My grandfather was from Queens. He was a great guy, and he taught me a lot. He was also a native New Yorker, so he was street smart, and he was tough. Among the lessons he taught me, this one stands out: One day, while we were walking together down 47th Street, near Times Square, I stopped to look at the jam-packed window of an electronics store. My grandfather waited patiently but cautioned me, “Careful, they’ll take the eyes out of your head.”
It was a funny expression, but I understood: Be careful of shiny objects, he was saying, and be even more careful of the salesmen peddling them.
That was more than thirty years ago, but I was reminded of it this week, when I heard a financial industry insider offer a similar word to the wise. In this case, the shiny objects in question were investment funds, and I want to share his comments with you.
Andy Rachleff is one of Silicon Valley’s most successful venture capitalists. In 1995 he founded the firm Benchmark Capital, and over the course of his career Rachleff achieved an enviable record. He made a fortune, for example, as the first investor in eBay.
Needless to say, if you had been an investor in Benchmark’s funds, you would be very happy today. And so, as an investor, it might seem logical to try to find the next Andy Rachleff. After all, who wouldn’t want to get in on the ground floor of the next generation of successful startups? This is where Rachleff’s warning comes in: In a recent interview, he explained why, as an individual investor, you shouldn’t try finding the next Benchmark.
“The only venture capital fund that would let [the big wealth management firms catering to individual investors] invest in their fund are the ones that are desperate for capital. Why are they desperate for capital? They suck…So by definition, if [a wealth management firm offers to] give you access, run away.”
Strong words, but an important message: The problem isn’t that you can’t find great investment funds. The problem, in Rachleff’s view, is that, as an individual, you simply can’t get in. So, instead of settling for second-best, it’s better to take a different approach entirely. Specifically, I believe you’re much better off focusing on what you can control rather than hoping to catch lightning in a bottle. Here are some recommendations:
Step 1: Remember that asset allocation is what matters most. Research has shown that it’s much more valuable to spend time thinking through the the types of investments that you own than it is to endlessly deliberate over the choice of specific investments.
Step 2: Within the asset allocation decision, recognize that the most powerful — and easiest — way to diversify is with stocks and bonds. Historically, stocks and bonds have exhibited a negative correlation with each other. In other words, when one goes up, the other goes down, and vice versa. For that reason, I don’t think you need to get too elaborate in choosing investments. You might see ads for gold funds, or currencies or commodities and the like, but the data indicate that these don’t provide the same diversification benefit as a simple stock/bond mix. Yes, they sound sophisticated, but they aren’t much help.
Culturally, 47th Street seems a long way from Wall Street. Scratch the surface, though, and I don’t think they’re very different at all. To be sure, Wall Street’s salespeople look professional, with their pinstriped suits and fancy offices, but don’t let that fool you. Regardless of the venue, always beware of shiny objects.