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Laziness seems to have a lot of fans in these times. But is there a smart way to be lazy and still get what you want as an investor? In the following article, Paul Merriman and Richard Buck examine this question -- in a relaxed manner.
If your life is anything like ours, you are extremely busy much of the time. You often feel pulled in multiple directions at once, and you simply can’t do everything (a) that you want to do, (b) that you think you should do and (c) that somebody else thinks you should do.
Hah! That definition has to cover almost everybody on the planet. Our doctors say we should spend an hour a day on exercise and get eight hours of sleep. Our dentists want us to spend half an hour a day taking care of our teeth. Advertisers of course want us to spend hours every day watching TV commercials. Spouses and partners have long lists of things we “should” be doing – and if you doubt that, just ask!
In addition, we’re supposed to be regularly maintaining our vehicles, dusting the coils behind the refrigerator, watering the plants, clipping coupons and watching for sales on things we need, reading to the kids, keeping up on local and national politics, calling and writing to relatives and friends, paying our bills, balancing our checkbooks, walking (and perhaps training) the dog, preparing for emergencies. This goes on and on, as you know only too well. (Did we forget to mention cleaning the gutters after you finish reading this article and pass it on to a friend?)
What does this have to do with investing? Everything. We’re also supposed to be figuring out our risk tolerance and our need for return. We should rebalance our portfolios once a year, keep track of trades for tax purposes, monitor the managers and portfolios of mutual funds we own – all the while remembering to review our estate plans, update our beneficiary designations and (of course it goes without saying) check our quarterly account statements to make sure they are accurate.
The most common commands we hear from others have become almost an imperative: “Have a great day.” “Have a great weekend!” “Have a fabulous evening!”
If anybody really has time for all this, we haven’t met that person.
This (we hope) sounds comical. But it’s a serious fact of modern life that we are overwhelmed with choices, opportunities, obligations. None of us has time to master everything that we “should” master. All of us must delegate important matters to other people, relying on their expertise and good will.
So here’s another task to add to our list: Figuring out what we’re going to do and what we won’t do.
Back to the title of this article. All by itself, laziness feels good in the short run but can spell disaster in the long run. This is not a tradeoff we want to recommend – and not something your kids or your spouse will likely let you get away with for long. But if you can put a strategy behind it, then laziness can gain respectability. It might even free you up to “Have an awesome weekend.”
Hence the need for Strategic Laziness, which we see as a way to help us think about making smart choices in a world in which we cannot do everything. If your house is anything like ours, you have various remote controls and clocks, all powered by batteries. If you followed the letter of your instruction manuals, you’d periodically test the battery in each device and replace as necessary, making a note on some master list, of course, of when each remote or clock got new batteries.
But this is certainly not the lazy person’s way to live. Alternatively, you could do what one of us did recently (we’re not saying who) and simply gather up every remote and clock in the house and replace all the batteries at once. This meant some batteries were tossed far before their useful life was over, a wasteful outcome. But it also meant that the chore was done, probably for at least another year, greatly reducing the risk of ruining a device from a leaking battery.
In our view, this is a perfect example of Strategic Laziness.
This concept can be applied to many areas of life. Health, family, community and personal relationships all come quickly to mind. In every case you can ask the questions: To what are you going to devote your time and energy, and are you strategic about it?
In this article, we’ll focus on investments, because that’s what we know. The two of us spend the bulk of our working time absorbing – and disseminating – the knowledge of experts who study investing. We don’t have to do it this way. We could (in theory, at least) make the academic studies ourselves. Once in a while, we’d probably do it better than the experts, perhaps by asking better questions or finding better sources of data.
But if we did that, we wouldn’t have adequate time to bring the results of our efforts to investors. So we take what could be called the “strategically lazy” course of relying on existing experts for their data. This allows us to use their knowledge and resources and still do what they can’t: bring the results of their work to the investing public.
This illustrates an interesting point that is central to Strategic Laziness. We believe the best research being done by others is good enough, even though we like to think that in theory we might be able to do it better. Some people go through life acting as if they must have the absolute best of everything, while others are willing to settle, selectively of course, for what’s “good enough.”
Barry Schwartz, a professor at Swarthmore College, discusses this distinction at length in his fascinating book “The Paradox of Choice: Why More is Less.”
Schwartz uses the term “maximizers” to describe people who must have the very best of everything. Imagine shopping for a sweater, he says, and finding just what you’re looking for after an hour or so. You are about to make the purchase when you remember there’s another store nearby with a reputation for low prices. You take your chosen sweater back where you found it, burying it under some other merchandise so that nobody else will “steal” it from you while you check out the other store.
Even if you find a better deal on an equally good sweater down the street, you run into a central problem: How can you ever know you have found the absolute best deal? You could spend days shopping in your own locale and yet never know what else might be available elsewhere in the world. The only way to know is to check out every alternative, an essentially impossible task. As Schwartz says, “Buying a single sweater could take a lifetime.”
The opposite of a maximizer is what Schwartz calls a “satisficer,” somebody who settles for what’s good enough and stops worrying about whether there might be something better. It’s the second part of that equation that makes a lasting difference.
If you can’t be satisfied, you may spend a good deal of time looking over your shoulder at the options you passed over. You won’t have to look far before something plants a seed of doubt in your mind. Did you fail to get the very, very best? What should you do then? This very possibility is likely to rob you of your satisfaction with what you in fact did choose.
We see this behavior in investors who are intent on finding the very best mutual fund manager or the very highest-yielding certificate of deposit. Some people spend hours every day at their computers doing market research. Others spend hours glued to watching CNBC, presumably hoping to gain some insight that will give them an edge over their competition (all the unfortunate souls who don’t happen to be watching at that moment?). Or perhaps they are hoping for some warning that they have done something wrong.
Yet no matter what investment you make, you’ll always be able to find some other investment that’s doing better. This can lead either to anxiety or to second-guessing – or both. Neither is likely to bring lasting investment success.
In no way do we mean investors should settle for mediocrity. As we have said many times in many ways, investors need low-cost access to the asset classes that are most suitable for them. Once investors have found the right asset classes and the lowest-cost way to invest in them, we think their homework is done. Sometimes, it makes sense to accept excellence as good enough.
Maximizers, on the other hand, will always be able to find some other asset class with better recent performance. They’ll always find an individual manager who has temporarily “beaten the market” in any given asset class.
Consider for a moment the problem facing a maximizer who is determined to hire the very best top-performing manager. It’s inevitable that there will be such a manager over the next year or whatever other period you might choose. But it’s impossible to know who that manager will be. Therefore the only way to guarantee that you hire this particular manager is to hire every manager. And of course if you hire every manager, your overall result will be the average results of all the managers.
Ironically, in this case the only way to be a true maximizer is to do what will defeat the very purpose of being a maximizer in the first place.
Essentially the same problem confronts an investor who’s determined to invest in the very best individual stock in a particular asset class, say small-cap value. There certainly will be such a stock, but it can’t be known in advance. To be certain of owning it, you must own every small-cap value stock. The easy way to do that is to own an index fund such as Vanguard’s Small-Cap Value Index Fund (VISVX), which happens to be one of the funds we recommend.
Why, you might logically wonder, would we recommend owning every small-cap value stock, a strategy that’s bound to include the worst performers as well as the best, when we wouldn’t make the same recommendation regarding managers?
The answer involves mechanical distribution vs. subjective choices. An index fund owns carefully weighted lots of every stock in its universe. Buy it and you know what you’ll get: exposure to nearly every small-cap value stock. But if you buy every small-cap value fund, you’ll wind up with multiple funds owning overlapping stocks. Statistically, it’s almost inevitable that the majority of those funds will underperform the index, partly because of the expenses imposed by the funds. An investor who owns them all will most likely underperform the index as well.
The strategically lazy investor, in our view, would accept the performance of the index as a low-cost, low-risk way to get full exposure to small-cap value stocks. In any given year there will probably be at least a few small-cap value stocks that turn in spectacular performance. An index fund will be sure to own them, so a shareholder will be sure to benefit. An actively managed fund may or may not have those stocks in its portfolio.
If you’re a strategically lazy investor, you won’t need to re-invent the wheel or do your own original homework. You’ll just need to find somebody reliable who has done that homework, and then apply the lessons.
We have done that homework, and it indicates that the best asset classes for most investors are U.S. large cap stocks, U.S. large-cap value stocks, U.S. small-cap stocks, U.S. small-cap value stocks, international large-cap stocks, international large-cap value stocks, international small-cap stocks, international small-cap value stocks, emerging markets stocks and, on the fixed-income side, short-term bonds.
Our research indicates that the best access to those asset classes for do-it-yourself investors is through index funds like those offered by Fidelity, Schwab and Vanguard. For investors who pay an advisor, we believe the best access to those asset classes is through the asset-class funds of Dimensional Fund Advisors.
Hiring a manager to help you determine the exact right mix of those funds and to invest in them is another perfect example of Strategic Laziness.
We realize that index funds are boring, and many investors have a terrible time giving up the notion that they can do better. However, to be a strategically lazy investor, you must be able to avoid getting sucked into the emotional pull of the market. Because index funds distinctly lack any emotional component, we think they illustrate the point that “boring can be beautiful.”
The concept of Strategic Laziness has a certain emotional appeal, at least on the surface. But being lazy in a strategic way isn’t as easy as you might think.
First, you must somehow overcome the fact that laziness itself has a mixed reputation. A strong current runs through our culture telling us that hard work is the answer. This was summed up in a sentence that Rich and his siblings had to memorize and recite to their father: “The persistent exercise of a little extra effort is one of the most powerful factors contributing to success.” (That’s a real mouthful, but decades later it remains familiar to him, his brother and their sisters.)
Sayings like “The early bird gets the worm” and “To the victor goes the spoils” reinforce the same point. Many of us associate laziness with lassitude and being a loser. That attitude may be appropriate when it’s applied to what one does for a living. But applied to the task of being an investor, it’s a trap.
There are literally tens of thousands of pieces of data that you might conclude are important to the investment process and potentially important to your portfolio. You could spend all your time finding and analyzing that data, and still not know what to do.
Second, being strategically lazy, as opposed to being just plain lazy, requires a certain intellectual effort. If you’re merely lazy, you are a potential pushover for the financial media and Wall Street, which have their own agendas that are likely to be counterproductive to your long-term interests.
But if you are strategically lazy, you’ll identify the essential work, in this case the work of being a successful investor, and you’ll be able to answer the question: When is that work done?
Quite aside from the need to keep adding money to your portfolio if you are accumulating assets, we think your essential work as an investor is done when you have:
· Made a written plan laying out your short-term and long-term goals;
· Determined your risk tolerance and your need for return in order to achieve those goals;
· Identified the asset classes that will be suitable in achieving that return within your risk tolerance;
· Found widely diversified no-load mutual funds to give you efficient access to those asset classes while minimizing your recurring expenses, your tax liability and your portfolio turnover;
· And (ideally) hired an advisor to implement your plan for you.
The effort you spend beyond that – including the hours you might spend watching CNBC, studying Money magazine, tracking individual stocks, conferring with brokers and trying to figure out the economy – is likely to bring you emotional pain without much (or any) economic gain.
This is the point where you can give in to strategic laziness. This will have many benefits. No longer will your energy be siphoned away on investing matters when you could instead be shopping for gifts, remembering people’s birthdays and attending to the other essential things in life.
Even better, when you have mastered Strategic Laziness in terms of investing, you can apply it to all those other chores. With persistence (there’s that old “hard work” bugaboo again!), you may be able to carve out a real life for yourself to spend as you choose. What a concept!
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