When you read a book like How to Fund the Life You Want, or Mark Hebner’s Index Funds: The 12-Step Program for Active Investors, it can be tempting to try to manage your investments on your own. But is it a good idea?
True, Index Funds is an extraordinary book. It equips you with all the information you need on the best way to invest. But it’s one thing to have the knowledge you require, and quite another to put that knowledge into practice on an ongoing basis.
The main reason why is that human beings are not cut out to be good investors. It’s not our fault — it’s just the way our brains have evolved over hundreds of thousands of years. We are, in short, naturally inclined to speculate rather than invest. Although most investors like to think they make rational decisions, they are more likely to act on instinct, impulse or emotion, especially when markets are volatile.
In his famous book The Intelligent Investor, Benjamin Graham wrote: “The investor’s chief problem, and even his worst enemy, is likely to be himself.” What investors really need, in other words, is someone to protect them from themselves.
More specifically, they need a financial adviser with a thorough understanding of investment risk, and who knows how to capture market returns efficiently using broadly diversified index-fund portfolios. The adviser should have a detailed grasp of the mathematics of investing and of statistical significance. And, crucially, they should be acutely aware of the behavioral biases that investors are prone to and know how to modify and manage investor behavior.
As Mark Hebner puts it in Step 12 of his book, ”an investor may want to consider the fees paid to a passive adviser as a casualty insurance premium, insuring investors against their own mistakes and lack of knowledge.”
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