Advancements in investment products and trading platforms haven’t altered long-standing investing fundamentals, according to neurologist and best-selling financial author William Bernstein.
Bernstein, the author of the second edition of “The Four Pillars of Investing,” a classic investment guidebook, joined CNBC’s Bob Pisani on “ETF Edge” to discuss his insights.
The first pillar of investing, according to Bernstein, is theory. He highlights the inseparable relationship between risk and return.
In his words, “If you desire a completely safe portfolio, you won’t achieve high returns. To attain the high returns associated with equities, you must be willing to endure significant losses.”
The second pillar, history, builds upon the concept that markets tend to overshoot on both ends and only reveal their bottoms in hindsight.
Bernstein states, “Markets don’t reach extreme valuations without good reason. It is crucial to maintain discipline and understand that the expected market return is influenced by the perceived risk of the market and the environment.”
The third pillar, psychology, addresses investors’ tendency to overestimate their ability to select stocks.
“I often compare investing to playing tennis against an invisible opponent, only to realize that the person on the other side of the net is Serena Williams,” Bernstein explains.
Bernstein also emphasizes the danger of overestimating one’s risk tolerance.
“Both during the 2008 financial crisis and the March 2020 Covid market downturn, I learned that how one behaves during the worst 2% of market conditions often determines 90% of overall investment performance,” he reveals.
The final pillar outlined by Bernstein is business. He asserts that the primary objective of most fund companies is to gather assets rather than effectively manage them.
This perspective is one reason why Bernstein holds a favorable view of exchange-traded funds (ETFs) and their role in reducing fees.
As Bernstein concludes, “Investors can now access a wide range of investment products with minimal expenses, often just a few basis points.”
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