Jason Zweig & Peter Bernstein: Avoiding Financial Ruin and Diversification

For do-it-yourself investors who are looking for easy to digest financial lessons, may I recommend Jason Zweig and Peter Bernstein?

Zweig is a personal finance writer and educator currently working with the Wall Street Journal. Bernstein is a financial historian and educator, who routinely blends history, psychology, philosophy and other subjects into easy-to-follow investing wisdom.

Fortunately, the two got together for a conversation (2004) that provides timeless investing and life lessons:

Investing and Avoiding Financial Ruin

Peter: “In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival…” (emphasis mine)

Many businesses and investors forget these lessons, in dogged pursuit of high investment returns.

The collapses of multi-billion dollar corporations like Lehman Brothers and Long-Term Capital Management are recent cautionary tales where aggressive investment strategies turned into survival threats. When both corporations experienced a brief economic downturn, excess borrowing, meant as an asset for juicing returns, crushed them. Suddenly, “assets” became liabilities—neither survived.

For do-it-yourself (DIY) individual investors looking to get decent investment growth without risking ruin, here are a few pitfalls to avoid:

1. Borrowing money to invest to “enhance returns”

2. Borrowing stocks for short-selling

3. Only “investing” with options

4. Double and triple-levered ETFs

5. Commodities trading

6. Putting all your eggs in one “basket” with large concentrated bets.

Diversifying Investments

Peter: “And I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. I want to make sure I’m exposed to it. Somebody once said that if you’re comfortable with everything you own, you’re not diversified.” (emphasis mine)

For DIY investors, Peter Bernstein recommends spreading capital into multiple investments or asset classes.

Perhaps an investor could scatter money across a S&P 500 stock index fund (ticker: VFINX), a bond index (ticker: BND), gold (ticker: GLD), real estate (REITs or single/multi-family rental properties), emerging markets (ticker: VEMAX), etc—avoid too many eggs in one basket. Different decades come with different winners and laggards, and it’s unknowable beforehand which investments will takes first.

For example, from 2010 to 2020, the S&P 500 (ticker: VFINX) turned a pretax $10,000 investment into ~$35,000, while assets like gold (GLD) and broad emerging markets ETFs (VEMAX) turned $10,000 into roughly $15,000—leaving one comparably $20,000 “worse off”.

But, if one looks back even further in history, they’d find gold crushing the S&P 500 the prior decade (2000-2010). Yesterday’s laggards may be tomorrows winners.

Because investors can never be certain where the next windfall may come from, we diversify. Different assets/investments will take turns carrying a portfolio’s returns, and we don’t know which ones they’ll be—so, we make a few bets.

Life in Britain During the Nazi’s V2 Rocket Siege

Peter: “One evening I went to a concert at Royal Albert Hall, and behind the conductor’s head was a red lightbulb. If it went on, that meant “imminent danger” — a bomb was coming.… To stay in your seat meant that you could be blown to bits. The red light went on three or four times during the concert. But everybody knew that if anybody moved, we could all be killed in a stampede for the door. Nobody moved. The British showed that if you didn’t go on [with life as usual], you couldn’t go on. It was wonderful. This is how people survive. People are resilient.” (emphasis mine)

During the WWII, Nazi V2 rockets terrorized England striking blows to the British psyche along with their cities. With the Nazis threatening England, tough choices for survival were forced upon the population.

Despite the looming risks posed by the Nazis and their rockets, Bernstein tells of how the British faced the predicament. And while not an investing excerpt, I included this snipit because the article timing coincided with the COVID-19 pandemic.