The following is a guest post from Andrew Hallam, author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School.
This is the world’s only finance article comparing investment decisions to wild dogs…real wild dogs….those that want a chunk of your Levis and a rare piece of gluteus maximus.
Evading dumb investment decisions and sidestepping a gruesome battle with a pack of dogs involves a similar strategy. Let me explain:
Most people, when seeking financial investment advice, find a professional to choose actively managed mutual funds for them. But there’s a far better way. After all, these kinds of funds benefit the investment salesperson more than they benefit you.
Now imagine that you’re running through the woods and a pack of dogs comes after you. What do you do? Climb a tree? Nope, there are no branches low enough. Run away? Nope, you can’t outsprint a squirrel, never mind a dog. Your instinct, of course, is to bolt. But that’s about as bad as giving your money to the average financial advisor. In the end, you’ll get a raw deal. The dog will pursue you, filled with confidence, and you’ll get bit.
In each case, trusting your money to a typical financial advisor and running away from a pack of angry dogs is instinctive. You seek the safety and guidance of a professional investment advisor, and you run from the danger of charging canines. But this instinct is wrong.
First, partly because it’s a fun story to tell, I’ll explain that I’m a weekly veteran of the dog attack. I live near a jungle, in Singapore, where packs of wild dogs scavenge for food, mostly feasting on garbage (if they can find it) and dead monkeys. I’m a regular runner, and I’ve come under attack in Singapore, Vietnam, Cambodia and Laos. I speak the language of dog evasion. Here’s what I do:
When a pack snarls its way up to me, I figure out which dog looks the nastiest. And then I charge. Dogs aren’t used to people running after them. It’s actually pretty disconcerting to them. I’ve been bitten by more than a dozen dogs in my lifetime as a runner and a cyclist, but never when I’m attacking them. I don’t need a stick, just a snarly sense of purpose and endurance.
Most dogs don’t run more than a few hundred meters at a time. But if you choose the Alpha dog (especially if you’re reasonably fit) you can chase him for miles. I once chased a single dog so far that he started to whimper. I felt like Muhammad Ali when he fought Sonny Liston for the heavyweight championship. Liston was the champ, and Ali was the young challenger. And the ferocious Liston was apparently afraid of one thing: crazy people. He had served some prison time before becoming heavyweight champ, and reportedly, the only thing he was afraid of was the “crazy people” in prison—those who were mentally unstable, drooled, babbled, that sort of thing.
If you chase a dog for a few miles, never relinquishing your pursuit, you’ll become the Ali to Liston: the unbalanced human who has obviously flipped out. Just imagine what goes through that dog’s mind after the third mile of the pursuit. He’s on your barbecue.
What does this have to do with investing? Everything. You can’t do what’s instinctive. You can’t invest with the average financial advisor, no matter how nice they may appear to be. Human instincts may have served us well in the caveman era, but with financial conflicts of interest running rampant, coupled with a lack of financial education for the average person, we can find ourselves on the short end of the skewer.
If you’re American, you have some incredible investment options. You could invest with a company called Vanguard, the world’s largest provider of index funds. Vanguard advisors don’t get paid commissions, and the company has no fat cats at the top of its business pyramid, reaping huge salaries and bonuses based on the clients it reels in. The company is much like a non-profit organization. The profits go towards lowering the investment fees for people like you.
Index funds are pariahs to the average investment advisor. Most advisors hate them because they can’t reap huge commissions from them. They will try to tell you that they can find actively managed mutual funds that can beat the market indexes, but they’re wrong.
Allan S. Roth, adjunct professor at the University of Denver, ran a Monte Carlo simulation to determine the likelihood that an account of actively managed mutual funds would beat an account of index funds.
He determined that, if you had five actively managed funds over a 25 year period, your odds of beating a portfolio of index funds would be just 3%.
If you had ten actively managed mutual funds over a 25 year period, your odds of beating a portfolio of indexes would be just 1%.
You won’t find academically supported evidence to refute those findings. For the best odds of investment success, index funds are the right choice.
| Five Years | Ten Years | Twenty Five Years | |
| One Active Fund | 30% | 23% | 12% |
| Five Active Funds | 18% | 11% | 3% |
| Ten Active Funds | 9% | 6% | 1 |
I mentioned that you could invest with Vanguard, but there are a few other options. You don’t need to invest “on your own”. They are rare, but you can find investment advisors who can build portfolios of index funds for a small fee.
Besides Vanguard, I also recommend Assetbuilder, a firm based in Texas and founded by the legendary finance writer, Scott Burns. They charge very small fees (less than 1% per year) to clients, and they build, diversify and rebalance accounts of index funds for their clients.
There’s also RW Investment Strategies in Maryland, which will do the same thing for 0.4% of your portfolio’s value each year. In fact, this advisor (Robert Wasilewski) sets a goal of firing himself once you get the hang of the investment procedure yourself.
Evanson Asset Management does something similar, but they don’t relish firing themselves.
Going with a local advisor who will toss your money into baskets of actively managed mutual funds is as smart as running from a pack of wild dogs.
And it should go unsaid, but I’ll state it anyway.
Building portfolios of indexes or hiring a manager to do so is a heck of a lot easier than chasing the Alpha.
For further reading, please check out my book, Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School. It’s an international bestseller, and perhaps the quirkiest money book you’ll ever read.
5 Comments
Hey Value Indexer,
They’d be wimpering the second they left the office.
What a great description! I wonder what would happen if you started growling and charging at financial advisors? :)
Great analogy! In life we’re always told to follow our instincts. This works probably 90% of the time. But when it comes to investing, our instincts – often emotional – lead us to make incorrect judgments and actions about our financial situation. Success in investing requires us to put emotion aside and focus on our goals and future plans.
Well put Ryan