Avoiding evangelicals
Among the financial planning profession there is a range of opinions about how to do things. Whether it is how to give advice, what the process should be or what to invest in – there is a great diversity of views. That is, generally, all for the better. Different approaches will suit different types of people.
There is a tendency, however, to view one’s own approach as not just the best (how could it not be!) but as the only legitimate way. And this is where things start going wrong.
Take investing, for instance. There has been a long and unsatisfying industry debate about how to put together a diversified portfolio of assets. Should it be ‘active’ – we should use the expertise of smart and knowledgeable people to identify what to invest in. Or should it be ‘passive’ – using an artefact known as an index to cheaply purchase securities of a certain type. The former is much more expensive; as a result since the inception of tradable stock indices ‘passive’ approaches have gradually gained ground. In the 1980s brokerage firms in the US attempted to paint investing through these indices as ‘un-American’: a practically communist conspiracy undermining the principles of free market capitalism. In more recent years some commentators have suggested that all attempts to select investments based on their characteristics (rather than just buying the whole market) are an expensive con.
I have sympathies with both sides. Investing through low-cost index funds controls one of the key determinants of investment success – the fees. They have been an unquestionably positive force for consumers in creating downward cost pressure across all investment products and services. But the idea that there is no role for judgement when investing (which advocates are effectively arguing) is a bizarre one. There are all sorts of arguments about how markets operate with regard to information that don’t strike me as very convincing. But there are also some very obvious institutional frailties to index investing. My favourite example is the ‘No China in Index Funds Act’ currently worming its way around Washington D.C. This act seeks to ban investments in China from appearing in US-based Index Funds. In this instance ‘passive’ means allowing your investments to be determined by nakedly nationalistic and political motives.
As with most things, the answer lies somewhere in the middle. Taking advantage of cheap exposure to indices where appropriate, while being keenly aware of fees and building in some style diversification makes the most sense to me. But beyond the question of what to invest in, this suggests a broader lesson on who we should listen to. Whenever people hive too closely to a particular view and show no sympathy for contrary opinions, it suggests to me that their views should be taken with liberal quantities of salt. Investing, to me, is best not thought of as a science. It is a dynamic practice that changes over time. It is self-referential – the act of investing changes your object of analysis. It is also personal – people have different practical and psychological capabilities to experience volatility. Even in the confines of a single individual, this changes significantly over a lifetime. In this complicated framework, the best approach is to hold opinions lightly. And when looking for advice to avoid evangelicals.