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And Yet the myth of the Index Investor Unicorn persists. This wonderful beast with the discipline of Warren Buffet and the serenity of Gandhi is continually upheld as exhibit A in the case against the value of financial professionals.
_“Why pay a __ % fee to someone? Just follow this simple plan and you’ll get better returns than if you worked with a so-called expert.”
It’s a false comparison; a form of illusion resting on the assumption that peoples’ emotions and biases will not subvert their ideal actions. And we have a mountain of data – thank you, DALBAR & Associates – that conclusively show what people actually do in the absence of financial guidance.
To paraphrase Nobel Prize winning physicist, Richard Feynman: “It doesn’t matter how beautiful your theory is. If it conflicts with reality, it’s wrong.”
And the Index Investing Unicorn is “wrong”.
One reason is mathematical. To meet 100% of a benchmark you must be 100% invested in meeting that benchmark. People won’t (and shouldn’t) do this. The other is psychological. Putting every cent of your investing capital toward matching a market benchmark is a nightmare emotionally. It amplifies the fear during market swings to levels most humans cannot tolerate.
Instead the rarity of this creature - almost as uncommon as the "I bought AAPL when it was 30 cents and still own it Big Foot" - ought to be held up as evidence of _Advisor Alpha _in support of using a financial professional. The data show that in the absence of an advisor’s planning, guidance and support, the average investor will not behave like a benchmark clearing beast, they will behave like a human.
You want to know the real irony here? Putting the Index Investing Unicorn forward as a superior alternative to working with an advisor most hurts the very person the critics claim to want to help – the “average investor”.
The time has come to debunk not the theoretical existence of this investing strawman, but its much more relevant practical existence.
America's bank accounts and waistlines are all the rebuttal you need.
"And hey... let's be careful out there."
Frank Murtha, Ph.D.
Co-founder of MarketPsych