What was the idea behind the book’s title?

This should be a winner’s game. In the long run, certainly over all the historical periods that I examined, investing should have multiplied your wealth even if you made a succession of errors.

But people have a tendency to undercut themselves and shoot themselves in the foot. You’re taking what is so clearly a winner’s game, with the power of compound interest working in your favor, and you’re hurting yourself. It’s very, very simple, although not very easy, to affect your odds positively.

What do you think investors actually do right?

A minority of investors do the right thing for the right reason. And I think probably an even larger group of people do the right thing but not for the right reason. They do it through inertia.

There’s a lot of anecdotal evidence and some hard evidence that some people—who may be intimidated by finance or don’t know much about it—are fortunate. They fall into a pattern of putting away money in a passive way and not reacting or even being aware of scary headlines. Either they’re mentally able not to react or they’re oblivious. Either way, they’re doing themselves a huge favor by leaving things more or less on autopilot.

What is the downside to listening to the media and allowing it to influence your investment decisions?

Reading about what’s happening in the world financially is one thing; going out and reacting to it or trying to anticipate the next big thing is another. There’s very little evidence that even someone very savvy about interpreting the news and anticipating what might happen will be any better at security analysis than anybody else.

Reacting to the news or even to the news analysis with your own portfolio is on balance a poor decision.

How would you recommend an investor make peace with market volatility?

One way is to recognize where most of the returns come from. A disproportionate share of underperformance comes not from being fully exposed to the brunt of the bear market but from not being exposed to the recovery.

I tried very hard in the book to show people that it was the pulling back and reacting to bad times that really, really cost them. I think being exposed to the sometimes very sharp dips in the market is just the price you have to pay. You have to punch that ticket in order to go along for the ride.

What is it about the financial markets that makes it impossible for professionals to forecast a downturn before it arrives?

It really isn’t in the interest of mainstream forecasters for large financial services firms to stick their necks out and say that some abrupt economic reversal is around the corner.

And I think most economic data are backward-looking. So it’s difficult even if you’re sincere about calling a turning point to identify one correctly. You’re engaging in a lot of career risk by doing so.

Markets are far better at anticipating a downturn than the collected wisdom of economists and strategists. That’s why markets tend to preempt professional calls for a downturn.

We often hear that investing in the broad stock market or stocks in general can give us our best chance for success. Why should we believe that stocks are the best long-term place for our money?

I think it’s probably safe to say that over any longer period of time, stocks are going to produce a superior but much choppier return than less risky assets. An academic would explain that by talking about the equity risk premium. You’re paying the price for superior returns in stress. That stress causes most people to forgo a large chunk of potential returns by engaging in market timing that’s destructive to their nest eggs.

That really is what explains the superior return of stocks. Most people can’t stomach those twists and turns. For people who can, or who can be philosophical about it, the returns are there for the taking.

What tips do you have for today’s busy investors who are nearing retirement about establishing an investment strategy that’s not too time-consuming?

Life cycle or target-date funds are one very easy way to put things on autopilot on an age-appropriate basis. When you’re older, you tend to have more assets that are less volatile or are not going to lose value.

Putting those decisions on autopilot has two advantages. It takes the decision out of your hands, so you’re less likely to engage in destructive timing. And it allows you to be a profitable contrarian over the long run by buying riskier assets closer to the bottom and selling them closer to the top of the market.

What advice do you have for intelligent people who want to be educated and engaged in their investments but might not be experts in the field?

A lot of evidence shows that smart people, as I say in the subtitle of my book, have a tendency to be poor investors. Reading a lot about the markets tends not to improve results.

There are many aspects to finance and to managing your money where knowledge is very useful. But when it comes to security selection, the evidence is extremely strong that all the education in the world is unlikely to allow you to beat a completely passive strategy.

Notes:
Opinions expressed by Mr. Jakab are not necessarily those of Vanguard.

All investing is subject to risk, including the possible loss of money you invest.

Past performance does not guarantee future results.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target date funds is not guaranteed at any time, including on or after the target date.