But the evidence is overwhelming that such investors suffer poor
returns as transactions costs and bad timing sink returns.
Investors who have been burned by picking individual stocks often
turn to mutual funds in their search for higher returns. But choosing a
mutual fund poses similar obstacles. “Hot managers” with superior past
performance replace “hot stocks” as the new strategy to beat the market.
As a result, many investors end up playing the same game as they had
with individual stocks and also suffer below-average returns.CHAPTER 21 Structuring a Portfolio for Long-Term Growth 363