Nick Foy, CFP®
From Nobel Prize winning economists to Warren Buffett, a consensus has formed for investor-centric advisors and thought leaders: Index (or passive) investors stand a better chance of having a great investment experience than their active counterparts. Decades of research and data have provided us a deep insight into the ways of the market. Stock markets don’t always make sense; sometimes, in fact, they go completely berzerk. But investors who focus on those things they can control: costs, taxes, diversification, and their own behavior, are probably going to capture more of the return that markets provide than those who overspend in what the data shows us is likely to be a futile attempt to beat a benchmark.
I drew this conclusion after studying the markets for the past 17 (or so) years, 11 professionally. Now, as a relatively young (middle aged?) advisor, I’m grateful to have developed this understanding early in my career.
Some aren’t so fortunate.
In 2011, after leaving Vanguard to go out on my own, I attended the Dimensional Fund Advisors introductory conference (what we refer to as the “Kool-Aid conference”) in Austin. Dimensional’s approach is somewhat similar to Vanguard’s, and depends on a understanding of the science behind the capital markets. While Wall Street has done a great job withdrawing money from their clients’ accounts to improve their bottom line, Vanguard and Dimensional quietly went about the business of bringing their clients a better way to invest.
Dimensional uses the conference to explain to dozens of advisors what led them to their investment philosophy, and how to best apply it to their client portfolios. For me, it made sense right away because I was already taking advantage of their funds, but a question that one later-career (perhaps late 50’s?) advisor asked toward the end of the conference has stuck with me ever since:
“I’ve been in this business thirty years. How do I go back and tell my clients I’ve been doing it (investing the clients’ money) wrong this entire time?”
For the first time in his career, this man had seen the light. This was his Road to Damascus experience, at least as it pertains to investing.
Many see the evidence and ignore it; at least he had the guts and humility to admit his error. But, at his age and stage, those client conversations were going to be rather uncomfortable.
I tried to imagine the way he’d approach it with his clients, but couldn’t settle on a single theme. It might have gone something like this:
“You know, Mr. & Mrs. Client, I’ve seen some new evidence that has forced me to reevaluate the way I’ve managed your portfolio (and dozens of others for the past thirty years).”
The trouble with that is the evidence isn’t new.
Or perhaps a more direct approach:
“So, Mr. & Mrs. Client, you’ve paid me thousands of dollars in fees to try and outperform the market. That hasn’t worked out, and now I know why.”
“I want you to know that all of those transaction costs, taxes, and fees you paid were entirely in vain.”
I’d love to see the look on their faces at that point.
All to say, I am glad to have arrived at an academically sound, rigorously tested approach to investing that relies not on my own ability to beat whoever is on the other side of the trade, but merely to capture as much of the return as the capital markets provide over the long-term. Plenty of grey-haired advisors out there haven’t, and won’t, ever understand this.
The guy at the conference thought he was getting paid to beat the market, but investing well isn’t actually that difficult. It’s a combination of art and science, and understanding what risks are worth taking and which aren’t. Maintaining a focus on achieving important goals, and continuing to invest when the market goes haywire is why I get paid. Advisors who get paid for anything else are a vanishing breed.