Five Good Questions for Tadas Viskanta of Abnormal Returns

Active strategies whether they are stock selection, market timing or manager selection are costly. Whether you do it yourself or hire a manger these strategies increase your expenses with no guarantee that they will necessarily increase your returns for the risk taken.

Not only is there an explicit cost there is also an opportunity cost. The time and effort put into trying to generate additional returns could be spent in other ways.

These don't necessarily have to do with investing. Most investors don't have the burning desire to be active portfolio managers. Their time would be better spent on their careers or family rather than in the pursuit of a few more basis points of returns.

4. You extol the virtue of "investment mediocrity" in your book.  When, if ever, should we strive to do better than that?

I say in that book that investment mediocrity or competence is not too low a hurdle. John Bogle has written extensively about how it is that a low-cost indexed approach to investing will actually lead to above-average returns. This occurs by simply avoiding the high-cost, active game that most everyone else is playing.

This doesn't exclude the possibility of finding managers that can outperform. The challenge is identifying them ahead of time and hoping that their alpha will outweigh whatever fees they charge. I talk about in the book the difference between luck and skill in investing. Unfortunately there is no easy way of teasing out these two effects.

Investing is one of those rare endeavors where amateurs can compete directly with professionals. That is an enticing prospect. Investors just need to be aware that the odds are against them and that there are real costs, both explicit and implicit, in taking on an active approach.

All that being said I don't think I or anyone else should dissuade a highly motivated investor from undertaking active strategies. No one can say ahead of time who will or will not be successful. It requires actually doing it and getting your hands dirty. However, investors need to undertake active strategies, like they would any other business endeavor, with rigor and above all a focus on risk.

5. What is the best piece of investment advice you ever received?

"There is no must-own stock/fund/asset class, etc."

This kind of thinking leads investors to load up on Internet stocks in 1999 and second homes in 2006. Investors are easily caught up the waves of sentiment that drive markets. We are driven to own a certain asset lest we feel like we are missing out some once in a lifetime opportunity. This peer pressure leads us to make decisions that ultimately work against our own best interests.

Every investor is ultimately his or her own client. You have only to answer to yourself and your own goals. You have to feel comfortable and confident with your decisions and you shouldn't feel that you have to do something because everyone else is doing it. This ultimately leads to a real disconnect between the risk we think we can take and actual risks we are taking.

This dissonance in risk perception in theory and in practice is what leads to investors reducing risk at market bottoms and increasing risk at market tops. This so-called "behavior gap" drives a wedge between the returns we can earn and what we ultimately earn. In today's markets there just isn't that much in the way of nominal returns where we can afford to lose much to our own unforced errors.

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Also in the Five Good Questions series:

• William J. Bernstein
• Meir Statman
• Wade Pfau
• Scott Vincent
• Dan Ariely
• Jeffrey Kleintop