Hokey Pokey Investing

by | Nov 7, 2011 | Weekly Column | 1 comment

It’s been years since I took dance lessons, but as I remember it, an evening of dancing has an overall rhythm that’s separate from each individual song. A good band will vary the tempo of the dance by playing a variety of music. Too many slow songs, and dancers get bored doing one foxtrot or two-step after another. Too many polkas or fast jitterbugs, and half the crowd might end up a bit too literally “on the floor.”

A dance band might play mostly country-western music, have a big band sound, or focus on oldies rock and roll. But no matter what type of music it plays, in order to be successful it needs to have a diversified repertoire.

And no band would be invited back if it played nothing but novelty dances like the hokey pokey or the chicken dance. These might be fun for a few minutes, but nobody—except possibly a three-year-old on a sugar high—wants to do them over and over and over.

Unfortunately, some investors use what we might call the “hokey pokey” method of investing. They follow the latest get-rich-quick guru or the ups and downs of the market just like dancers following the directions of the song. They “put their right foot in,” and then the minute the market goes down, they sell and “put their right foot out.”

Those least likely to enjoy this type of dance are the ones who “put their whole self in” by investing everything they have in one company’s stock or one asset class. When the value of that investment goes down, as it’s bound to do sooner or later, they get scared and pull their “whole self out.” Usually this is just at the wrong time, about when the market is starting up again.

The investment class where most investors go “all in” is U.S. stocks. The majority of portfolios I see are heavily overweighed here. U.S. stocks are just one out of ten different asset classes. If everything you have, or most of it, is in this asset class, you are certainly putting your investment eggs all in one basket.

If a young person went “all in” just in stocks and never got out, they would probably be okay. Unfortunately, most investors can’t leave well enough alone. The downturns are usually too much to bear emotionally, so they try to time the market by attempting to sell when stocks are high and buy when they are low. That almost never works. By trying to time the U.S. stock market by going all in and then all out, you compound your anxiety and depress your investment returns.

It’s even worse if inexperienced investors fall prey to scam artists and “put their whole self in” by speculating in dubious schemes that are more hocus-pocus than hokey pokey. Some of these scams are multi-level marketing programs, dubious limited partnerships investing in the scam de jour, and even going into what could be good investments like business or real estate. Whenever you go “all in” to an investment, there’s a high probability you’ve set yourself up for a nasty fall.

Diversified investing is like pacing your dancing. When you have a mix of tempos and a variety of steps, you can enjoy the music for the whole evening. Once in a while, a galloping polka might make you a little dizzy, or you might get out of breath doing the twist. But the next slow two-step will give you a chance to recover. With a variety of music, you’ll still be having fun at the end of the night.

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