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Indexing Plea From a Dying Ex-Wall Street Pro

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I was deeply moved by an article in the New York Times which told the story of a "dying banker", Gordon Murray. Mr. Murray has terminal brain cancer. His career included stints at Goldman Sachs, Lehman Brothers and Credit Suisse.

Mr. Murray and his financial advisor, Daniel Goldie, have written a book in which he extols the virtues of passive management and disavows his prior efforts to "beat the markets." The book, The Investment Answer, is self published and only ninety-three pages. The last time I looked, it hit #5 on Amazon, which is very impressive.

When I wrote The Smartest Investment Book You'll Ever Read in 2006, it seemed to me there was a market for a book that demystified investing and gave investors a specific road map for implementing a globally diversified portfolio of low cost index funds, in a suitable asset allocation, with or without a broker or adviser. The New York Times noted that my book addressed "...a gaping hole in the marketplace..."

In short order, a number of authors followed suit with investment books that were short and easy-to-understand. Among the better ones are: The Little Book of Common Sense Investing, by John Bogle; How A Second Grader Beats Wall Street, by Allan Roth; and Wise Investing Made Simple and Wise Investing Made Simpler, by Larry Swedroe.

Now we have the shortest book, with The Investment Answer.

Actually, I wrote a blog that distilled smart investing to three easy steps. If it had been a book, it would have consisted of two pages!

The proliferation of short books which guide investors into indexing is a very positive development, but it comes at a price. When these books are written by investment advisors (and I include myself in that group), we are on the horns of a dilemma. If smart investing is so easy, why should anyone use our services?

The authors of The Investment Answer make their position very clear. According to them, "[F]inance is complex, the odds are stacked against you, and the stakes are very high: your entire financial future." The logical extension of this argument is that you should consider retaining an adviser (like Mr. Goldie) to guide you through this process.

This pitch for business undermines the basic appeal of indexing and keeps many small investors from taking the critical first step towards index investing.

There is considerable merit to the claim that passive advisers add value. Investors in funds managed by Dimensional Fund Advisors (recommended by Goldie, Swedroe and myself) capture significantly greater fund returns than those obtained by average, active fund investors, and indexers without passive advisers. In addition, passive advisers are valuable resources for insuring you are in the right asset allocation, that you rebalance your portfolio regularly and that you engage in tax loss harvesting where appropriate.

The data shows that investors in risk adjusted portfolios of Dimensional funds have achieved higher returns, net of fees, than investors in comparable portfolios of low cost Vanguard index funds.

However, the data also indicates that indexers without passive advisers capture, on average, more than twice the fund returns of active fund investors.

The reality is that many investors will resist paying a passive adviser a fee. Those investors should be encouraged to start indexing on their own. They would be far better off than continuing their present course of trying to "beat the markets," relying on the advice of brokers who falsely claim to have that expertise.

As authors with broad followings, we need to demystify the investing process. It's not "complex." As I explain in the Smartest Investment books, the fundamentals are very easy to implement. While you would likely achieve higher returns using a competent passive adviser, don't be deterred from trying indexing on your own if you don't feel comfortable paying an advisory fee. It's the first step towards smart investing.

I admire Mr. Murray and hope his book gets to #1 on Amazon, and stays there.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

Here is the trailer for my new book, Timeless Investment Advice.

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