Time to stop thinking ”smart” like a bond guy?

The last month has caused a warranted fixation on the credit crisis and the housing market. Problems with credit-worthiness and liquidity have been paramount across all of the fixed income and currency markets. In spite of all the problems, equity markets performed rather well for the month.

Once again equity managers saw a glass half-filled as optimists while fixed income guys were pessimists with the glass half empty. These are personality traits that seem to be engrained in the professionals of each asset class. So who is right?

Perhaps neither. I got some advice from the Lam Group, a wealth advisor out of Portland Oregon. He is not overly optimistic but also not willing to succumb to a sky is falling mentality. He referred me to some wisdom from Ben Stein. Ben makes a very good case for simplicity.

"Stupid" investors, rejoice!

Ben Stein
Economist, writer, lawyer, and actor

No one is too stupid to make money in the stock market. But there are many who are too smart to make money.

To make money, at least in the postwar world, all you have to do is buy the broad indexes domestically--both in the emerging world and in the developed world--and, to throw in a little certainty about your old age, maybe buy some annuities.

To lose money, pretend you're really, really clever, and that by reading financial journalism and watching CNBC, you can outguess the market day by day. Along with that, you must have absolutely no sense of proportion about money and the world at large.

In an attempt to act “smart” or have the “illusion of control” we believe that we have to take some action. We read about what is going on in the financial world and that news is a signal for us to do something. The need for action should be based on the asset class and the situation. For money markets, action was needed immediately. For equities, it may still be early for major changes in allocations. The key is to avoid taking action for the sake of action. An attempt to do something during periods of maximum uncertainty makes you feel in control but may have negative consequences.

Being smart does not mean having to do something. Nevertheless, being a bond guy, I want to protect principal and find cover. A liquidity crisis and contagion will have a mind all its own.