Counterintuitive Wealth Creation


This morning, I saw a financial services industry TV ad that I’ve seen multiple times. The Invesco ad presents this question to investors: “Why invest in average?” Sounds like a reasonable question, right? I mean, who the heck wants to be average in anything, especially investing? After all, successful investing is extraordinarily important to all of us. Our future, especially our retirement, depends upon our getting it right. Over the long term, we expect our personal investment portfolios to grow, and once we transition from the accumulation phase of our lives to the withdrawal phase, we expect our portfolios to sustain our lifestyles during retirement.

Therefore, it stands to reason that we apply the same behavior to investing that we previously applied to many other aspects of our lives that have yielded successful results. If studying long and hard in college yielded good grades, if intensive training allowed you to record an impressive half marathon time, if working harder and more hours is responsible for your recent promotion at work, then you logically will transfer those successful principles of causation in your life to investing. But as counterintuitive as it seems, such an approach will rarely yield successful investing results, and you will not be better off economically than if you had invested in a low-cost, passively managed fund that merely tracks an index. Nothing I’ve ever achieved in life has come from accepting or being content with average. That’s why it’s so darn difficult to breathe and to throttle back on a take-the-bull-by-the-horns mentality when it comes to investing. It seems that rolling up our sleeves and getting to work figuring out this crazy stock market is something any competent professional ought to be able to do given enough effort. But investing is not a competitive sport. You don’t have to be right to win. You don’t have to pick the winners – stocks or funds that appreciate – and avoid the losers to win. If you’re in the game, and you stay in the game, you win! However, Invesco and the rest of Wall Street want you to believe that expensive active management where you pay high explicit fees and absorb additional fees from the insert-name-of-Wall-Street-firm fund or portfolio manager(s) actively trading the fund is THE path to prosperity. The myth that expensive active fund management beats low-cost passive fund management has been quite lucrative for Wall Street. What’s more, Wall Street knows the research reveals that active fund or portfolio managers most often underperform low-cost, passively managed funds or portfolios. Wait a minute! Pause right there please! You mean a low-cost, passively managed fund or portfolio on autopilot beats an expensive, actively managed fund whose team of extraordinarily talented and well-educated managers trade the fund? Can’t the fund managers more than make up their higher fees via superior performance? No, they cannot! But don’t take my word for it. Google “what is SPIVA?” and check out the search results. In so doing, you’ll find fascinating research about how S&P Indices Versus Active (SPIVA®) measures the performance of actively managed funds against their relevant S&P index benchmarks. Here’s a link to a three-minute YouTube video with great color on SPIVA®: http://bit.ly/2rXuk4G. Goolge active versus passive investment management to discover a whole host of empirical data of how passive beats active!

The temptation to reject the notion that we’ll be better off economically by having a low-cost diversified portfolio on autopilot is often too much. Many individual investors succumb and buy actively managed funds or revert to tweaking or even trading the heck out of their self-directed investment portfolios. Obviously, they believe they can and should beat the market by active management, and it feels better! Getting the market returns is, well, average, and as I mentioned earlier, who the heck wants average? Invesco attempts to harness investors’ reluctance to be average with their ad campaign. Of course, many of Invesco’s actively managed funds have extremely high gross annual expenses plus a 5.5% up-front sales load.

Although nobody wants to be average, earning average market returns are one of those rare times in our lives when “average” produces extraordinary results. Allow me to repeat that statement for emphasis: average market returns are one of those rare times in our lives when average produces extraordinary results. Among all of Warren Buffett’s quotes, my favorite, and the one in my Gmail signature, is: “It is not necessary to do extraordinary things to achieve extraordinary results.” How beautiful is that? The guy whose name is synonymous with wealth creation and preservation tells us that ordinary investing delivers extraordinary results. This is the thesis of the passive investment approach! Again, Wall Street does not want you to know or believe that you can create and preserve wealth by simply taking what the markets give you. It’s too simple. You’ll never hear anyone on Wall Street say, “To create wealth, simply build a low-cost, broadly diversified portfolio which includes exposure to multiple asset classes, and except for periodic rebalancing, leave it alone for a few decades.” However, we’ve heard Buffett say, “Always invest for the longer term,” and, “If you don’t feel comfortable owning something [a stock] for 10 years, then don’t own it for 10 minutes.”

TAKEAWAY:

I recommend you memorize or otherwise enshrine this premise in a place where you can frequently refer to it: Investors who have achieved long-term success know that appropriate investment strategies are simple, low-cost, transparent, and disciplined. It’s really that simple. As complex as we think successful investing is, or should be, it’s not. Successful investing is simple and counterintuitive. That’s why I maintain that successful investing is attainable by every investor, not just an elite few. Sweet, right?

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