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On Do-It-Yourself Investing and other ideologies! May 26, 2009

Posted by shaferfinancial in Finance, Uncategorized.
Tags: , , , , , ,

Periodically,  I search the the web for interesting sites on finance.  Invariably, I run into the do-it-yourself investing sites that for the most part suggest buy-and-hold index mutual funds.  Now, these sites have been around for a long time and usually are part of a whole value system that is loosely based on frugal living.  Now the frugal living side of the sites I find  generally useful.  The investment side is usually IMHO dangerously incorrect.  But, it has become apparent how difficult it is to subtract out one side without the other.  Why is that?  Well, what holds these ideas together is a general approach to life and assumptions on how the world operates, otherwise know as a paradigm.

The pied-piper of  these folks is John Brogle of low expense index mutual fund fame.

Here are the main points these folks hold onto very tightly:

The professional class knows no more than the average person about the world.  In fact all you need to know/have  is “common sense;”

The professional class, since it does not work with its hands in actually building something real, exists mainly to siphon money from people who do work building actual things;

The average person can do most anything as well as the “expert”; and

Since all the above is true, the average person can save their hard earned money by doing things themselves.

Look at all the places that professionals reside; health care, law, finance, engineering/design, and  government and you see a large movement to do-it-yourself!

These large social movements are perhaps the largest mass movement in the world that gets no recognition.  I must admit that I have been largely attracted to this movement at times.

However, like any mass movements, when the ideology becomes so accepted that anyone suggesting modification is labeled a heretic, it loses its connection to reality.  Like any mass movement, some people become the pied pipers, while others are in charge of ideological purity and focus on out shouting any heretics and removing them from the group.

Unfortunately, that is where the do-it-yourself investing community has found itself.  Here are John Brogle’s main ideas:

Wall Street has overcharged for their services;

Professional investors are unable to “beat the market” over any meaningful time span; and

The average investor can gain the same results as the professional investors by simple buying stocks monthly [dollar cost averaging into index funds] and staying the course.

Note how these ideas match the general ideology of do-it-yourself folks:  Wall Street professional do nothing but siphon off much of your hard-earned money, average people can do as well as professional investors, all you need is common sense to obtain great investment returns.

Now John Brogle spends much time and effort explaining why mutual fund managers fail, on average, to beat the market.  And for the most part I believe he is accurate is his assessment.  I also know that he is accurate in that minimizing expenses plays a big part in investment success.  But one can’t help but notice that Bogle’s writings and the low-expense index mutual funds he sells, exactly fits the pre-existing ideology or paradigm of the do-it-yourself crowd.  This, perhaps, explains why the adherents to his investing philosophy have become so dogmatic as to not allow alternative voices into their spheres; internet or other.

Working as an alternative to these incredibly attractive ideas was not how I planned to spend my time.  But it is the outgrowth of my research into personal investing.  Here are my ideas that clash with Bogle’s and the DIY crowd:

There are skills needed in all worlds to succeed that the common/average person does not inherently posses;

Follow the crowd only if you know and are satisfied where the crowd is going;

All theories need to be vetted by looking at real world results;

Ideas get better when there is a free flow of information and critique encouraged;

You can learn most from people who have accomplished what you are trying to accomplish;

We live in a world where being average is punished; and

Popularity is in no way a proxy for worth or correctness.

Hope you all had a great Memorial Day holiday.  It is a special time in our family where we think about the soldiers who have died and most acutely my father who was a WWII, Korean, and Vietnam veteran and died a little over a year ago.



1. investmentblogger - May 27, 2009

I totally agree Dave. Its the same thing all over again, except with low cost index funds being the new sure fire thing. There are now so many ETFs and other index funds that are popping up everyday, not to mention all the advertisements. Even the uncreative major banks in Canada, have their own product lines of low cost index funds now! Unfortunately for the average person, wherever the herd is going, is where the next milking station will be set up.

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