By Brett Arends, MarketWatch
Rodin Eckenroth/Getty Images
BOSTON — Oscar-winning actress Mira Sorvino just went on Yahoo Finance’s My Three Cents to publicize her latest movie. And in a few short sentences, she summed up pretty much everything you need to know about how not to invest in the stock market.
“I don’t [follow the stock market] at all,” the 51-year-old told host Jen Rogers. “I used to have money in the stock market, and then September 11 happened, and I was convinced not to pull my money out, because if every American pulled their money out at that moment we would have a terrible crash. But I lost hundreds of thousands of dollars that I did not get back. Things just plummeted.”
She went on, “I had to pull money out… before it could grow back. I am not a gambler. I do not enjoy playing with money and seeing it go down. Literally my kids’ college fund has gone down in the past year. I’m like, “What? No, no! We’re putting money in! That number should be steadily rising!”
Apparently the rich and famous aren’t getting better financial advice than anyone else: Sorvino is making the same basic mistakes as tens of millions of people on Main Street.
She doesn’t follow the stock market. She doesn’t understand it. She thinks it’s gambling. She apparently plunged heavily into stocks during the mania of the late 1990s. She seems to have owned an incredibly volatile portfolio. She blamed the portfolio’s downturn on 9/11, a random shock. She didn’t have a strategy. She didn’t plan for ups and downs. She didn’t stick with her investments, but pulled them out when the stock market was down. And she doesn’t understand volatility.
The only thing she did right was not selling after 9/11. And that was for emotional, rather than financial, reasons.
For a highly-paid star like Sorvino, the missed opportunities are painful. But for those who don’t have her income, they can be disastrous.
“The Dow Jones Industrial Average is up 184.6% since 9/11/2001,” points out Monica Dwyer, a financial planner with Harvest Financial Advisors in West Chester, Ohio. “The S&P 500 index (S&P:SPX) is up 175.8%... The Nasdaq index (AMERICAN:COMP) is up 386%.”
Sitting on the sidelines has cost people a lot of money. And even those who invest in the stock market often miss out on a lot of the gains. Many are like Sorvino. They don’t understand the market. They invest when it’s up. They sell when it falls. They buy hot stocks. And they end up getting hosed.
“I don’t think Mira Sorvino is alone,” says financial planner Marguerita Cheng of Blue Ocean Global Wealth in Gaithersburg, Md.
The turmoil of the past 20 years have left many people with a distrust of the markets and financial institutions, she says. That’s especially true for Generation X and Millennials, she adds. (Sorvino, born in 1967, is a Gen Xer).
Any financial adviser could tell you: You could get rich just by doing the opposite of Sorvino at almost every point. Buy when everyone’s selling. Sell when everyone’s buying. Avoid hot stocks or sectors. Understand that when the market is up it is going to go down at some point. Understand that when the market is down it is going to go back up. Be patient. Have a portfolio you don’t have to worry about.
And if you have an uncertain income — as an actress does — and you may need to liquidate investments at some point to live, have a portfolio that doesn’t fluctuate so much.
You don’t need to bet everything on U.S. stocks, either. Traditional investment managers used to recommend a basic portfolio of 60% stocks and 40% bonds. Today anyone can pretty much cover the waterfront with five Vanguard funds: the Vanguard Total Stock Market Index Fund (NAS:VTSMX) , which invests in the U.S.; the Vanguard Developed Markets Index Fund (NAS:VTMGX) ; the Vanguard Emerging Markets Stock Index Fund (NAS:VEMAX) ; the Vanguard Long-Term Treasury Fund (NAS:VUSTX) ; and the Vanguard Inflation-Protected Securities Fund (NAS:VIPSX) .
This exposes you to the world’s stock markets, not just those in the U.S.. And it covers you against almost any eventuality. Long-term Treasury bonds will hold up in a crash or a depression, like the 1930s. Inflation-protected Treasurys will hold up if we get a rerun of the 1940s or 1970s, when consumer prices skyrocketed.
Total returns since the day before 9/11: About 250%.
Brilliant investors, such as hedge fund legend Ray Dalio, offer more complicated “risk parity” portfolios. But anyone can buy five Vanguard funds.
Even a Hollywood star.