By Andrew Welsch

President Donald Trump's on-again, off-again approach to tariffs has whipsawed markets and left investors struggling to keep their footing. That makes Barry Ritholtz's new book, How Not to Invest, a timely read because it urges investors to maintain a long-term perspective. "There's always a reason to think the world is going to hell," says the co-founder, chairman, and chief investment officer of New York-based Ritholtz Wealth Management. "Investors have to ask themselves the question: Is it really worse today than it was during the financial crisis, the pandemic, or 9/11?"

That is not to say Ritholtz, whose firm now manages $5.7 billion in assets, is sanguine about the potential consequences of tariffs. Far from it. In his worst case scenario, they could set back the U.S. economy significantly. Yet in an interview conducted April 22, Ritholtz says investors need to remain calm and emulate Mr. Spock, the unemotional, logical Star Trek character: "Don't let emotions and the fire hose of information dictate your investing."

What do you make of the current tariff-induced market volatility? I try to think in terms of a range of probabilities. The best-case scenario is Trump is engaging in negotiating strategies and will walk back the most egregious parts of the tariff plan. We tried this a century ago and it didn't work out. That is not to say that China treats us properly, that they don't steal intellectual property, and hack our computers. So maybe we end up with a better deal.

The worst-case scenario is this just goes off the rails, the dollar is no longer the reserve currency, foreigners don't want to buy our debt and we run into deficit problems, interest rates spike, and we go into a serious recession and then a depression. That is the worst-case scenario.

Most of the time, neither tail happens. You tend to end up in the fat part of the bell curve. So, the rest of the world is on notice: You can't trust the U.S. to do the right thing. And maybe we don't implement the worst aspects of this. Maybe there is a mild recession, and that scares everyone, and they walk most of this back.

That is Part A. Part B is if you think about markets as a future discounting mechanism for corporate revenue and profits, it's clear that the market hadn't anticipated tariffs high enough that it would affect the economy and corporate revenue and profits. This is really a fundamental misunderstanding of how global trade works. I look at globalization, and I certainly have benefited from it as an educated male working in the financial-services industry, but it seems like there is an asymmetrical risk here in terms of what the White House is trying to accomplish. This is kind of rolling the dice on a $27 trillion economy. The best-case scenario is only a mild improvement, and the worst-case scenario is economic disaster. I wouldn't want to take that bet.

There is a lot of discussion about the uncertainty created by the Trump administration's tariff announcements. In your book, you talk about the uncertain and the unknown. Can you unpack that and how it might help investors think through the current moment? Uncertainty is a TV pundit's best friend. Let's be honest: The future is always unknown and uncertain. I like to remind people that nobody who did their year-ahead look in 2019 had a global pandemic on their agenda. Nobody, or very few people, expected Russia's invasion of Ukraine. Or the Israel-Hamas war. Not only is the future random, but every random factor has unintended consequences. It's like you throw a pebble in a pond and you get concentric rings. Imagine throwing a million pebbles in a pond.

In the book, I talk about when you hear people talking about uncertainty it's because we all live in our self-constructed bubbles, and when we lose the ability to lie to ourselves, that's when you hear people get nervous about uncertainty.

All that said, there is a factor with tariffs that is unique. What makes this so unpredictable is that it literally turns on the whims of one person. That hasn't happened before. We can look at sentiment data, and when the crowd of millions of investors gets too pessimistic, that can be a warning sign that a reversal is about to happen. We can look at employment data and see how many people are changing jobs. But you are talking about millions of people. Today, we're talking about one person. I'm trying to think about the last time a single person had such an impact on the global economy. Maybe you'd have to go back to Genghis Khan or Julius Caesar.

Now, in the book, I have a chart that goes back to 1926, and there is always something horrible happening -- Pearl Harbor, the Kennedy assassination, 9/11 -- there's always a reason to think the world is going to hell. Investors have to ask themselves the question: Is it really worse today than it was during the financial crisis, the pandemic, or 9/11? I think we are today more informed and more misinformed. In the olden days, you knew what was going on in your town. Today, you find out every new piece of information instantly. We have doom-scrolling. That suggests that maybe the world isn't the worst off, but you have access to more information than ever. And we are wired to see existential threats.

So where does that leave investors? Just sit tight? I'd break investors into two groups. If you just had a baby and you are putting money into a 529 plan or you are 10 or 15 years away from retirement, you can look past the noise. And this is definitely a noisy administration. If you don't need to touch that money for five, 10, or 15 years, you can look through to the other side and say, "This isn't as bad as the financial crisis or the pandemic."

Those people are in a very different situation than people who are planning on retiring soon, say in the next 12 or 18 months. It's never fun to retire into a downturn. Those folks have legitimate causes for concern. There are solutions for those issues, but no one will be happy with them. That may mean working for an extra year or two, or taking less money [from your retirement accounts], or cutting expenses. The reality is that if you have a 20% downturn, that can affect your sequence of returns.

You write about long cycles: secular bull and bear markets. We've been in a bull market. Is that nearing an end? We were in a long secular bear market from, let's call it, 2000 to 2013. During that time, there was 9/11, the Iraq war, and the financial crisis. At the same time, you had the underpinnings of a long secular expansion. First it was software and then mobile, and that transitioned into AI. So the secular expansion has been technology driven. Hopefully we don't do anything to interfere with that. But there are now concerns about funding for education and science research. U.S. education is one of our best exports. People come from overseas and pay big bucks to be here.

We are at increasing risk of an unforced policy error that leads us to damage the key drivers of America's economic success. And we tried [tariffs] before in the 1930s, and we know how the movie ends. It just feels like an asymmetric risk to achieve some goals. I don't know how this plays out, which is why I am giving you probabilistic answers. But I don't want to play Russian roulette with a $27 trillion economy. Five times out of six, you might be fine, but the sixth time you blow out your brains.

You advise investors to be long-term thinkers. How should they do that? Read history. It's amazing to me how much of what is happening today is an echo of what has happened before. Black Monday by Tim Metz is a good book about, "Hey, we tried something unproven, and it blew up the stock market in a single day." I don't know if the tariffs end up being an idea that blows everything up, but if you want to have an idea of what will happen, you need to read history. Technology changes, but human nature never does. There's a Ray Dalio quote that effectively goes when people say something is unprecedented, they mean it hasn't happened in their lifetime.

You talk a lot about unforced errors. What are some of investors' most common own goals? When people bring us portfolios, two of the biggest mistakes we see are two sides of the same coin: They are either taking too much risk or not enough relative to their circumstances. Let me unpack that. A lot of millennials were underinvested before the pandemic; they had too much bonds or cash. A lot of that was post-traumatic stress from the financial crisis. But the 2010s turned out to be a great time to invest in stocks. So, they ended up underinvested. They were risk averse instead of risk embracing.

The flip side is the person who has done well, risen through the corporate ranks, and fully funded their 401(k). Every once in a while we'll see a proverbial middle-class couple that did well, and they'll have $10 million, and $9 million of it is Nvidia stock. It's like: Guys, you have a ton of single-stock risk here. Why is 90% of your wealth tied up in a single company?

Another big one is behavior. When Trump won in 2016, we had clients who wanted to sell everything. When Biden won in 2020, we had other clients say the same thing. Markets did well under both. Don't let emotions and the fire hose of information dictate your investing.

In your book, you suggest investors be more like the Star Trek character Mr. Spock, who is highly logical and unemotional. You can't pretend your emotions aren't there. We are emotional creatures. So acknowledge them, but put things in place to guide your decision-making beforehand.

You also suggest some investors consider opening a "cowboy account" if they want to dabble in more risky investing. Why is that a good thing? I have a vivid recollection of going to barbecues in the late 1990s when everyone was talking about their favorite stock. Back in the '90s, we didn't call it FOMO [fear of missing out], but that's what it was. There's nothing worse than seeing your idiot neighbor down the street make a fortune. It makes us crazy. I tell people to be like Mr. Spock, but I know how hard that is. So how do you protect yourself from yourself and still indulge that itch?

If you have a cowboy account that is 5% of your net worth, that can be one way. That is my primary way of indulging it. It's funny because just knowing it's there lets me ignore the rest of my portfolio. And just scratching that itch can be satisfying. If you are that person with that itch, a cowboy account can ensure you don't mess with your portfolio. And if something goes awry, well thank goodness it was only a small percentage of your overall portfolio.

How do investors know when to sell their "big winners"? In the book I talk about regret minimization. It is a framework that applies when you are sitting on huge, outsize gains and a position has become 60%, 70%, or 80% of your portfolio. So how do you know when to sell that? The first thought is to ask if you sold some or all of this position, would it be life changing? If you're looking at $30 million and sell some or all of it, that's life changing: You pay off your home, your kids' and grandkids' colleges, you never have to work again.

At what point do you walk away from the table with your winnings? We know the Nvidias of the world are few and far between. Tesla is another great example. How long will they be so far ahead of the rest of the industry? How long until other companies catch up? It wasn't long ago General Electric was considered the hot stock. If General Electric can implode, any stock can. Regret minimization allows you to make a decision you can live with comfortably.

You tell readers to go ahead and treat themselves to a $5 latte, but shouldn't I forgo instant gratification and save those bucks? It doesn't really add up. I am constantly beating the drum about framing and context. If $5 a day is the difference between a comfortable retirement or not, then you have other problems.

Also, what is money? It's a medium of exchange. It lets you trade your expertise and work and time for all these other things. You can't take it with you [when you die]. Just make sure you are maximizing its effectiveness. I had a cup of coffee this morning with a friend I hadn't seen in a few months. Spending a couple of bucks to be with a friend seems like a good use of money to me.

Thanks, Barry.

Write to Andrew Welsch at andrew.welsch@barrons.com

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April 25, 2025 11:42 ET (15:42 GMT)

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