Bubbles happen. Our brains are our worst enemy. New products don't make us better investors. Those are notions that SmartMoney's editors and writers embrace -- now. Back in April 1992, however, the magazine's goal was just to help demystify personal finance. But as investing veered from thrilling (the 1990s rally) to devastating (the 2008 financial crisis), many important lessons emerged.
In the late 1990s, analysts hawked profitless tech stocks by the dozen, saying the new rules of the "new economy" made them worth billions of dollars. Later, we were told that nationwide housing prices, no matter how high they rose, would never fall. Wrong on both counts. Bubbles can stick around for years, allowing investors to make fortunes. But when bubbles burst, they make the lives of millions miserable. The key, experts say, is to watch for prices going out of whack en masse.
We're Irrational Investors
A Bull Run, Two Bubbles, a Dozen Crises...
...and 229 magazine issues -- a look back at events and issues that have shaped SmartMoney's investing coverage since 1992.
"Buying low and selling high goes completely against human nature," says Stu Schweitzer, vice chairman at J.P. Morgan Private Bank. That wasn't the prevailing wisdom 20 years ago. It took Princeton professor Daniel Kahneman winning a Nobel Memorial Prize in 2002 for many to take the field of behavioral finance seriously. What have we learned? We are, too often, overconfident in our investing ability. When we're not overconfident, we're often too afraid of losing money, which makes us miss opportunities. So-called sophisticated investors aren't immune; the past two decades are littered with hedge fund managers and mutual fund gurus who let their emotions or preconceived notions get in the way of smart decisions.
Faster, Cheaper, but Not Better
Online trading, ETFs, funds of funds and a slew of other products have expanded investing opportunities immensely. Often they've made the process cheaper -- and easier, too. But all this innovation hasn't necessarily made us more effective investors. Target-date funds debuted as a way for people to buy one product and not worry about retirement strategy again. Then came 2008, when some funds lost 40 percent. So much for "set and forget." Such innovations, we were reminded, are not replacements for critical thinking.
Emerging Risks and Rewards
In a February 1996 story, our first on investing in emerging-market stocks, we complained about how difficult it was to buy the stock of Chinese and Indian firms. But buying them would have been worth the effort. China entered the World Trade Organization in 2001, pulling itself and other nations supplying it into the modern global economy. Since then, the Morgan Stanley Emerging Markets index is up 221 percent (U.S. stocks: up 14 percent). There's still money to be made; emerging markets will eventually account for half of the world's economy, says Eric Lascelles, chief economist for RBC Global Asset Management. These stocks will probably continue to be volatile, however. International-stock investors still have to worry about coups, currency defaults and runaway inflation a lot more than domestic-stock investors. "Foreign stocks soar and crash. It's not their fault," Lascelles says.