The More Things Change With Personal Finance Education…

Robert Powell at MarketWatch has written a good article on the challenges of education in personal finance. The impetus for his story is last month’s Life-Cycle Saving & Investing Conference at Boston University. Powell’s takeaway from the meeting: “It might be a stretch to say that Americans, in general, are failures when it comes to investing. But given the amount of time and attention spent teaching people how to be savvy about all things money, it sure seems that way. We simply haven’t moved the needle all that much.”

There are no easy shortcuts to successful investing, but there’s a sea of wrong turns and bad information. There’s also a simple antidote: start with the basics. I continue to believe that the starting point for every investor is the default portfolio a la my Global Market Index (GMI). This is simply a market-weighted mix of all the major asset classes, which can be accessed inexpensively via ETFs and index mutual funds.
GMI, or something similar, is the obvious starting point for designing and managing portfolios. Indeed, there’s a half century of theoretical and empirical research telling us as much, as I explain in my book, Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor. Every investor should ultimately customize this benchmark of the market portfolio, but you need to start with the basics before you reorder it.
The fundamental reason for using GMI or its equivalent as the first step on the thousand-mile journey of investing is that it’s an easy, forecast-free way to capture average to above-average risk/return profile of world’s beta opportunities. Theory predicts as much, as does recent history. Throw in some simple rebalancing and you can do even better with little or no additional risk. In general, this is a reasonable way to tap into moderate returns and risk over the medium- and long-term horizons.
The critical questions that are worthy of deep analysis and study are 1) how to stray from Mr. Market’s allocation, and 2) how to manage the mix through time. If you had a very long time horizon, and decided that your risk tolerance, investment skills, and expectations were more or less average, you might simply hold something akin to GMI. Otherwise, you need good reasons to rethink the default portfolio’s mix. True, most investors should rethink it. Very few of us are average. But if you understand that you can easily grab the market’s average return and risk at little cost or effort, you’ve made a crucial and productive first step on your investment journey.
Unfortunately, even this basic insight is lost in the cacophony of financial advice that spews forth daily (and hourly). You’ve a better chance of winning the lottery than finding useful investment information (unless you know where to look). Powell’s right when he reports that investment education hasn’t changed all that much. Unfortunately, it’d be foolish to expect any change for the better any time soon. The basic information about how markets work, and what that implies for managing money is getting buried under the crush of misinformation and speculative recommendations.