When I’m tired of hearing the same ten songs played on the radio on repeat, I usually switch to a podcast. One of my favorites is Freakonomics, which purports to “discover the hidden side of everything”. This summer, I found two episodes to be especially interesting as both had an investment tilt. On July 27, an episode entitled “The Stupidest Thing You Can Do With Your Money” hit the airwaves and can be enjoyed via this link:
White Oaks Investment Strategy
The premise of the episode is that investors should forego the fees and active management of financial advisors, and dive headfirst into the index fund pool instead. While I agree with several points made during the episode, I don’t think it tells the whole story. In addition to maximizing returns and minimizing fee, the investment strategy at White Oaks has long been focused on risk (volatility) management. We don’t advocate for a complete index-based approach as the liquidity inherently involved with indexes doesn’t reduce risk. However, we do believe index-type funds have a place in our portfolios. For almost 18 months, we have been using Dimensional Fund Advisors’ (DFA) passive-leaning products for many of the reasons explained in the podcast: lower fees, less tax churn, better performance, etc. In fact, two individuals interviewed during the episode may sound familiar: Kenneth French and Eugene Fama. These academics won the 2013 Noble Prize in Economics for their research that DFA has used to construct many of its investment options.
Do we find this research compelling and generally aligned with our own analysis? Yes, but not without continuing to believe that risk matters. White Oaks’ clients and the majority of investors throughout the world will need to use their investment portfolios eventually. Most people do not have the luxury of investing without regard to consequences or with the expectation that the funds will never be touched. Real people need real portfolios that acknowledge the importance of risk management. In a portfolio that experiences routine withdrawals, less movement up and down generally leads to a greater remaining balance at the end of the day. We can make no certain prediction about the market other than it will continue to ebb and flow in perpetuity. Index funds are essential building blocks to diversified portfolio and serve as a strong compliment to other investments that act, trade and respond to the market differently.