I was recently listening to an episode of the “Rational Reminder” podcast in which Rick Ferri’s “four stages of an index investor’s education” were mentioned. (Note: if you like podcasts please give ours a shot!)
They stuck with me because I find that, in a curious way, they rather accurately describe my own journey as an investor. And I wonder if many of you have also been down a similar path.
Here are some of my thoughts on them and how we can move toward investing in the right way with more conviction.
What are the “four stages of an index investor’s education” according to Rick Ferri?
The period during which we are still out hunting for individual stocks based on news, rumours, and tips—trying to find a way into the “sexy” world of investing.
When we discover low-cost index funds and reach the realisation that using them makes the most sense for the vast majority of investors, including ourselves.
A personal journey that we take into the weeds looking for the best funds, trying to optimise for everything including the best allocation, lowest cost, most tax-efficient domicile, or structure, etc. and finding ourselves paralysed.
The final stage at which we learn that aside from the right asset allocation, most of the complexity matters surprisingly little, and that simplicity is easier to manage, more time-efficient and is still a powerful and effective tool in helping us achieve our goals.
This almost exactly describes my own experience, from starting out as a newbie investor picking local stocks to now holding a globally diversified portfolio of stock and bond index funds (as well as evidence-based funds), advising clients to do the same.
Why do we go through these stages?
Going through these stages is normal, though how long we stay at each stage differs from person to person. Unfortunately, it usually takes us some time before we reach “Simplicity” where we implement an appropriate portfolio with conviction, let the market do its job, and spend our efforts on other important things in our lives.
We go through stages one to three mainly because:
Humans love complexity
We have a natural bias towards being active, doing more and adding complexity rather than simplifying. It seems to be our default mode of problem-solving, unless we are more careful when thinking about it.
Professionals pitch it too
The industry tells us that investing should be a sophisticated and complex game. Many even sell us products and services based precisely on that—complex solutions that supposedly give us an edge. And they seem clever while doing it.
How do we reach the “Simplicity” stage and invest with conviction then?
By examining the evidence
To really invest with conviction, we need to take time to look at the evidence. We can either take a deep dive ourselves or look for a suitable partner who has examined the evidence to show us the way.
Although it would be nice if we could skip some of the stages and get to the last one more quickly, it is very important that we are not simply taking an adviser’s opinion as the truth.
Only by understanding what the evidence says and what we exactly are investing in (e.g., index funds) can we do it with the kind of conviction and assurance that we are all looking for.
That is why a good adviser will not simply tell you what they recommend that you do, but also share what they know in a way that you can understand and buy into.
By realising that investing is not just about returns
Investing is also about risk, reliability of those returns and more importantly what those returns mean to you.
What are you really after? A fun and exciting thrill? Money for money’s sake? Assurance? Reliability?
Concluding that simplicity is the way to go often stems from first discerning what is truly important to us. Often, we will realise that reliable, long-run market-like returns are enough for our needs, and that we do not have to put ourselves in situations that are too risky.
What is next for the level 4 index investor?
Once you have cycled through those stages, bought into the philosophy and simplified your investment approach, what remains is to focus on the other parts of building wealth, according to the money equation, and everything else that matters to you.
Grow yourself, your career, and your earnings. Be intentional with your expenses. Remain disciplined in the execution of your wealth plan. And, of course, spend valuable time on other things that money cannot buy.
This is an original article written by Bryan Chan, Client Adviser at Providend, Singapore’s First Fee-Only Wealth Advisory Firm.
For more related resources, check out:
1. Reminder: Trying to Outsmart the Stock Market Is Not a Helpful Game to Play
2. How Providend Helps Affluent Families Have a Good Investment Experience
3. Providend’s Money Wisdom Podcast Episode 28: Don’t Use Short-Term Information to Make Long-Term Decisions
We do not charge a fee at the first consultation meeting. If you would like an honest second opinion on your current estate plan, investment portfolio, financial and/or retirement plan, make an appointment with us today.