ETFs vs. Mutual Funds

etf_v_mutual_fundMutual funds and exchange traded funds (ETFs) do pretty much the same thing, which is allow an investor, with a single purchase, to own a diverse pool of assets – usually stocks or bonds, but also sometimes commodities, currencies, futures, bank loans or other financial exotics.

Since they mostly do the same thing, the most interesting question is usually not “mutual fund vs. ETF?” but rather a question about “asset allocation” – that is, what things you actually own within an ETF or mutual fund.

Asset Allocation

I wrote a few months ago what I consider to be the final word on the asset allocation question. To repeat:

“You should invest via dollar-cost averaging in no-load, low-cost, diversified, 100 percent equity index mutual funds, and never sell. Ninety-five percent of you should do that, 95 percent of the time, with 95 percent of your investible assets.”

What about ETFs?

You probably noticed I said ‘mutual funds,’ not ETFs. Well, 95% of the time you could substitute ETF for mutual fund and get the same result.

The rest of this column is about the 5% of the time when it makes a difference. The factors that make up that 5% include timing, minimum investment amounts, costs, liquidity, and availability of assets.


I like to call ETFs “mutual funds with ADHD” because you can trade them at any time of the day that markets are open, including multiple times a day if you like. This contrasts with mutual funds, which you can only buy or sell based on the end-of-day price, after the 4pm market close.

This feature of ETFs is not an advantage from my perspective. Since the right holding period for investing in stock markets is somewhere between 5 years and forever, the ability to trade in the middle of any day, for an individual, should be wholly irrelevant.

Minimum Investment

Some mutual funds and some mutual fund companies require a minimum investment such as $10,000, or $5,000, or $2,500. Or, different prices apply for different minimum investments. ETFs, by contrast, often can be purchased for as little as $100.


As a result, for newbie investors with their first $500 or $1000, ETFs can be the first step needed to get ‘in the market.’ Which is nice.


ETFs and mutual funds come in both high cost and low cost varieties.[1] For myself, I almost always seek out the low cost flavor, which tend to be in ‘passive’ or ‘index’ funds, rather than ‘active’ or ‘managed’ funds.

Vanguard – the giant brokerage and mutual fund company – reports that among ‘active’ strategies the average ETF is cheaper than the average mutual fund. Among ‘passive’ strategies, however, the average mutual fund is cheaper than the average ETF.[2]

The key to understanding your costs, of course, is to go beyond the ‘average,’ and to actually figure out the specific cost of any mutual fund or ETF you’re thinking of buying. Depending on the size of your portfolio and the time you have to invest, minimizing management fees will save you tens to hundreds of thousands of dollars over your lifetime.

So, it’s worth taking those five extra minutes and figuring out the fees, for a return on your time spent of, like, infinity.

Finally, depending on your brokerage company, purchasing some funds and ETF may incur ‘loads’ when you buy, and transactions costs when you buy and sell. Naturally, avoid if possible.


ETFs appear at first to offer better liquidity than mutual funds, because of the moment-to-moment prices for trading ETFs, rather than the once-a-day price of mutual funds. That kind of liquidity advantage, however, should be irrelevant, since your investment holding period ought to be measured in years, not hours or minutes.

In another sense, however, ETFs may in certain cases be less liquid than mutual funds. As you move on the spectrum from plain vanilla to more exotic ETFs, it’s possible that the illiquidity of the underlying assets raises the cost of transacting in ETFs.

During this past August’s market turmoil, for example, traders reported that certain ETFs in relatively illiquid assets such as bank loans or corporate bonds mispriced during the trading day.

As an individual investor, you should assume the ‘mispricing’ will not be in your favor in these situations. Market makers will raise the cost for investors of getting in and out of these illiquid ETFs through a larger wider gap between the price you can buy or sell the ETF, known as the ‘bid-ask spread.’

Availability of assets

Some brokerage or mutual fund companies where you do your investing may have a better inventory of products in ETFs versus mutual funds – or vice versa – making it necessary to buy one rather than the other. Because most of the time mutual funds and ETFs in the same assets do the same things, normally you can substitute one for the other without worry.

As always, the choice of ‘asset allocation’ – what underlying things you’re buying – matters more than the packaging, whether wrapped in an ETF or a mutual fund.


[1] To give you a benchmark for high or low costs, some active mutual funds and ETFs charge 1.5% fees or more, while some passive mutual funds and ETFs charge 0.15% fees or less. That’s an order of magnitude of ten times the cost between the low and high cost varieties.


[2] The average index ETF charges a 0.29% management fee, while the average index mutual fund charges a 0.14% fee. So index mutual funds are cheaper, on average, than index ETFs. The average actively managed ETF charged a 0.62% fee, while the average actively managed mutual fund charges 0.80%. So actively managed ETFs are cheaper than actively managed mutual funds, on average. Source: Vanguard webinar on ETFs v. mutual funds.


A version of this appeared in the San Antonio Express News



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More On Actively Managed Equity Mutual Funds

Lately I’ve taken to saying boldly and loudly to anyone who asks my opinion (and some who don’t!) that every academic study ever done on actively managed (high cost) mutual funds vs. passively managed index (low cost) mutual funds shows that, in aggregate, the actively managed funds under-perform the passively managed funds by approximately the difference in fees charged by actively managed funds.


That’s the central and ongoing conclusion of not just the first edition of Burton Malkiel’s A Random Walk Down Wall Street, but every updated edition since the book first appeared in 1973. Although Malkiel’s view has won the academic battle, still the combined marketing heft of the actively managed mutual fund industry has not yet conceded the war.

Investment strategist and  and nationally syndicated columnist Scott Burns of Asset Builder – points out in this post yet another important article debunking the usefulness of actively managed mutual funds, when compared to their admittedly doughty but nevertheless more profitable younger siblings, index mutual funds.

If you’re curious to dip your toe into these ideas, I recommend starting with Scott Burns’ post, then move on to the article itself.

Please see related posts:

Book Review of A Random Walk Down Wall Street, by Burton Malkiel

Book Review of Investing Demystified by Lars Kroijer


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Book Review: A Random Walk Down Wall Street

First published forty years ago, A Random Walk Down Wall Street by Burton G. Malkiel is one of those books – much like Benjamin Graham’s The Intelligent Investor – more referred to than actually read.

Malkiel’s central thesis – that equity markets are so efficient at pricing stocks relative to their risk that the vast majority of investors would do best to buy an index mutual fund rather than invest in individual stocks or buy an actively managed mutual fund – has utterly demolished the other side in the battle of investment ideas, even if the war of investment ideas rages on in the world, oblivious to the total intellectual victory of one side.

Since a majority of individual equity investors – in addition to institutional investors – do not yet embrace in practice the Random Walk’s Efficient Market Hypothesis, more should probably read this book to realize that the battle has already been decided.

Lately it does feel as if the tide is turning – as both more individuals and more institutions realize that although some individuals and some managers may ‘beat the market’ some of the time, few managers beat the market often enough to justify their fees. And further, that even if some managers did regularly beat the market in the past, it’s quite difficult to know in advance which ones will beat the market in the future. The resulting logical choice that more and more people make – despite the extraordinary marketing efforts of the Financial Infotainment Industrial Complex – is to purchase index funds.

 A Random Walk‘s impact

How important is Burton Malkiel and his book? One measure of his book’s impact is the index mutual fund industry.

At the publication of the first edition of A Random Walk in 1973, the ‘index fund’ did not yet exist, and instead was something Malkiel mused about:

“What we need is a no-load, minimum management-fee mutual fund that simply buys the hundreds of stocks making up the broad stock-market averages and does no trading from security to security in an attempt to catch the winners. Whenever below-average performance on the part of any mutual fund is noticed, fund spokesmen are quick to point out, ‘You can’t buy the averages.’ Its time the public could”

Shortly thereafter, John Bogle at Vanguard proposed the creation of the S&P 500 index, which became available to the general public in 1976. Malkiel became a director at Vanguard fund and may take considerable credit for the intellectual authorship of this superior idea.

The Tide is Turning

After reading Malkiel’s A Random Walk, I was fascinated to learn about the following shifts in the mutual fund landscape in favor of indexing:

For eight years in a row leading up to 2013, domestic (US) actively managed equity funds experienced net outflows, while domestic index funds experienced inflows.

Steady Growth of Index Fund Investing. Source:

Of the $167 Billion in net new money invested in mutual funds1 in 2013, $114 Billion went to index mutual funds.

As a result of these trends, equity index funds, as a share of all equity mutual funds, has hit a high of 18.4% in 2013, up in a steady increase almost every year from just 9.5% in 2000.

Malkiel’s book does not explain all of this shift, nor did it cause it, but it has provided the popular intellectual justification behind the investment of hundreds of Billions of dollars per year. That’s a pretty cool legacy that should at least be added to his Wikipedia page or something.

Great writing

Malkiel carefully navigates that difficult ridge line between technical writing that includes academic research, including probabilities and statistical methods, and fundamental security analysis – upon which he bases his ideas – and popular interpretations and advice for the average investor.

While stock prices may be random, his writing is anything but random. He’s careful and logical and subtly funny too.

I expected the academic case for the Efficient Market Hypothesis – for which A Random Walk is most famous – but I am pleasantly surprised at how practical, accessible and prescriptive the rest of the book is on constructing an individual’s investment portfolio.

How to value stocks – two ways

Malkiel posits two ways to determine the value for any stock.

Fundamental valueBenjamin Graham in The Intelligent Investor taught us the theory and technique for determining the fundamental value of securities.

In plainest terms, you have to determine all of the future cash flows of a security, and then apply the discounted cash flows formula to determine the present value of all future cash flows. The sum of all discounted cash flows equals the fundamental value of a security.

The great thing about this technique is that you can know the actual worth of a stock, for example.2

Furthermore, asset prices periodically revert back to fundamental values, so if you can do this technique you can know in a sense where prices are headed, at some point in the future.

Many investors – including probably the majority of mutual fund portfolio managers, Wall Street analysts, and stock-picking hedge fund managers – employ fundamental valuation techniques when selecting stocks. Certain bottom-up investors, also known as value investors, believe that they can achieve impressive results using fundamental valuation techniques.

This guy has practiced fundamental investing pretty successfully

Graham’s most famous student Warren Buffet seems to have done pretty well using this technique.

The terrible thing about this technique is that:

a)    Its incredibly hard – ok it’s impossible – to actually know what all future cash flows of a stock will be – so we end up adopting models of the future that include substantial guesswork about earnings growth (or shrinkage);

b)   The appropriate mathematical discount rate for determining the present value of all future cash flows is also always an estimate, introducing a further element of imprecision to what appeared at first to be a precise process, and;

c)    Market prices can remain widely divergent – above and below – from fundamental value for long periods of time. “The market can remain irrational longer than you can remain solvent” is an old Wall Street phrase that captures just this type of problem with fundamental analysis. It’s an unfortunate but true statement that sentiment and irrational factors – the eternal struggle between fear and greed – and technical factors such as the ebb and flow of investment funds – can set the price of stocks far away from fundamental value for long periods of time.

So fundamental value techniques, explained by Malkiel as well as critiqued by Malkiel, are a commonly used technique but not a panacea for stock market investing.

Investor Sentiment – Malkiel credits Economist John Maynard Keynes as an early proponent of the truism that the combined madness and wisdom crowds – also known as investor sentiment – can carry along the price of individual stocks as well as the general level of the market, irrespective of fundamental value. Believers in the theory of investor sentiment may invest with the idea that they can anticipate future interest in a stock or in the market by understanding investing crowd psychology.

When it comes time to sell, the price of a stock will be buoyed by other believers in the ‘story’ of the stock or the market, willing to buy in at the same or higher prices. Even for fundamental value investors, an owner in equities has to depend to some extent on the future participation of others in order to receive value in the secondary market for any shares sold.

This is sometime described by the shorthand phrase ‘The Greater Fool’ theory of investing. Meaning, I don’t necessarily need to know anything about a stock’s fundamentals as long as a Greater Fool than me is willing to buy my shares when I want to sell.

The great thing about ‘investor sentiment’ investing – which by the way I would posit 99.5% of all individual investors depend on much more than fundamental value investing – is that you don’t need to do much homework or heavy math. Just get a ‘feel’ for the direction of the market or the ‘story’ of the stock, and away you go. Again, this is basically how everyone invests in stocks in practice.

I mean, do you know any non-professional stock investors who model out all future cash flows and then apply an appropriate discount to obtain a present value? No? Me neither.

The problem with investing largely on this theory, however, should be obvious for a number of reasons:

a)    While irrational exuberance (and its evil twin “irrational lugubriousness”3) can dominate for some time, it’s a ridiculously blind way to invest. We all do it of course, but we’re blind. And we should acknowledge our blindness in advance.

b)   Bubbles grow out of Greater Fool theory investing, and the end of bubbles is always ugly and painful.

c)    Sentiment can and does change much faster than fundamentals, adding unwarranted volatility to markets as well as possibly to unwarranted activity in our own investing. We humans change our minds twice a day before breakfast and four times on Thursdays. That kind of volatility of sentiment tends to hurt our investment portfolios.

Financial bubbles arise from ‘investor sentiment’ investing

So which way of investing is right? Neither!

As investors we often adhere – at least in theory – to one of these two methods.4 But neither tends to serve us well, or well enough, to achieve an edge over any other investors.

Malkiel advances the Solomonaic wisdom5 that both theories are right, and both are wrong.

Certainly both fundamental value and investor sentiment do determine market prices in a confusing, seemingly random, combination. The problem is that with most stocks we compete with hundreds, thousands, or tens of thousands of extremely smart and knowledgeable investors. With so much competition to achieve the best returns for our capital, we rarely have the chance to outguess others in a profitable way.

We try and try, but as Malkiel’s and others’ academic research has shown, precious few professionals can achieve a better result than the market as a whole. As individuals we have even less chance to outperform than the professionals.

‘Tis The Gift To Be Simple

tis the gift to be simple

Malkiel’s famous conclusion in A Random Walk is that most people would do best by trying to simply earn the market returns of the broad market – rather than attempt vainly to ‘beat’ the market.

As the old Shaker dance goes, ‘tis the gift to be simple, ‘tis a gift to be free. The modest, simple, low-cost index fund beats managed funds most of the time, and it also beats an overwhelming majority of actively managed funds over extended periods of time.


Since all mutual funds in aggregate are made up of the entire market, logically the aggregate returns of all mutual funds will reflect the aggregate returns of the entire market. Roughly half will ‘beat the market’ in any given year, and roughly half will underperform the market. However, past performance – as the clichéd disclosure goes – does not predict future results.

With each successive year you compare actively managed mutual funds to market returns, fewer and fewer actually ‘beat the market.’

In practice this is what academic studies confirm, except for the fact that actively managed mutual funds tend to lag, in aggregate, market returns by approximately the fees they charge. Which fees tend to range from 0.75 to 1.5% of assets.

Index mutual funds by contrast tend to charge 0.1% to 0.35% fees and so tend to underperform their respective markets by a much smaller amount.

Forty years later, hundreds of billions of dollars flow into index mutual funds annually, in large part due to Malkiel’s popular presentation of these simple ideas.


Final thoughts and caveats on index investing

S&P500 not entirely diversified

About one third of all indexed investment money currently resides in S&P 500 index mutual funds. The S&P 500 Index consists of the largest 500 US companies, which make up 75% of total stock market value in the United States. As such, this index serves pretty well as a proxy for market exposure, but investors should understand that it consists of only large companies and only US-based companies.

S&P500 share of Index Funds. Source:

Investors in the most popular index fund do not get the diversification of ‘mid-cap’ or ‘small cap’ companies, many of which may ‘beat the market’ in any given year or even long period of years. Furthermore, some research suggests that smaller capitalization stocks may outperform larger capitalization stocks in the long run. This may be because smaller companies appropriately offer higher returns because they are smaller and possibly inherently riskier. I don’t think the research is definitive on this point, but at the very least investors in the S&P 500 should know that they’re only getting exposure to 75% of the US stock market, and only the biggest companies.

Perhaps more importantly, investors in the S&P500 index forgo exposure to the majority of public companies – approximately 60% – that are not listed on the US stock exchanges. S&P500 index investors miss direct exposure to the public companies of Europe, Japan, Australia, Africa, Latin America, China, and India – any of which may ‘beat the market’ represented by large cap US companies. Of course, equity markets are linked and responsive to one another, and the largest US public companies have extraordinary exposure to non-US growth, but the effects are indirect. S&P 500 index investors should know they are not as geographically diverse as they could, and probably should be.

Author Lars Kroijer argues in his book Investing Demystified, persuasively I think, that the logical approach for someone who embraces the Efficient Market Hypothesis of A Random Walk is to invest in an ‘all world equities’ index. This product exists, and offers a cheap, maximally diversified way to wholly embrace Malkiel’s approach.

Market-weighting indexes have drawbacks

The next problem with the S&P 500 index is that it is designed as a market-weighted index, meaning investors get their money allocated to the component stocks of the index in their current market-capitalizations proportion.

Here’s the problem with that. If Apple Inc makes up 3% of the S&P 500 index, and investor sentiment pushes up the value of Apple shares when the iShoe gets announced, such that the weighting of Apple becomes 3.1% of the largest 500 companies in the US, then index funds are forced to buy more Apple, to remain in line with market-weightings.

Admit it. You would totally buy the iShoe

This type of forced buying acts to further push up shares of Apple. A self-reinforcing market mechanism – when buying forces more buying – creates a troubling feedback loop that probably pushes the stock away from fundamental value and possibly creates opportunities for non-indexed money to take advantage of index money.

Its not terribly hard to see how the largest capitalization stocks could be pushed to prices higher than fundamentally warranted as a result of too much S&P 500 index money for example, which would tend to dampen returns for investors in the largest capitalization stocks.6

As Malkiel describes repeatedly throughout A Random Walk, certain smart investments cease to be as smart when everybody does them. The success of the S&P 500 index mutual funds in particular may make future investing in the S&P 500 index less attractive for the purposes of achieving broad market returns.

In this case a simple solution is to diversify into a broader market index like the Wilshire 5000, or the kind of total world equities index advocated by Kroijer.

a random walk

Please see related post, All Bankers Anonymous book reviews in one place!

Please see related book reviews:

The Intelligent Investor Benjamin Graham

The Signal and The Noise by Nate Silver

Investing Demystified by Lars Kroijer

And related posts:

Nate Silver on the Efficient Market Hypothesis

Lars Kroijer on Agnosticism over Edge



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  1. Defined by the report as “new fund sales less redemptions combined with net exchanges”
  2.  Or annuities, private companies, bonds, longevity insurance, oil and gas leases, or income-generating real estate. If a financial instrument has cash flow, this is the way to value it. By the way, as a side note, how do I know gold isn’t a real investment? No cash flow.
  3. Thank you. Thank you very much. In the future, when I am Fed Chairman, I will just whip that phrase out during a Great Recession to show how the market is excessively pessimistic and stocks are about to soar. Then later I will have it trademarked. Who wouldn’t buy my next book titled ‘irrational lugubriousness?’ It has a nice ring to it.
  4.  In practice, as I mentioned before, 99.5% of all individuals just punt with the investor sentiment method.
  5. By that I mean: Split the baby in half, leaving nobody happy.
  6. That, Alanis, is a much better example of irony than the proverbial black fly in the Chardonnay, which is really just an example of something that’s kind of a bummer.

The Giffen Good Concept Applied To Investments

Editor’s Note: A version of this post appeared in the San Antonio Express News “So…Money” column.

The only “C” I got in college was in Intermediate Macroeconomics, but I remember one economics term that I really loved — the “Giffen Good.”

With ordinary, rational, economic behavior, we expect that when prices go up, people buy less, and when prices go down, people buy more. We buy more things, for example, at Wal-Mart and Costco because of their low prices. We buy fewer things at Nordstrom because of their higher prices. Makes sense, right?

Sir Robert Giffen

A Giffen Good — named for a 19th Century Scottish economist named Sir Robert Giffen — is an odd thing. It’s something that people buy more of as the price goes up. With a Giffen Good, people act in exactly the opposite way we would normally expect them to in response to the price of things.

When you look up Giffen Good in Wikipedia — as I just did to refresh my memory — you read that little evidence exists for Giffen Goods in the real world, and people do not generally purchase more of something when the price goes up.

When it comes to our investments, however, I totally disagree with Wikipedia.

Ever since learning about Giffen Goods, I see them everywhere, as well as what’s known by analogy as “Giffen Behavior.”
Outside of the investing world, I remember reading with much interest the story of a guy trying to get rid of his mattress. He posted a “Free Mattress, Used” notice on Craig’s List, and got no responses. When he posted “Mattress, used, just $10,” he had to turn away interested buyers who lined up with their trucks to try to take advantage of a great bargain. That’s a Giffen Good.
Here’s an example of a Giffen Good from the art world: Imagine if I landed on Earth knowing nothing about art and somebody offered me the Edvard Munch painting “The Scream” for $1,000 to hang in my living room.

I’d offer you $75 for this, because I love a bargain.

I don’t know about you, but I might just think, “Whoa, that’s kind of a lot of money, and although there’s something neat about the painting, it’s still a bit creepy.”
And then I might think, “How about I give you $75 for it?” Because I love a bargain.

Of course, knowing that somebody else paid $120 million for it last year changes its attractiveness to me. Would I sell every single one of my worldly possessions right now to own “The Scream?”

Duh. I’m a finance guy. Of course I would. That painting is the ultimate Giffen Good.

Shifting from the absurd to the irrelevant, a concept like Bitcoin suddenly became everybody’s most desired tulip bulb last year when the price starting shooting upward, making it the Giffen Good of 2013.

And now lets return to the core of ordinary investment behavior: Discretionarily-managed equity mutual funds typically charge 0.75 to 1.5 percent management fees, while equity index mutual funds typically charge one-third of that amount in management fees, despite offering the same long-term results, according to every academic study that’s ever been done. Like, ever.

Most investors figure — wrongly — that if the fees on the discretionarily managed equity funds are higher, they must be a better product. The lower-priced index mutual funds just seem less attractive. That’s a Giffen Good.

In fact, much of the time, the entire stock market is an example of a Giffen Good. We really don’t want to own stocks when they fall in price. On the other hand, we really, really, really get interested in stocks after they’ve jumped 10 to 15 percent a year for a couple years in a row. This is madness, of course, but it’s also exactly what drives much investing activity.

Most of the time, indexing wins

Beware of your own Giffen Behavior.

Final note: Real, live economists reading this may object to my imprecise adaptation of an economic term for the popular illustration of a personal finance concept. In anticipation of their objection, I can only show them my previously mentioned “C” on my college transcript. Also, lighten up, dismal scientists.


Please see related post: Guest Post by Lars Kroijer – Agnosticism over Edge

A book review of Investing Demystified by Lars Kroijer


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New Highs in the Dow Part III – What Should I Do?

2013-02-05 13.27.30Please see New Highs in the Dow Part I – Indifference and Inevitability

And New Highs in the Dow Part II – What’s going to happen?


First, if you’re actually an investor1  in public securities2, take a moment to be sad about these past two weeks and all the new highs hit in the Dow Jones Industrial Average.

All that it means when an equity index hits a new high is that it costs you more to purchase shares in the equity markets.  If you’re an investor and you plan to buy stocks ever again – in your life – these new highs are not to be celebrated, but rather be lamented.

Unless of course you like paying more this week than you did last week for the exact same product.  I know I don’t.

After you recover from your sadness, do what you should always do under any circumstances, which is blindly and reflexively take the monthly surplus you can reasonably afford to dedicate to long-term investing, and purchase low-cost, diversified, stock mutual funds.

And never sell until you absolutely must have the money to cover your lifestyle costs.

And that’s pretty much it.

For 95%3 of individual investors, 99.5%4 of the time, the rest of what passes for investing advice amounts to noise.5

Please understand I’m saying this as a guy who

1. Is not an investment advisor and I’m not selling mutual funds.  I can’t benefit in the least from you taking my advice.

2. I’ve been a bond salesman of credit default swaps, CDOs, RMBS, CMBS, ABS, IOs, POs, Inverse IOs, calls, puts, swaps, and swaptions.  I’ve sold sovereign emerging market debt and corporate emerging market debt.  I started and ran a distressed debt hedge fund.  I’m a fiduciary for a school endowment invested in hedge funds and mutual funds.   I know the products out there.  They have their place and their usefulness in the institutional investing world, or the ultra-high net worth world.

I’m saying all of that sophistication – outside of low-cost, broadly diversified, long-only equity mutual funds – is mostly irrelevant to personal investing.

So, embrace the simplicity that’s beyond sophistication.  Be child-like in your humility about what and how you invest.

Again, take the monthly surplus you can reasonably afford to dedicate to long-term investing, and purchase low-cost, diversified, stock mutual funds.

Do this when the market goes down.  Do this when the market goes up.  Do this when the market goes sideways.

Do this with a Fox.

Do this with a Peacock.

Fox-Business-News-logo“But I would not, could not, with these stocks.

I would not, could not, with a Fox,

I would not, could not, with a Peacock,” you say.CNBC Logo

When Fox and Peacock like Charlie Gasparino and Jim Cramer tell you to do other things, just do this.

Just try it.  You’ll like it.  You’ll see.


Please see my previous posts in this series

New Highs in the Dow Part I – Indifference and Inevitability

And New Highs in the Dow Part II – What’s going to happen?


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  1. Just to be clear: my statement is aimed at people who intend to be investors in their life, in the future.  If you’re a retiree drawing down on investments rather than adding to them, you of course celebrate new equity index highs like we’ve seen in the past week.  But in that case, you’re not an “investor” in the sense I’m using the word.
  2. Another caveat: Plenty of successful, wealthy, investors ignore public securities and do just fine.  I’m really just talking about one’s involvement in purchasing stocks and bonds.  Essentially, the kind of people who care about the Dow.
  3. I rounded down to be conservative.
  4. Ditto
  5. For the fuller explanation from a great book on why this is all you need to know, read this review of Nick Murray’s Simple Wealth, Inevitable Wealth, and then go buy the book.

Book Review: Simple Wealth, Inevitable Wealth by Nick Murray

Nick Murray’s Simple Wealth, Inevitable Wealth, [1] deserves to be the exception to my rule of never reviewing “How to Invest” books.

Stylistically, Murray’s prose is the Yin to Nassim Taleb’s Yang.[2]  Murray is gentle, meditative, and modest in affect, part financial advisor and part Zen master, contemplating the beauty of compounding investment returns[3] and inter-generational wealth-building.

Yet for all his gentle style, he’s no less sure of himself or passionate when it comes to what he sees as simple, but overlooked principles for building wealth over time.

Since I’ve come to adopt his views as my own, it’s worth highlighting the best of them here.

  • Murray questions the common journalistic narrative[4] as it mostly misleads rather than informs.  Even worse, the journalistic narrative rarely asks the key questions for wealth building such as “What is Risk?”, “What does wealth mean to me?” and “Who am I?” (I’ve hyper-linked to my earlier consideration of the latter two questions.)
  •  Timing the market is a fool’s game[5], whereas time in the market will be your greatest natural advantage.
  • The highest value of an investment advisor is often to tell you to not do anything.  This sounds a lot like advice from Benjamin Graham.
  • Only equities provide the possibility of growing wealth in perpetuity.  I would add – but Murray does not – some other risky assets in addition to equities for certain people and institutions.  Murray has a particular fondness for stock mutual funds, and, for the vast majority of people, I concur that that’s all you need to grow wealth.  My own definition of ‘equities’ would include ownership in not only stock mutual funds, but also allow for a broader variety of risky vehicles such as real estate, traditional business ownership, commodity investments, or other volatile assets.
  • For the individual investor, bonds are an “anxiety-management tool” but not a wealth-building tool.  Unfortunately – given current interest rates – this is truer now than it was when Murray first published his book in 1999.  At this time, fiduciaries who depend on managing money in perpetuity cannot afford to be in bonds, a big, under-recognized problem – in my opinion.

His strongest points, which he spends the bulk of the book proving to my satisfaction are the following:

First, owning a diversified portfolio of equities over the long-term does not carry significant risk of capital loss.  The diversified portfolio of equities is subject to volatility, but volatility passes away under long-term time horizons[6] and should not be conflated with risk.

Second, building wealth through the steady accumulation of equity mutual funds is simple,[7] and the result of this behavior, over a lifetime, is inevitable wealth.

Third, in contrast, bonds or riskless assets will not build wealth, but rather condemn the investor to a long-run loss of purchasing power.  If your goal is to build wealth – rather than provide current income – you cannot afford to be invested in bonds.

Murray’s main message – as restated above – may be manipulated, distorted, exaggerated or parodied, but cannot be proved wrong.

Professionally I’m a “fixed-income/bond guy” through and through,[8] so I believe in the uses and opportunities of bonds and safe cash-flows.  Despite my experience and biases, I believe Murray on his own terms, is absolutely, capital “R” Right.

Please see related post: All Bankers Anonymous Book Reviews in one place.



[1] Full title of the book: “Simple Wealth, Inevitable Wealth – How You And Your Financial Advisor Can Grow Your Fortune In Stock Mutual Funds”

[2] I greatly admire and recommend Taleb, but as I’ve written on Fooled by Randomness and Black Swan, his prose style can be abrasive.

[4] Also known as the “Financial Infotainment Industrial Complex”

[5] On timing, Murray writes: “Time in the market, as opposed to timing the market, is not a way of capturing the long-term returns of equities; it is the only practicable way.  You have to stay in it to win it.”  This makes a lot of sense if you understand the magical power of compound interest.

[6] He defines long-term as, at minimum, 5 years.

[7] Murray explains that, while the process is simple, simple is not the same as easy.  It’s incredibly hard, in fact, to have enough left over, after paying your bills, to constantly invest in equities month after month, year after year, for your entire life.  But if you can do that, wealth is inevitable.  Hence, the title of the book.

[8] I’ve been a bond salesman, and fixed-income hedge fund manager.  I have no professional experience with the stock market.  Mostly I find conversations about stocks and the stock market incredibly uninteresting.  But I still believe you have to have your money exposed to them, or other forms of risky equity, to build wealth.

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