Why Investment Failures Are So Important

A Princeton professor has made waves online by publishing his own resume of failures — grants he did not get, schools that turned him down. He’s not the first academic to do so, as he notes, but it’s an interesting exercise nonetheless.

The professor, Johannes Haushofer, took on this masochist effort not to punish himself but, as he put it, to give some perspective on his successes.

“Most of what I try fails, but these failures are often invisible, while the successes are visible. I have noticed that this sometimes gives others the impression that most things work out for me,” he wrote.

It’s instructive to think about his approach to failure in terms of retirement investing. A lot of people think that the best approach is to buy a small number of investments and never sell.

Others take the view that you should try lots of things, getting in and out of the market often. After all, why spend months or years on investment failures when so many clear winners are out there to buy?

It’s counterintuitive, but you should do both: It’s important to buy investments and hold them for long periods and to avoid trading. But it’s also important to try to own the best-performing investments.

How do you know which are which? Here’s the beauty: You don’t have to know anything at all.

Portfolio investing is about owning asset classes, not individual stocks or bonds. Index funds allow investors to buy and hold whole markets. Since the funds rebalance automatically by market cap, you don’t have to worry about buying and selling.

Likewise, you don’t have to try to guess which asset class is going to do better or worse in the coming months or years. Rather, you just to be sure to own an appropriate amount of each investment type, be it stocks, bonds, real estate or commodities.

Over time, one investment class or another will surge ahead and be an obvious winner. When you go to rebalance, you end up taking those gains while they exist. The resulting cash is available to buy other investments that are down, relatively speaking.

That’s selling high to buy low, which is exactly how you should invest for long-term retirement planning.

Risky decisions

If you do it right, the long-term effect is to diminish the impact of your “failures” in comparison to your “successes.” In fact, the portfolio indexing strategy turns those relative failures into real successes over time.

More importantly, this approach erases the huge emotional risk entailed in focusing on individual investment failures. It also takes your attention off of relative successes, which can be important, too. You get to worry less.

And one more unseen risk: Nothing is worse for a long-term investment plan than a string of accidental “wins” early on in the process. It can give the young investor the impression of knowledge in a business that relies far more on chance, and that can lead to terribly risky decisions in the future.