MARY LOUISE KELLY, HOST:
Even though the trade war with China is making some investors nervous, the stock market hasn't fallen off a cliff. When the market has turned sour in the past, it has often led investors to make bad choices. Chris Arnold covers personal finance for NPR's Life Kit podcast. He recently looked at how to ride out stock market storms.
CHRIS ARNOLD, BYLINE: Most people could use some good investing advice, right? Well, I've got the perfect person to help us.
DAVID SWENSEN: My name's David Swensen. I manage Yale's $29 billion-plus endowment. I've done that for 33 years, and it's been a pretty good run.
ARNOLD: Actually, Swensen's had an astoundingly good run - the best track record of any university endowment in the world. He's also written a book about how to invest for retirement. It's called "Unconventional Success."
Is there, like, a biggest mistake that you see people make when it comes to investing?
SWENSEN: You know, Chris, that's a tough question. But if I had to pick one, I would say performance chasing - buying what has gone up, selling what has gone down. When you do the math, that just doesn't work.
ARNOLD: So this is Swensen's first tip for us. You don't want to buy a lot more stock after the market goes way up, and especially you do not want to sell stocks after the market crashes down. Now, you might think, but wait a minute. I mean, if stocks are in a freefall, they might fall farther. And behavioral economists say we experience loss in a way that clouds our judgment and makes us feel like selling is the right move. But let's think about it this way.
All right, David. Let's pretend that we just got on a roller coaster, and it's going up the big clickety-clickety thing. And we're at the top, and we start crashing down. And everybody's screaming, and it is terrifying. And we're going around a corner, and we're pulling Gs. And you look over at me, David, and I'm trying to get out from under the bar. And I'm telling you, David, I'm freaking out, man. I'm jumping off this thing. What would you say to me?
SWENSEN: Sit down, and shut up.
ARNOLD: OK, so nobody jumps off an actual roller coaster, right? I mean, that'd be crazy, but that's basically what people are doing when they sell stock after the market crashes down. The only way that you get hurt is if you panic and jump out of the market and sell because you are locking in those losses. If you don't sell, you could ride that roller coaster back up when the market recovers, which it always has, eventually, right? But if you sell, you're left in a ruined heap at the bottom.
SWENSEN: That's exactly right. And when you sell in the midst of a crisis, you can put yourself in a position where your portfolio will never recover.
ARNOLD: OK, our tip number two from David Swensen - don't buy individual stocks. People like to think that they can pick some hot-looking stocks like maybe Amazon or Tesla. But here's the dirty little secret of Wall Street. Even most professionals - they can't pick individual companies whose stock will perform better than the overall market.
SWENSEN: It's basically a fool's errand. Think about these professionals who are devoting their careers to beating the market, have such a hard time beating the market. How can somebody who's casually spending a little bit of time on the weekends compete? They can't.
ARNOLD: Eighty to 90% of mutual fund managers - they fail at this. So Swensen says don't buy actively managed mutual funds where you're paying those managers to pick stocks because they so often fail, and the fees that they charge cost you a lot of money. Advisers in financial firms might try to tell you that those fees are worth it, but...
SWENSEN: I mean, it's completely untrue.
ARNOLD: Instead, Swensen says his tip number three - buy passively managed index funds. They have super low fees. You basically own a slice of all of corporate America, and they have a great track record.
SWENSEN: And when you look at the history, the overwhelmingly right choice for investors is to take this index fund approach, and you'll be far better off than with the actively managed alternative.
ARNOLD: So to recap, Swensen says use low-cost index funds; don't try to pick stocks, and don't panic and jump off the stock market roller coaster when it goes crashing down. We have a lot more advice and a suggested portfolio from David Swensen in our NPR Life Kit guide to saving and investing. Chris Arnold, NPR News.
KELLY: And you can find more tips about a whole bunch of stuff at npr.org/lifekit. Transcript provided by NPR, Copyright NPR.