It was another reminder that, as an index investor with a long-term approach, you will never be able to share entertaining anecdotes. That’s not to say that you won’t become a success story: if only you are able to generate returns in line with the market, you will likely outperform at least 90% of professional wealth managers, let alone your table mates at a Japanese restaurant. But you’ll never be able to scream about great stock pick or market call. Meanwhile, the loudmouths around you will be bragging about their conquests and bringing you an acute case of FOMO.
Even if you don’t have patience with stock picking, your plain vanilla ETFs will eventually lose their sexiness and you could be tempted by Smart Beta and its promise to outperform traditional indices. These backtesting results are certainly convincing and the marketing material certainly sounds clever. The temptation happens to all of us at some point.
Part of the problem is that we are conditioned to think that simple solutions are easy. Certainly, passive investing is often portrayed as: “It’s okay for people who are unable to research.” Right. It may be helpful to know that many of the staunch advocates of indexing are finance professors with Nobel Prizes on the mantelpiece. Academics often prefer passive investing, not because they are “unable to do the research” but precisely because they focus on data and evidence rather than anecdotes about investors beating the odds. (Though academics and other experts are hardly immune from the same temptations that lead so many people to become bored with indexing.)
Simple solutions can appear even less attractive as the portfolio grows. The convenience of an ETF portfolio is one of its great virtues, but it can look like it’s not diversified enough for a nest egg of $ 1 million or more. On the surface, it looks like you’re investing hundreds of thousands of dollars in just a few holdings – or, in the case of an asset allocation ETF, just one fund. But let me reiterate that with a few ETFs you can hold tens of thousands of stocks and bonds from around the world. It’s as broad as possible, even if you’re investing millions.
To add some perspective, Warren Buffett has said he would like 90% of his assets to be invested in an S&P 500 index fund when he dies. Perhaps his executors “are unable to do the research”.
If you are fortunate enough to have a seven figure portfolio, there will be no shortage of sellers willing to flatter you by providing access to exclusive opportunities only available to “accredited investors”. These include hedge funds, private equity, peer-to-peer lending, real estate partnerships, and so on. It is possible that some of these opportunities may continue to deliver oversized returns without undue risk, but you will likely face high costs, illiquidity, and a lack of transparency.
You don’t sacrifice anything by taking a pass and just sticking to index ETFs. And you don’t miss a thing but disappointment.
Dan Bortolotti, CFP, CIM, is Portfolio Manager at PWL Capital in Toronto. He works with clients to combine investment management with long-term financial planning. He also promotes investor education through his blog, article, and podcast.
This article was read from Restart Your Portfolio: 9 Steps To Investing Successfully