Good Advice, So Roundly Dismissed

The world of wise financial management is imbued with proven, effective – often simple – principles. Spend less than you earn; invest the difference. Maintain a personally-appropriate asset allocation of stocks, bonds, and cash. Diversify broadly within those asset classes. Keep investment costs low. Be mindful of tax consequences. Be patient and focused on the horizon through all market conditions; invest for the long-term.

This advice is so firmly established and so often repeated that it begs the question: why isn’t it more universally followed?

I believe the answer to that question lies in the fact that we tend to minimize, if not quickly disregard, findings or conclusions which we don’t regard as sufficiently new. Health guidance suffers from a similar dynamic. Great advice for a healthy, long-lived life might include the following: don’t smoke; eat a balanced diet in moderate quantities; exercise regularly; wear a seatbelt; foster rewarding relationships; engage in purposeful activities. But if today’s newspaper ran a front-page article listing these and similarly well-established guidelines, who would find it instructive, or behavior-changing? Does that render avoiding smoking any less valuable an element in a long, healthy life? Or maintaining a healthy weight?

Among the challenges of efforts such as ours is that this great, time-honored, rewarding financial counsel typically fails to meaningfully change investor behavior – at least to the degree that we would like. We are enthusiastic preachers of simple, sound advice, yet our message can fail to stir action on account of being insufficiently flashy or exciting. After all, how fulfilling it would be if we could revitalize these axioms to inspire adherents to feel more savvy. But in reality, sound investment decisions are not built on outsmarting others. Rather, they are grounded in the wisdom of not outsmarting yourself. In the end, this brings us to another good reason to follow these sound, “common-knowledge” principles: wealth is not typically created by exploiting shortcuts. Rather, investing is a long game, benefitting those who are brave enough to play, and patient enough to reap its rewards, including calmly following sound principles, regardless of the season.