A friend recently passed me a new book, Martin Sosnoff’s Master Class for Investors. Sosnoff had read about DailyWorth and me in Forbes and asked if I would read his book and interview him. I shrugged. What could an old-school Wall Street financier teach me?
Sure, Sosnoff is a successful money manager. As CEO of Atalanta Sosnoff Capital, LLC, he manages $5 billion in assets. Scanning his book cover, I assumed he was like most Wall Street investors who mock people like me — saying we play it too safe by choosing to invest in index funds over direct stock picking.
Finance pundits on TV generalize that women are bad investors because we’re “risk averse.” But I disagree (and so do the facts). I’m not afraid of risk, and I didn’t want to read about a style of investing that runs counter to — or mocks — my strategy.
When I cracked open his book, I was surprised to read about Sosnoff’s background: A childhood of poverty and struggle stands in stark contrast to the mogul he is today. Raised during the Depression in a walk-up tenement in the East Bronx, Sosnoff subsisted mostly on potatoes bought in 25-pound bags.
During our interview, he told me he wanted to help less-savvy investors learn how the markets work. While affirming his best intentions, I challenged the premise of his book: Shouldn’t inexperienced investors primarily invest in indexes and not try to “beat the market”?
While Sosnoff agreed with me overall, he cautioned against my resoluteness and gave me sage advice to pass on: Trusting anything or anyone — whether a financial advisor or a passive investing strategy — is not an excuse to fall asleep at the wheel. You still have to understand what’s going on under the hood.
Here’s what you should keep in mind when managing your investments, even if they’re diversified mutual funds or ETFs (exchange-traded funds).
1. Understand How Investments Work
There’s risk in everything. Don’t just trust the index funds you’ve invested in — know the companies that make up those funds. For example, if you’re checking out your stocks on a site like Morningstar.com (an investment research firm, among other things) and you search “VEA” for the Vanguard Developed Markets ETF, you will see that this ETF is made up of individual holdings like Toyota, Nestle, and Bayer. You’re a better-informed investor with more control over your financial future when you know what you’re invested in.
This doesn’t mean you should get tunnel vision and ignore the big picture, Sosnoff says. Take a global perspective: Are jobs plentiful or scarce? Are geopolitical tensions high? How do college students feel about their prospects? Are interest rates low?
Here’s the bottom line: “Any investor, whether a professional working at it 10 hours a day or somebody who is disinterested in Wall Street's day-to-day mumbo-jumbo, should have a point of view on what's happening in the world and one's own country,” Sosnoff says. You simply have to know what's going on in the world to be in control of your own financial picture.
2. Get Used to the Roller Coaster
Since the stock market is always changing, so will your investments. The only way to make money is to take on some risk — it’s part of what it means to invest. Some days the total value rises and other days it falls. This is normal. But when you’re not used to it, the roller coaster can make you ill. It’s inevitable to watch your portfolio lose money at some point, so anticipate the ups and downs relative to what’s happening in the overall stock market.
3. Statistics and Data Tell Only Part of the Story
Because of my career as a computer programmer, I tend to invest in more tech-weighted ETFs because I witness in my personal life how these types of companies grow in value. I believe in the economic potential of technology.
Sosnoff warns me: Just because I can appreciate the promise of technology companies doesn’t mean I should be more heavily weighted toward technology-rich ETFs. Don’t get seduced by the noise.
If I’m choosing an ETF because an article on Yahoo! Finance shows a favorable growth report, chances are lots of other investors are doing the same thing, and the price of the holdings themselves could be inflated. Data may shed light on what parts of our economy are growing, but the price and growth potential of the shares themselves may also be inflated. In that case, the values of those shares could drop.
As a result of reading Sosnoff’s book, I’ve become much more of a skeptic, and for that I’m grateful. I’d grown so comfortable with my trust in diversification that I’d stopped asking some of the harder questions about my own portfolio.
How have you grown comfortable with your ideas about investing, and do you believe they’ll serve you in the long term? Passive investing isn't a free pass to trust anyone else’s ideas of what’s good for you. Keep learning and stay awake, or you’re risking far more than the money in your portfolio.