By Professor Pennywise

Why do accomplished Ph.D.'s sometimes find it difficult to comprehend the brochures issued by their university's financial provider?

Simple: Your stature as an expert in the call of the pine siskin, the Battle of Hastings, or fractal geometry means either that for a very long time you have been a cloistered scholar paying little heed to the material world or that you had little time left along the way to pick up the argot of investing.

Now, however, you have a retirement account, and it's up to you to manage it.

In the next several installments of Academic Assets, we will explore investing for retirement. The pitch and register are meant for the green, the middling, and the muddling—intelligent readers, some new to the game and some puzzling their way through a maze they entered a few years back and still don't understand fully.

Judging by Pennywise's e-mail in box, retirement remains both a primary objective and a source of worry for many academic staff and faculty members. The roller-coaster stock-market rides of the past decade have rendered some sardonic.

"I can predict the market by looking at my retirement account," a Midwestern university staffer writes to Pennywise. "When it breaks $100,000, the market never fails to dive, and then I have to start the climb again!"

Actually, that reader is doing pretty well by national standards. The average 401(k) balance as of March 31, 2010, was $66,900, according to the Center for Retirement Research at Boston College. The market has bounced up a bit since then, so let's raise that number, in whimsical optimism, to $73,000. I wouldn't object if someone pushed an envelope stuffed with that amount through my mail slot tomorrow, but consider this: If that's all a person has at retirement, it could well be exhausted in a few years' time. The average monthly Social Security check is only about $1,000. If we Americans don't save a great deal more, our golden years will be, well, aluminum years.

Pennywise has addressed many retirement-related subjects in the past, including the choice between a traditional pension and a tax-advantaged account, the importance of taking your employer's full match, and how to put retirement saving on autopilot. While those columns may still be of use, this new series will make new soundings. Since perspective matters as much as knowledge to investing success, let's start with some general points about investing behavior. We all must find our own way, ultimately, but it helps to have some signposts.

Signpost 1: Enjoy it. Talk of money may sound sacrilegious or boring, and saving may sound sacrificial, but once you delve into understanding your finances you may be surprised at how rewarding it can be. Investigating different options and approaches is instructive, tinkering with your holdings is pleasurable, and watching the upward arc of your balances over the longue duree (sometimes, admittedly, the very longue duree) can provide a sense of security, accomplishment, and contentment.

Signpost 2: Just save. You would think the hard part about investing would be choosing the investments, but the hardest part is more elementary: saving. It is the single variable that you control completely. Saving regularly and leaving it untouched is fundamental, since without that basis your holdings cannot appreciate.

Be sure to meet your employer's match (the full amount that the employer will top up—ask the human-resources office if you are doing so). Then save more. If your employer offers to let you increase your savings rate incrementally with each annual salary increase, do it, as it will make a huge difference across a lifetime.

Signpost 3: We are small. Once you have a retirement account, you become an investor, but that doesn't make you a player. I don't care if you own a commodities fund or can define "price/earnings ratio." I don't care if you have read a biography of Warren Buffett. I don't even care if you are a president making more than everyone else on the campus except the football coach. I'm sorry, you are not a player.

Here is what you are: an individual investor, or, in Wall Street jargon, a "retail" investor. You are small. So am I.

The Big Boys are who people mean when they speak of "the market." And who are the Big Boys? First, Wall Street traders. Then the institutional investors: Harvard's endowment, the Rockefeller Foundation, Swedish pension funds. Next sovereign-wealth funds: Saudi oil proceeds, Chinese manufacturing profits, giant cash hoards looking to make new killings. Then hedge funds: investment firms open only to the "high net worth," whose wealth is sunk into Arkansas forests, Indonesian candy manufacturing, the Norwegian krone, Cambodian rice paddies—absolutely anything at all that seems likely to appreciate in value. Finally, the superrich: Bill Gates and the rest of those on the Forbes roster.

Now, you and your $66,900 account are not "the market." You are a gnat. Not only are the Big Boys bigger than you, they are shrewder, smarter, meaner. They live to invest. They are on watch 24/7. They have forgotten more about pork-belly futures than you will ever know.

Confession time: Every time I've felt like a player I've made my worst investing mistakes. Humility is a valuable component of successful investing. Realize that you are small. Have the honesty and courage to admit your limits. Study, learn, ponder. Above all, don't make "plays" with your retirement savings. You are not a player or a trader. Strive to make rational, well-examined decisions, integrated within an overall plan.

Signpost 4: Nobody knows. Just because you're not a player doesn't mean you have to be a chump or sucker. One of the best ways to avoid becoming bait is to understand that you are not a seer. You cannot know the future. Nobody does.

Investing pays because, over long spans of time, markets provide a return, but that can never be counted on in any particular moment. In any given day, week, or decade, markets can decline, shoot up, or limp sideways. Nobody can be sure what they will do.

The reason Wall Street condescends toward the retail investor is that small investors persistently get excited by momentary trends and get burned. In 2000 we bought tech. In 2004 we bought real estate. In 2007 we bought equities. In 2010 we're buying bond funds and gold. They can only go up, right?

Not only do many investors get cocky in looking forward and load up too much on one thing, figuring it will hit the moon, they also spend too much time looking backward.

When first opening a retirement account, many new investors scrutinize the elaborate statistical tables of their provider's fund options to see which have performed well. It is like a demented psychological experiment to show how the mind tries to discern patterns where there simply are none. The investors then pick funds based upon, say, which has the best 10-year return.

Who can blame them? It seems perfectly sensible. After all, the statistics must mean something.

But they don't. The past decade's returns are totally irrelevant. They may actually be a negative indicator. As a rule, the very asset classes that have performed best in the past have, because of corresponding demand, grown expensive, making them due for correction. Those that have lagged, conversely, may be underpriced and likely to outperform in the coming future. But existing trends can persist, as well. One can't assume, either way.

Don't look backward. Even 75-year data may be irrelevant, given that the United States's economy has in that time enjoyed a state of world supremacy that may very well be coming to an end. Ignore statistics on past performance. Rather than build an investment strategy that rests on that data, or on anticipation that one fund or asset type will perform better than others, build a broad portfolio that assumes an unknowable future, taking advantage of many different types of assets. Diversify. More on that, and much else, next month.

Professor Pennywise, who writes Academic Assets monthly, is the pseudonym of a humanities professor who has taught from the Pac-10 to the Big Ten and is not a financial professional, merely a frugal academic. Comments, suggestions, and questions for future columns may be sent to professorpennywise@yahoo.com.