The Investment Scientist

Intelligent Ignorance Is Bliss

Posted on: April 3, 2020

 

envelopes.jpgAllow me to indulge in a bit of fancy. I would love to be remembered as the person who invented the oxymoron “Intelligent Ignorance.” By the end of this essay, I hope to convince you that intelligent ignorance can make you a better investor.

Like the other oxymorons “jumbo shrimp”, “pet peeve”, “bloody awesome” etc., this one needs a story as well. It all started with Nobel Prize winner Daniel Kahneman’s discovery that we humans experience joy when making money and pain when losing money – Duh!  Hold on, keep on reading, there’s more. The pain is usually twice as intense as the joy even if the amount of money lost or gained is the same. This means that if you pay too close attention to a volatile market, it could be a hell of bad experience. Bad experiences lead to bad judgments and before long you are making bad trades.

Thus Kahneman suggested to Israel’s pension authority that instead of sending out investment statements to pensioners once a month, they should send them once a quarter instead. After adopting Kahneman’s suggestion, the Israel pension authority found a substantial reduction in irrational trades and pensioners’ portfolios are, overall, doing better.

With the close of March, when the market gave us a great discount, you will get your monthly statement soon. The statement will show you the least consequential number of your account – your account value on 3/31 as compared to 2/29. It won’t show you the most consequential one, the shares of productive assets you own. This presentation of information is guaranteed to freak you out and may cause you to make bad decisions. With that in mind,  you can intelligently adopt Kahneman’s suggestion by just not opening the envelope.

You can make a guess if you need to. The equity market has discounted about 25%, the debt market about 5%. If you have a 50/50 portfolio, you should expect the portfolio to be down 15%. If you have stayed the course, you will have the same shares of productive assets; if you have rebalanced because you have a good financial advisor, you will end the month owning more shares of productive assets! That’s what will count in your retirement.

Intelligent Ignorance is bliss. You can open the envelope when this crisis is over.  I promise you will get a jolt of delight.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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