In 1940, Fred Schwed Jr. wrote a book called Where Are the Customersā Yachts? It remains the wisest book ever written about finance because it acknowledges that investing is not a study of spreadsheets. It is a study of how people behave when they are under pressure. Schwedās point was simple: the financial industry is built on the idea that doing something is always better than doing nothing. If you arenāt trading, you arenāt earning your keep. If you arenāt analyzing, you arenāt working. Decades later, the math has settled the debate. We know the S&P 500 beats the vast majority of professional stock pickers over a twenty year horizon. The math is solved. Yet, passive investing remains the hardest thing for a human being to do. The reason is not a lack of data. It is a brand problem. To understand why passive investing is dying, you have to look at the word itself. In almost every other theater of life, passive is an insult. If you are a passive student, you are failing. If you are a passive employee, you are about to be fired. To be passive is to be a spectator in your own life. Evolution hardwired us to equate effort with results. In the physical world, there is a linear relationship between calories burned and outcomes achieved. After all, I canāt run a marathon from my couch. But money is different. Money is one of the few areas where the harder you try, the worse you often do. When you tell a high achiever that the best way to manage their wealth is to be passive, it feels like a physical rejection of their identity. It feels like giving up. The human brain craves agency. This is why we feel more nervous as a passenger in a car than we do when we are driving, even though the statistical risk is the same (unless the driver is 19 or 90). Active investing, such as the picking of stocks and the timing of the market, is rarely about returns. It is about the pursuit of control. It is a way to scratch the itch of anxiety. When the world feels chaotic, selling a stock feels like doing something to protect yourself. It provides a hit of dopamine because you have āasserted your willā over the market. But letās collectively let the term āpassiveā die and replace it with āPerformanceāInvesting. Choosing a low cost index fund(s) like $VFV or $XEQT is not a sign of laziness. It is a high conviction, active decision to choose the strategy with the highest statistical probability of success. It is choosing a strategy based on actual performance data rather than the strategy your ego wants to use to soothe its own fears. True performance investing requires you to sit on your hands and accept the marketās volatility as the price of admission. It offers no outlet for your nervous energy. The irony is that the most active thing you can do for your financial future is to aggressively protect a performance based strategy. You are using a broad market tool to execute an active philosophy: that your edge is not in your intelligence, but in your temperament. Most people think the cost of investing is the expense ratio. The real cost is the emotional toll of uncertainty. When you buy an index fund, you are buying a way to disconnect your ego from your net worth. You are choosing to be a curator of your own time. Success in investing has little to do with what you know and everything to do with how you behave. When you reframe passive as performance, the difficulty evaporates. You realize that you aren't being a spectator. You are being a professional. You are making the difficult choice to ignore the financial noise online and stick to what works. The math says buy the index, but your ego says do something. The secret to wealth is finding a way to make your ego realize that doing nothing is the most elite performance of all. On a personal note, this August will mark the end of my 5-year experiment with trying to beat the market. The plan is to invest my cash reserves and all new capital in my index funds, bringing down my allocations to single stocks. Over time, Iāll sell out of my single stocks and follow a performance based approach to investing.
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44 Comments
Sarah Giver@staystronggiver Ā· 3mo
Thank you Fraser, I had to read this post a few times....so much wisdom here, I do pick stocks because I want to feel that degree of control in a world where it feels much of my agency has been removed (i.e.being priced out of housing etc). It is wise to have a look at my ego and reconsider why I am making the decisions I am making with investing. Thank you for your excellent post šš½.
Michael Conroy@conroy119 Ā· 3mo
Very interesting post!Ā I agree that a globally diversified market cap index fund like XEQT is an optimal approach to investing.Ā Even with passive index (or performance) investing, there are decisions to be made. What index or indexes to buy? XEQT? What about Nasdaq 100 QQQ? Do I believe in home country bias? Or got with $VT?Ā What about things other than stocks/equities, like macroeconomics or scarce assets? Do they have any place in a portfolio or is 100% equities the approach? In other words, there is always some sort of element of "active" or investing preference even with index investing.
RandomYaapping @randomyaapping Ā· 3mo
Great post. For me it was following the evidence and the vast majority of it pointed to index funds being your best long term bet. I have stuck to them every since and it's played out very well. It allows me to decouple from the market and let it do it's thing.
Mr Financial@mr.financial Ā· 3mo
Thanks for sharing that perspective. It took me 20 years to figure this out buddy. I wish I could get those thousands upon thousands of hours back!
Giorgos @geoforce Ā· 3mo
Great post Fraser. What I do is hold the majority of my portfolio in index ETFs. But I do like to have just 10 stocks that I can manage and hold for a long time. APH and PH are two of them that consistently beat the S&P 500.
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