Investments & Golf Clubs
"It's All Marketing"
(written: February 2007; last modified: 9 August 2009)

Many people consider investing a mystery at best and a "black art" at worst. Speaking from experience, I believe it stems from fear: fear of the unknown; fear of making mistakes, fear of running out of money before one runs out of breath. It is this fear that the financial services/investment community preys on--what I call "financial pornography". Print media, TV, and the internet is full of commercials from many of the major brokerage firms (Merrill Lynch, Waterhouse, Charles Schwab, yes, even my personal choice, Fidelity), the on-line trading services like E*trade, banks, insurance companies--it goes on and on. The common message in its simplest form is that you are not capable of making the investment and financial planning decisions necessary to ensure your own financial future (i.e. retirement). You NEED them to do it for you. They are the EXPERTS, possessing skills and information that only they can bring to bear for you and your future. The tens of millions of baby boomers are a market these firms are literally salivating over. The opportunity for them to get their "fair share" of your investment dollars is one that's too good to pass up. So they play on your fears in the hope that you'll pick one of them to guide you through the pitfalls of the rest of your financial life.

They're a lot like the golf equipment manufacturers. Ever notice how every year (or even more often), there's a new driver that will add so many yards to your tee shots, straighten out your slice (or hook), and take some number of strokes off your score. These new clubs are bigger, lighter, have a bigger "sweet spot". Or what about new putters that purport to square your club face so that you'll hit the ball straighter and on the proper line. Again, the message is that you can't possibly improve your game without this new equipment. So you rush out and spend several hundred dollars only to find that after the initial love affair (and maybe temporary improvement), you're right back with the same old slice, the same putting "yips", and the same handicap you had before. Conveniently forgotten is the hype from the previous year which claimed the same benefits. And it goes on year after year because, after all, we're all looking for the easy way to improve and rarely willing to admit that our problems on the golf course are much more directly related to our own abilities and how much time we have to practice!!

The investment community, like the golf club manufacturers, spends billions of dollars to try to convince you that they have what you need. It's all MARKETING!! You might say, sure, but I don't know enough about investing, I don't have the time to practice my golf game; I want to be financially secure AND shoot in the 70s (or 80s, or whatever your goal is). I maintain the former is easier than the latter, and quite a bit easier than you might think. Read on.

If you're like me, your investment goal is "maximum accumulation of wealth after expenses, commissions, taxes and fees with a minimum amount of stress" and an acceptable level of risk. You probably have additional goals that may include leaving something for your heirs, donating what's left to favorite charities, or some other reason. In order to do this you must accumulate as much wealth in the form of liquid assets (cash, stocks, bonds, mutual funds, etc.) and other assets (real estate, for example) that can relatively easily be turned into liquid assets. You do this by saving, investing in 401K (or equivalent) plans, IRA and Roth IRAs, inheriting it, etc. To that you might add social security benefits (don't get me started....) and, if you're lucky, an employer pension. However you do it, the idea is to accumulate as much as you can while keeping fees, commissions, expenses and taxes to a minimum! Keeping risk within manageable limits is important, too. (Controlling your spending helps as well, but that's a subject for another day.) We're talking "long term" here; not gambling, day trading, market timing, etc.

Getting back to the "fear" factor. How do you accumulate the wealth you'll need, while controlling risk and keeping costs low? It is generally accepted that minimizing costs (in the form of fees, commissions, expenses, and taxes) is the one strategy that correlates to the best market return for a given investment. The lower the expenses; the higher the returns. Why? No magic, no mystery: In "Predicting Mutual Fund Performance II," the independent Financial Research Corporation tested 11 "predictors" (including the Sharpe Ratio and standard deviation) and concluded that the expense ratio was the only (yes, ONLY) reliable predictor of future performance: The expense ratios of index funds are often around 0.10%, while the average expense ratios of actively managed equity funds are around 1.50%, and that makes all the difference. REMEMBER THIS GENERAL RULE: Lower expenses; higher performance.

I suggest that investing in a diversified portfolio of index mutual funds is an excellent answer, perhaps the best answer for the individual investor. You've probably heard of index funds. Each fund is comprised of securities that mimic a particular market or market segment in terms of the holdings of the fund and in terms of their market return. Index funds are designed to deliver the market returns of their underlying index. You might ask "why you should be satisfied with merely market returns? Why wouldn't you want to BEAT the market?" The answer is simple. Over the long term, it is almost impossible for most professional investors and money managers to beat the market. In fact, again, over time, almost none of them can even consistently deliver average market returns. They spend a lot of time and effort trying to "predict the future", based on past performance. This is a futile exercise, and certainly one YOU probably don't want to emulate. "Picking a financial manager who will be able to predict the future requires in itself the ability for the average investor to predict the future. For as every investor knows, the universal disclaimer is: "past track record/history is no guarantee of future performance". Why should you think you can do this when the typical investor sells when he should buy and buys when he should sell.....It is problematic (perhaps impossible) to predict the future in a way that will allow anyone to beat the market even over a short period of time (a year or more) let alone over a long period of 20+ years. Even those that are successful over a short period are identifiable only after the fact." (Quoted from Index Mutual Funds by W. Scott Simon.)

Here's an article that bears me out.

But if you think of "market returns" as "par" for the market "course", you'll see this isn't bad at all. Think of par in golf--how many golfers consistently match par, especially considering the millions who play. Not many! Even the pros have a tough time if the course is challenging enough (think US Open). For most of us par looks pretty good.

Indexing is a strategy you'll never hear from the investment firms, mutual fund families, financial planners or almost anyone else. Why?--because there's nothing in it for THEM! BUT, if these people were really successful in predicting the future, why would they share the information? The commissions/fees they receive would be dwarfed by the returns they would receive by keeping the information to themselves. You can buy index mutual funds (or ETFs which are the stock equivalent) at low cost (no commissions). They cover many asset classes (which provide diversification and reduce overall investment risk). There is very little turnover so these funds don't generate much in the way of capital gains, which are taxable. Best of all, a portfolio of 4-8 index funds is very easy to manage. You'll spend less than a few hours a year managing (and worrying) about them. You can even have dividends automatically reinvested for you. Here are five major advantages of using index funds to implement an investment strategy that focuses on a diversified mix of asset classes over the long term:
1) Relative certainty of achieving the expected return of an asset class invested in by an index fund
2) Minimal costs and taxes maximize performance (returns)
3) Broad diversification reduces risk
4) Full investment in the market at all times due to absence of cash reserves and market timing activity
5) Low portfolio turnover keeps capital gains (and the taxes thereon) to a minimum

Here's what none other than Warren Buffett has to say: "Stocks are the thing to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low cost index fund and buy it over time. Be greedy when others are fearful and fearful when others are greedy, but don't think you can outsmart the market.....Very few people should be active investors." (Quoted from "The Snowball", by Alice Schroeder.) I could fill this article with similar quotes from many other well-respected financial experts. Instead, I've provided a short bibliography at the end of this article.

We are our own worst enemies when it comes to investing. Our mis-guided goal to beat the market causes severe stress especially in down markets. Stock picking and market timing strategies contribute to the stress and cause us to "sell low and buy high". Our emotions and market hype get the best of us; we buy the hottest stocks and into the hottest markets--paying the highest prices and incurring the highest costs. We panic in down markets, selling out at the lowest prices and destroying our chances for a sound financial future. Since indexers eliminate stock picking and market timing with their goal of matching the market over the long term, stress and anxiety can be eliminated. It took me more than 30 years to understand these issues and draw my conclusions. But don't take my word for it (or anything else for that matter. Remember my disclaimer at the top of my Retirement Home Page. I am not recommending any particular fund or combination thereof). An indexing strategy has worked well for me. I don't lose any sleep worrying about whether I will run out of money before I run out of breath. Take some time and read the following books (I'd recommend reading them in the order listed)--they're easy to read and probably available at your public library. They will explain, in detail, all the points I've tried to make and show you how you can take charge of your financial future.

The Smartest Investment Book You'll Ever Read, The Simple, Stress-Free Way to Reach Your Investment Goals by Daniel Solin. (Solin provides all the evidence you'll need to dump your broker/advisor and maximize your returns through index investing. It's short and easy to understand; you can read it in a couple of hours.)

Millionaire Teacher by Andrew Hallam. The nine rules of wealth you should have learned in school.

A Random Walk Down Wall Street by Burton G. Malkiel. (If don't read any of the books below, read this one.)

The Lazy Person's Guide to Investing by Paul B. Farrell. ("A book for procrastinators, the financially challenged, and everyone who worries about dealing with their money.")

The Great Mutual Fund Trap by Gregory Baer and Gary Gensler. (Why index funds are a better long term investment strategy than managed mutual funds.)

Index Mutual Funds by W. Scott Simon. (A thorough discussion of the advantages to investing in index funds. It debunks all the financial industry arguments.

Once you've finished reading these books, I think you'll agree with most of what I've written. In any event, I wish you the best in investing, retirement and golfing!!