The ‘invisible gorilla’ experiment is one of the most famous in psychology, and the phenomenon it illustrates presents itself all the time in the world of investing. Invariably, when investors are looking left, something appears on the right. In recent years, for example, we’ve seen a pandemic, war and inflation. And in the future, there will be other surprises. Thus, the reality is that whatever we’re all focused on today represents just a fraction of what will actually occur in the future.

That’s why a fundamental principle for investors, I believe, is to avoid putting too much weight on today’s news, to avoid trying to make predictions and instead to structure your finances in as “all-weather” a fashion as possible.

“We paid off our mortgage a while ago. I know the ‘spread’ on what I might have earned with that cash. I don’t care. I love not having a mortgage, and no other debt to speak of.”

Among the questions I hear as a financial planner, mortgage payoff is a frequent topic for discussion. That’s because there appears to be such a simple, mathematical answer—the spread Portnoy refers to.

But when it comes to financial decision-making, I believe there are always two answers: what the calculator says, and how you feel about it. The mortgage pay-down question is a perfect example.

The ‘spread’ calculation overlooks the reality that unexpected events can sometimes get in the way of a financial plan. And if an unexpected event impacted your cash flow, a paid-off mortgage could suddenly become more valuable than it initially appeared strictly according to the calculator.

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“Life is poker, not chess.”

What’s the difference between chess and poker?

In chess, all of the pieces are on the board, where both players can see them. There are no secrets. So winning and losing depends only on a player’s skill. But with poker, it’s the opposite, and that introduces a dimension of randomness to the outcomes.

This distinction—between realms in which randomness does and does not play a role—is important to understand. Investing certainly falls into the poker category, where random events can, and often do, occur. This is why Howard Marks reiterates so frequently that “you can’t predict.” But what can you do instead? Prepare.

How?

No one can see around corners, but you can structure your portfolio so your plans aren’t vulnerable to market downturns. In practical terms, that means an asset allocation that stows sufficient assets in more stable holdings. I prefer a combination of bonds and cash.

When the market is going up, it might feel like a drag to hold bonds or cash. The reality, though, is that market downturns always arrive without warning, so in my view, it’s a small price to pay to keep a part of your portfolio in the slow lane so it’s always there when you need it.

“Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”

That was it.

Despite Buffett's being one of the wealthiest people in the world, the portfolio he recommended was remarkably simple—no actively-managed funds, no hedge funds, no private equity or any other seemingly sophisticated investments. Buffett's view is that it really doesn't need to be any more complex than that. I agree.

“...the notion of selecting the ‘best’ securities still deserves a close scrutiny. Those classes of investments considered ‘best’ change from period to period...what are thought to be the best are in truth only the most popular—the most active, the most talked of, the most boosted, and consequently, the highest in price at that time. It's very much a matter of fashion, like Eugenie hats or waxed moustaches.”

Schwed's book is funny, but his observations are timeless. The phenomenon that he is describing here—that popular stocks end up becoming overpriced—is one of the reasons why popular growth stocks have, on average, underperformed boring value stocks.

“Start with this brutal truth: No investment is free of all risk. Investments can usually be slotted into one of four categories—stocks, bonds, cash investments and hard assets. How much you can invest in each will depend on your goals, your time horizon, and your stomach for risk. This notition of risk, however, can be a tricky one. At times, each of the four may seem like the low-risk option. But don't be lulled into complacency. In the right circumstances, all four can go badly wrong. The good news: All four probably won't go wrong at the same time.”

It’s an excellent point. At various points in recent years, each of the major asset classes has gone through a tough period. When there’s political or geopolitical uncertainty, stocks will drop. When interest rates rise, bonds will drop. But it’s a rare occurrence when both drop at the same time.

And when stocks and bonds do drop at the same time, as they did in 2022? That’s when we’re reminded of the importance of holding cash.

We shouldn’t just expect stocks to go up simply because they have, on average, always gone up in the past. Rather, there is a basis for expecting stocks to rise. In general, there are three components to stock market returns:

1. Dividends

2. Profit growth

3. Changes in investor sentiment

Simple as it looks, these fundamental building blocks are the reason why investors aren’t simply extrapolating when they assume that the market will continue to rise in the future. The rate of growth might be slower in the future than in the past—due mainly to slower population growth, which may translate to slower profit growth. But overall, I still expect stocks to rise. And that’s why stocks should be the starting point in building a financial plan for long-term growth.

What does this mean? Bernstein describes what happened in Argentina in 2001. Facing economic troubles, the government first froze all bank accounts. Then, it forced everyone to convert their savings into government bonds at a disadvantageous rate.

This doesn’t seem like the sort of thing that could happen in the United States. And I agree it seems unlikely today. But if you have a globally diversified portfolio, this kind of thing is a risk. That’s especially true with emerging markets countries, such as Argentina, along with China, Russia and other countries with authoritarian regimes.

That helps explain, I think, why the valuations of those countries’ stock markets are often cheaper than those of developed countries. Those lower valuations shouldn’t be interpreted as making those markets more attractive. Rather, those lower valuations are indicative of a higher level of risk. This is why I recommend only a small allocation to emerging markets stocks.

“Don’t try to buy at the bottom and sell at the top. This can’t be done—except by liars.”

I draw two useful lessons from this:

The first is that we shouldn’t strive for perfection. It’s not possible, and we run the risk of overthinking, which can lead to worse results.

The second lesson is that we shouldn’t pay too much attention to what other people might claim about their portfolio successes. Often, it’s not true. But at the very least, it’s a distraction.

But there’s a point that’s often misunderstood about this book. Many interpret the findings, such as the car buying habits, to mean that there is merit in frugality as an end in itself. In other words, if millionaires have these habits, then we all should. But the authors’ conclusion is a little different.

The primary message is this: Many millionaires become wealthy because of their frugal habits. If you drive a Ford instead of something more upscale, that leaves more dollars available to invest and grow. However, if you’ve already become wealthy, then the authors see nothing wrong with using your wealth as you see fit.

Put another way, driving a Ford might help you become rich. But once you’ve become rich, there’s no crime in driving something else if you wish.

Contrary to the economics textbook, Kahneman and Tversky found that people look at potential losses and potential gains differently. Most importantly, for example, people dislike a $1 loss more than they enjoy a $1 gain. In fact, they found that it takes a gain of about $2 to offset a loss of just $1. In other words, people really hate losses.

How does this apply to your finances? Frequently people will ask me why they should own bonds if they're not even paying enough to keep up with inflation.

My answer is always the same: You shouldn't own bonds to make money; instead, bonds are there to help you avoid losing money. When the stock market declines, bonds help you manage through that period. In other words, your allocation between stocks and bonds might not stand up to the scrutiny of a calculator, but it should stand up to the reality that Prospect Theory teaches us—that protecting against losses is even more important than driving for further gains.

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Because of that difference, Bernstein sees value averaging as a superior approach. However, if you Google the term "value averaging," you'll find quite a bit of debate about whether or not it is actually superior to traditional dollar-cost averaging.

My view is that there is no "right" or "wrong" here. Since the market, on average, has always exhibited an upward trend, investors are statistically better off investing any sum of cash all at once and not delaying. For that reason, all incremental approaches are not mathematically-based. Instead, they are behavioral strategies, to avoid the regret that could result from a rapid market drop immediately after investing a large lump sum.

Because incremental strategies are not mathematically-based, there is no scientific way to choose one formula over another. I see the appeal of value averaging, but it's not necessarily the only or best way; it is just one of many similar strategies.

He split participants into two groups: The first received regular news on their investments and were permitted to make trades based on the information they received. The second group were also permitted to trade if they wished, but didn’t receive any news on their investments.

The counterintuitive finding: Those who received no information on their investments ended up making better trading decisions than those who were better informed. More information, it turns out, causes investors to place more frequent trades, and these trades end up being counterproductive.

Why? Successful stock trading requires investors to be right twice: First, they need to make the correct investment choice, then they also need to time their trades correctly. In other words, an investor can buy the right stock at the wrong time and still end up losing money. The market’s volatile path in 2025 is the latest illustration of why this is so hard.

Jack Bogle used to say, “Don’t do something; just stand there.” It was good advice then, in my opinion, and good advice now.

“...the most profitable thing we can learn from the history of booms and busts is that at times of great optimism, future returns are lowest; when things look bleakest, future returns are highest.”

This observation may seem fairly obvious, but it bears repeating. That’s because it can be so hard to implement.

When the market is low, as Bernstein notes, things will look bleak. At times like that, it can be very hard to be optimistic, even though that's the time when it would be ideal to be an aggressive buyer.

And when the market is high, and everything looks terrific, that's when it's hardest to be conservative.

That's why I think this observation is important, as straightforward as it is.

“...decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world. Neither approach, in general, dominates the other, and both have continued to co-exist in the world of management science.”

“Only an income-producing possession, such as a stock, bond, or working piece of real estate is a true investment.”

I entirely agree. That is the concept of intrinsic value. Yes, you can put your money into other kinds of things, including gold and cryptocurrency. But it is very hard to know what those types of things are really worth because they don’t produce anything. As a result, they are only worth what the next person will pay for them. So even though it may seem limiting, I recommend only including stocks, bonds and real estate (and cash) in portfolios.

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The statistician George E.P. Box once made this observation: “All models are wrong, but some are useful.” This certainly applies to personal finance, where many of the concepts are imperfect, and on virtually every question, there’s more than one opinion.

For individual investors, this absence of clear answers can be frustrating. The goal of The Investor’s Bookshelf is to help you navigate—and make sense of—this world of competing opinions.