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.

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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13 Responses

  1. woodes34 says:

    Ok Andrew,

    Which pot do I jump into?

    I have liquidated my actively managed portfolio and have the funds being transferred to Vanguard. Do I place them into one of Vanguard's retirement funds which follow along with the index funds model, or into the balanced index model? I'm a 44 year old frog and want to make the best choice so as not to boil in the long run!

    Thanks again for your blog! I've learned so much from it that I wish I'd known 20 years ago.

    • Thanks Woodes 34

      I think either option would be an excellent choice. You'd be bathing in luke-warm water, and not tempting yourself to turn up the temperature. Two well selected pots, my friend.

  2. DIY Investor says:

    Your anecdotal seminar based evidence supports the findings of researchers that women are more patient than men when it comes to investing. And patience pays off!

  3. I think you're right Robert. Women don't have egos (typically) that are as big as men's either. And that helps them too.

  4. Hey Woodes 34:

    On second thought, the Target fund would also give you some international exposure, which I think would be a good idea. The balanced fund would not.

  5. Fun post Andrew! I've got absolutely no ego to uphold, I love indexed products. So does my wife 😉

  6. You're no gambler Mark. Nobody is going to trick you into a boiling pot.

  7. duboisos says:

    Hey Andrew,

    Saw you down at EARCOS and you've helped me to get my thinking on track as far as empowering myself w/ my money. So a BIG THANK YOU!

    We're taking charge and educating ourselves. I'm reading or have read a few books on your recommended list & opened up an account on Fidelity. We've invested in a S&P 500 etf and are now looking to diversify…

    I have two questions:

    1. In doing my research, I'm struggling with finding quality, and understandable data on solid choices of international as well as bond etf's. Can you recommend any places to go?

    2. We teach up in Beijing and I'm interested in preordering you upcoming book. Is shipping available?

    Once again, thanks for sharing your common sense approach to making our money work with us… It's appreciated!

    All the Best!

  8. Thanks for the kind words. It makes my day to hear stories like yours.

    If you open an account allowing you to trade ETFs, you can purchase some international bond indexes. Off the top of my head, there's the ticker symbol BWX, but there's also a slightly cheaper one (in terms of expenses) but the symbol is escaping me right now.

    If you're interested in my book, I will be getting my first copies next week, and I could probably sell you one directly, if you can cover the postage from Singapore. We could probably use paypal, or something like that. Get in touch from the contact page if you're interested.

    Otherwise, you could order through Amazon.com, but they probably won't be available through Amazon for another two months.

    Cheers,

    Andrew

  9. duboisos says:

    Thanks for the quick reply. I just placed the BWX etf on my watch list. Going to see how that sizes up against a few other int'l options (EEM & IOO).

    Appreciate your time!

    • The other ETFs you listed above aren't bond ETFs, so you can't make comparisons.

      If you want to compare BWX with anything, you could compare it with ISHG, which I've linked to here: http://finance.yahoo.com/q?s=ishg&ql=1

      It has lower expenses than BWX. And don't forget that if you look at charts of bonds, the bond itself will only move sideways over your lifetime. Of course, it will float up and down, but it won't move outside of a relative range (unlike stocks). The bond will pay interest, and you won't be able to see that through a chart.

      To see what I mean, have a look at the U.S. bond index here, compared to the S&P 500 index: http://finance.yahoo.com/q/bc?t=my&s=SHY&…

      Over the long term, none of your bond indexes will end up with capital gains, just interest. And that's fine. They are meant to be the more temperate part of your portfolio. Shorter term, they can look like they ride high and low, but place them next to a stock benchmark, and you'll get a clearer picture of their (lack of) movement.

  10. Santos says:

    Great post and so true. As an financial advisor, always puzzled on how do you charge for such simple and easy advice? Thoughts?

    Thoughts on individual bonds versus bond funds. Even if you had a $2 million dollar bond fund, would you use funds?

    Keep up the great posts!

  11. Jesse says:

    Is there any difference between buying vanguard ETFs through an ameritrade account vs. buying vanguard ETFs through a vanguard account?

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