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The ‘do as I say, not as I do’ philosophy

Like many of you, I have a few habits that I have been doing for so long that I sometimes do not realize that I do them. I will spare you the ones that annoy my wife and talk about the one that annoys people at cocktail parties and on Little League sidelines.

Here’s the thing: I tell people that they should invest their money in an entirely different way than I invest money. I have a well-defined method of making investment decisions for the money that I manage.

When new friends meet, conversation often turns to what we do for a living, and I give the usual brief answer, “I manage money.” I might answer a few questions about how I make those decisions and what I am doing at the present with my clients’ money. Eventually, my new friend will ask what I think they should do with their own money.

I give them a quite different answer. I often get a blank stare and they will ask why I do it my way, but think they should do something else. It occurred to me the other day that this is a sensible question, and it deserves an answer.

I generally advise anyone who takes the time to ask that they should have their stock and bond investments in index funds. I have written before about the destructive habit investors have of chasing the latest trends and hot ideas.

Investors blow through billions of dollars every year by attempting to time various stocks and market sectors. The evidence is overwhelmingly colossal that a simple strategy of buying the index and holding for the long-term is the best investment strategy for the average household.

For the 99 percent of households that do not contain an investment professional, a belief that they can beat the market by buying hot stocks and funds is as sensible as believing that Dad can outshoot Tiger Woods.

This is the classic active versus passive debate. Is it better to actively choose stocks and try to beat the market or to buy the whole market through an index? John Bogle founded Vanguard on the principle of indexing, and continues to expound on the brilliance of passive investing today.

Never mind the fact that Vanguard offers many dozens of actively managed funds, from which Mr. Bogle has profited nicely. Like me, Mr. Bogle seems to live by a “do as I say, not as I do” standard.

Why do some investment pros practice active management, yet advise everyone else to go passive? We are no different from plumbers, Realtors, or any of many trades.

A real estate agent will market and sell her own home, and advise you and me to hire an agent to do it. A plumber is quick to tell you to let the experts handle it, while fixing his own plumbing himself.

I carry this contrasting bit of advice even to working with my own clients. When a new client comes on board, I first take them through a process of identifying and describing their own portfolio policy. This policy will include a listing of a few broad classes of stocks and bonds, and the general proportion of each that the investor should own.

I then tell everyone the same thing: If we stop here, you can go back home and buy these proportions of assets in the form of index funds, and you will probably do just fine. You can do this on your own if you have the discipline to stick to the policy, stay in index funds and avoid temptations and panics.

Since I have bills to pay and children to feed, I naturally tell them that I would be happy to do it for them. However, if I am going to manage the money, I will generally not be buying index funds. I study markets and investments for a living.

I fix my own plumbing, so to speak. I routinely make decisions that vary from what an index portfolio is doing. Should you consider doing these things? Perhaps, but my advice will always be to buy index funds and spend your time doing something else.

Rick Ashburn manages investments for private clients. Write to him at rick@richardashburn.com or 7777 Fay Ave., Suite 230, La Jolla, 92037.