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MOST POWERFUL Investing Question I Ever Heard

MOST POWERFUL Investing Question I Ever Heard

June 28, 2016
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In August of 2011, I paid to travel to NYC to spend three days at a Dimensional Fund Advisors (DFA) conference at the Grand Hyatt New York with 600 other financial advisors from all over the country.

It was at this conference that I heard the most powerful investing question I’ve ever heard. In my mind, this one question takes all the wind out of the sails of the ‘Active Management’ approach. Active Management is based in the belief that active managers possess superior knowledge and skill that allows them to beat the market.

The opposite of Active Management is Passive Management. The conference speakers were discussing Structured Investing, which is a type of Passive Management. The Structured Investing approach seeks to capture market rates of return while keeping costs and risks as low as possible.

A University professor at the conference was giving a presentation comparing and contrasting Active Management to Structured Investing. The speaker posed this question to the audience. It was the most powerful investment question that I had ever heard.

“If it were possible for the Wall Street active managers to:

  1. pick the right stocks and trade on them in advance of market movements and make money consistently and reliably, or…
  2. accurately time markets, to get in and out in advance of market movements and make money consistently and reliably, or…
  3. pick the right money managers to use that will perform #1 and #2 above consistently,

THEN WHY does Wall Street need you (the adviser) to get your clients to give Wall Street active managers their money to invest?”

Think on that for a moment. If these Wall Street mavens really could predict the future, then why would they need my money or your money to invest?

The answer is that they would not need our money at all. It is the equivalent of entering a gambling casino where you are guaranteed to never lose. All that is needed is a small stake to get started and then the winnings would be limitless.

That question hit me like a ton of bricks. By leaving active management behind, at the very least, my clients would save money on the annual fees and excess trading costs my clients were paying while the Active Managers were speculating and gambling with the clients money.

In a Structured Investing approach, the FOUR rules of successful investing are:

  1. Own equities
  2. Diversify
  3. Rebalance
  4. …and you must BEHAVE!

The first three are about engineering and using statistics and math to construct an efficient portfolio based upon economic and financial models of Nobel Prize winning academics. The last one is about managing that area in-between the ears and managing behavior. In some ways, that can be the hardest part.

In 2014, the 20-year annualized S&P return was 9.85%, while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%. The primary reason for the gap is investor behavior because the average investor buys and sells at the wrong times.[1] The value of a good investment adviser is helping the investor capture more of the 4.66% being lost due to bad investor behavior.

In closing, I’m a human being like you and I enjoy a good story. Every once in a while, one of the Active Management firms will send me an email and share a ‘strategy’ that sounds really great. It gets me sucked in a bit… until I remember THE QUESTION.

If that strategy was so great, then why do they need my money or my clients’ money? ANSWER: They wouldn’t.

If you’d like to learn more about investing, to get a second opinion or analysis of your portfolio, please contact me today and schedule a meeting with me. 

Thank you for reading.


[1] DALBAR 2015; Quantitative Analysis of Investor Behavior