“You might be a brain surgeon—but would you operate on your own head?”
That puzzling statement, in a recent Wall Street Journal weekend insert, comes from Eleanor Blayney, consumer advocate for the CFP Board, the group that oversees the courses and standards for Certified Financial Planners.
She isn’t the first person to say it. If the statement sounds familiar, you’ve probably heard it before. I know I have, far too many times. And that’s why I’m writing this column. I’d like to see the whole brain-surgeon-and-investing thing summarily buried, hopefully in some deep, distant word-fill along with the word “like.”
Let’s start by being literal. One reason a brain surgeon wouldn’t operate on his or her own head is that anesthesia is generally required for brain surgery. A surgeon who is asleep, regardless of professional talent, isn’t capable of doing a selfie brain operation.
This entirely reasonable constraint doesn’t apply to managing our own investments. You and I could be in a coma and still manage our investments. Investing isn’t as complicated as brain surgery.
For over 20 years now I have been advocating simple index fund investing, starting with my “Couch Potato Portfolio.” It is a 50/50 mixture of a major domestic stock index fund and a major domestic bond index fund. The task is to buy equal amounts of each fund, then go away (or go comatose) for a year. Once a year you revive briefly and rebalance, making certain that there are equal amounts invested in each fund. The cost of investing this way is insanely low and you can do it even if you have to use a hand held calculator to divide by the number “2.”
I’m not alone in proposing these simple, low-cost portfolios. MarketWatch columnist Paul Farrell provides regular reports on a variety of “Lazy Portfolios” from other writers or investors who have concluded that index investing is the way to go.
“O.K”, you might say, “That’s cute. But do lazy portfolios actually work?”
You bet they do. You can’t really do lazy investing while in a coma, but trust me; the amount of sentience required is minimal. Better still, the odds will be with you. Index investors are abandoning a 30 percent chance of higher returns with managed funds for a 70 percent chance of doing better with index funds.
Now let’s examine the medical analogy a bit further. One of the problems in modern medicine is called “iatrogenic illness.” It is any illness that is introduced by medical treatment. Google “iatrogenic illness” and you will learn that it is the third leading cause of death in the United States. People die from negative effects of drugs or errors in administering them, from hospital infections, from hospital errors and from unnecessary surgery. It’s dangerous to be sick, particularly in a hospital.
Sadly, your money may die from similar causes. Money managers introduce an iatrogenic illness for your money: High fees. The managers may be intelligent and well intentioned but the cost of their treatment is unhealthy for your money. Your money becomes ill. It fails to grow and develop.
Why does this happen? Simple: The heavy weight of the managers’ fees overwhelms any skill that might be exercised. Free your money of complicated investment “treatments”— such as tax shelters, tactical trading, momentum investing, hedge funds, concentrated portfolios, complicated insurance contracts with tax benefits, etc.— and it will grow and provide you with a healthy retirement.
The really good news is that while there are still hundreds of thousands of sources of iatrogenic illness out there, eager to help and charge fees, it has become dramatically easy for ordinary people to invest and manage their own money over the last 20 years.
We can do it in very low-cost 401(k) accounts. We can do it in very low-cost taxable accounts. Just as we don’t have to understand metallurgy, electronics and the internal combustion engine to drive our cars, we don’t need advanced training to manage our money.
Is low-cost investing perfect? Sorry, no. But it is good. It is not only better than some, it is better than most.
And we can do it “in our spare time, at home.”