ETF Investing, Frogs, and Boiling Pots of Water
I take it, from a two hundred year old source–however unreliable it may be–that a frog dropped in a pot of boiling water will desperately try getting out.
But if the water is heated gradually enough, he won’t notice the danger. He’ll bask in his bath-tub, turned hot-tub, turned soup pot, until he’s fit for a witch’s brew (French people wouldn’t dream of eating all of him).
I haven’t actually seen the experiment performed, but I have seen something similar: with investors who want the very best exchange traded index funds they can find.
Once an investor sees the light, and recognizes that his odds of success with indexing are far better than his odds with actively managed funds, he starts to build his passive portfolio of ETFs. The gender bias (note that I’m referring to “he”) is purposeful because of a soup-affliction that affects more men than women. Let me explain:
Based on my seminars over the years, I can show most women that indexing is superior to active management, guide them towards some low cost indexes, and they’ll be able to rebalance an indexed portfolio of stocks and bonds quite dispassionately.
On the other hand, if I can guide a man towards an indexing strategy, he’s more likely to become that frog, slowly boiled in the pot. Here’s why:
For him, an actively managed portfolio represents the boiling pot of water. He’s too smart to jump into it, so he won’t. But something happens.
He settles into some luke-warm indexing water, but sees no harm in slowly turning up the temperature, while on the look-out for the next best index. Perhaps it’s a fundamental index rather than a broad-based market index. He sees that recent historical returns have been better with a different type of index, so he slowly turns up the heat, and buys a fundamental index—not realizing that once the masses view a strategy as superior, it rarely maintains its superiority.
Then a new company comes out with a new low- cost exchange traded index fund. He doesn’t know whether the bid/ask spread will make it more or less expensive than the fund he has, but because the reported expense ratio is lower than his fund’s reported expenses, he sells his comparable ETF and buys the new one, slowly turning up the heat further.
Next, he reads a report about the growing health care sector in China, and a financial service company (lo and behold!) offers a Chinese health care exchange traded index fund. And the hot-tub starts putting him in a stupor.
Before you know it, he’s blogging (or reading other blogs) about how the economy is going to affect interest rates, how the elections are going to affect the economy, and how the stock market might do back-flips in the upcoming year….so he strategizes, to maximize or protect his money, based on these changing times. He becomes the very thing he was hoping to avoid: soup.
This frog is cooked. To an outsider, he would sound savvy, informed and ready to pounce on an economic opportunity. But he’d just be another active investor, trying to second guess his investments, paying higher taxes through his investment transactions, paying trading commissions whenever altering his strategy and following the “smart money” into what’s popular.
If his wife, on the other hand, kept her money separate to his, with a low hassle (leave me alone) kind of indexed portfolio, she could spend more time keeping fit, playing with her kids, and still beat the pants off her husband’s investment account—regardless of how much “research” he did. I’ve seen this firsthand.
And it fascinates me: the difference between amphibians from Mars and Venus.