Nudge's Richard Thaler on Investing

Stock pickers probably shouldn't.

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As Americans fret over their investments, Richard Thaler knows just what he plans to do with his extra cash. "I'm investing all my money in wine. At least you can drink it," he says. Thaler, a pioneer in the field of behavioral economics and the author, with law professor Cass Sunstein, of Nudge: Im proving Decisions About Wealth, Health, and Happiness, is mostly kidding, but his tips for the amateur sommelier (check out Rhone Valley or southern Italian vintages for bargains) are less blunt than his advice for everyday stock pickers: Don't even try to pick them. "It's the rare individual investor who should be buying stocks one at a time. I don't change that tune by the day of the week or the particular financial crisis we're in," he says.

During normal times in the market, investors act one of two ways: A small minority pretend they're Wall Street traders, jumping in and out of markets, losing money more often than not ("God knows what they're doing," Thaler says). The rest will mainly do nothing, sticking their collective head in the sand, revisiting their 401(k)'s only every decade or so. Unfortunately, in troubled markets—"panic" is the word he uses—those ostriches will get spooked and start selling, despite plentiful evidence that their market timing will be exactly backward. "So my advice is to make sure your portfolio is well diversified and then do nothing. Watch the baseball playoffs rather than CNBC," Thaler says.

Rebalance. If you must meddle, now may be the best time to evaluate where you are and where you're going. Thaler says down markets are good times to take a hard look at your portfolio and see that it's properly balanced. A few tips to remember: Invest some overseas. Keep inflation-protected treasuries in your portfolio. Consider life-cycle (target-date) funds that redistribute assets depending on your retirement plans.

Another warning: Don't depend on company stock. That should be glaringly obvious after the collapse of Bear Stearns and Lehman Brothers spawned horror stories of lost millions held in company shares. "It's actually worse than just putting all your eggs in a single basket. If your company implodes, you lose both your job and your retirement wealth," Thaler says. If you have more than 10 percent of your nest egg at the office, he advises, get out now. Then turn your attention to the red in your glass, not in your portfolio.