An Expert Investor Shares His Best Advice For Everyday Investors
A pillar of American finance says you should embrace uncertainty.
David Booth, 79, is founder and chairman of Dimensional Fund Advisors, an investment management company with over $1 trillion in assets. He was a pioneer of index investing, collaborating with five Nobel laureates over the course of his career, during a transformational time for finance. He is the author of Stay Calm: Learn to Embrace Uncertainty in Investing and Life.
Here, he talks to Kiplinger about what's changed in investing in his lifetime and what makes a good investor.
KIPLINGER: You said in your book that you'd rather be an investor starting out today than in 1971, the dawn of your career in passive investing. Why is that?
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BOOTH: First, the world has gotten much more efficient, and administrative costs have come way down. Second is the opportunity. My parents never invested in stocks and bonds. They viewed themselves as outsiders, and they felt that insiders made all the money and would just take advantage of them.
That all changed with the development of indexing and other types of portfolios. It's very easy today for people to buy the stock market at low cost. If you do that, you can do as well as or better than most professional money managers. That's as good of a story as I can tell you about markets. The outsiders have as good a chance of winning as the insiders — that's the democratization of investing that's happened over the past 60 years.
How does managing uncertainty in life help people manage uncertainty in investing?
Start off with the idea it's uncertainty that creates opportunity. That's hard for people to accept. But suppose there was no uncertainty in life, and your life was predetermined. That'd be pretty boring.
Similarly, in investing, if there was no risk, no uncertainty, then all investments would have the same riskless rate of return. People don't seem to be able to predict the market.
So instead of trying to, come up with an investment plan. Pay attention to it, make adjustments as necessary, and be flexible. That's true in life: You get out of school, start down a path, then you adapt. That's how you get through life, and that's how you get through an investment program.
A lot of individuals are worried about a catastrophe, because if you invest in any one stock, it can go to zero. That's an enormous uncertainty. But if you buy the whole stock market, through a passive portfolio, the market — and this is a prediction I'm happy to make — is not going to zero.
Figuring out how much you put in the market is the other way of controlling uncertainty. For most people, investing all their money in the stock market is too much uncertainty, but that can be tempered by how much you have in money market funds or other credit obligations.
You talk about how investors need to have the right temperament. What does that look like?
There's a certain optimism that comes from understanding how markets work. We have almost 100 years of good-quality data about stock and bond returns that cover a wide range of economic scenarios. That's a pretty good test period.
It's so easy to buy the market, and if you simply do that, you'll do as well as the pros.
Through all of that, the stock market returned over 10% a year. And I have confidence that the market is setting prices so that I have a fair outcome. See, the market is where buyers and sellers come together — mostly big institutions — and they don't trade unless each side thinks it got a good deal. These institutions all have access to similar information. There are a lot of investor protections, and the market has a lot of liquidity. What pops out seems to be fair prices.
So, the right temperament is saying, I feel like I'm going to get a fair deal if I invest in the stock market. There's no guarantee — sometimes I'll get a good return and sometimes a bad return. But over the long haul, I'll be okay if I invest at least some money in the stock market. Investing is complex; I'm not making light of it. But once you understand how markets work, you'll feel more comfortable and have the right temperament to be a good investor.
How can people manage very human urges that can sabotage investment success? I'm talking about trying to pick stocks, time the market — even speculating or gambling?
You just have to keep reinforcing these first principles. Control what you can control. In investing, you can't control the markets, but you can control the amount of risk you take. Make the best choices you can. Come up with a plan that you believe in and that can be supported by science and evidence. Then see how life unfolds and adapt.
There'll be winning and losing stocks. I can't predict who the winners will be — I may have a hunch, but I'm not going to bet on it, because the evidence is I'm not going to do any better than the market.
Is there a place for more tactical investing then? Being more or less invested in energy stocks given geopolitical events, or that kind of thing?
I think that's fine; that's human nature. I don't need it, but almost everyone I know needs to be able to do that. As long as you don't get carried away, that makes investing fun sometimes.
What makes a great financial plan? Should most investors work with an adviser?
I think most people should work with an adviser. A parallel might be your health. Most people, when they have a serious health issue, they don't self-medicate. They go to a doctor.
Everyone has a serious financial issue, regardless of how much money they have. Advisers can sometimes help you make better choices. Other times, they keep you from making poor choices.
You talk about the democratization of investing. What do you say to folks in this bifurcated economy who don't think the market is working for them?
They ought to study the market a bit more. The conventional wisdom used to be that you analyze stocks, stay up late at night, pore over financial data, then you figure out which ones are going to go up and which ones are going to go down.
It's refreshing to learn that kind of approach doesn't seem to work. And the people who brought us this good news — all these Nobel laureates — they were outsiders as well. It's so easy to buy the market, and if you simply do that, you'll do as well as the pros. But human nature being what it is, you have a tendency to think that if you work harder or smarter than the next person, you'll have a better outcome. That may be true at your job, but it's not true of the stock or bond markets.
What does true wealth mean to you?
Money's usually pretty far down the list of what's important to people. I learned that from my parents and my grandparents and a lot of my teachers along the way. I grew up in a small town in Kansas. Eventually, I went to what I thought was a big town: Lawrence, where the University of Kansas is.
My parents grew up during the Depression, then WWII, and never invested in public markets. As a result, they didn't have as easy a retirement as they probably should have. Along the way, though, they had what they really wanted, which was a great family.
I tell people my parents were wealthy — they just didn't have much money. I really believe that. In that sense, I learned about true wealth. I also had so much help from people who made it possible for me, some of my teachers. I appreciate all of that, and it ties into philanthropy for me.
At the end of your book there's a guide for investors. What's the most important takeaway?
You have a lifelong problem, or a lifelong opportunity, in investing. What's important is a regular pattern of saving and developing a long-term approach, taking into account your personal circumstances — your job, your kids, what you plan on doing with the money and so forth. It's got to be a process you can live with, because switching things around is very costly over the long haul.
Start with understanding markets and how they work, come up with a plan that assumes they work, then get the information you need to make sensible choices. Read what you can, get an adviser if possible, pay attention, and adapt as time goes on. The key is saving regularly, investing for the long haul and staying calm. Stay calm and stay invested.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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