Be Careful What You Believe; The Prison of Two Ideas

I recently came across a provocative article written by Greg Gutfeld titled “The Prison of Two Ideas”. While the article is mostly about political beliefs, the main theme carries over to the world of investing and personal finance as well. As Gutfeld explains, in modern parlance, you are either for or against “X”. Many have come to believe that for every issue, there are only two possible positions. Of course, this is in stark contrast to the reality of everyday life.

To be sure, this trend has been in place for many years but has only recently reached critical mass. As Gutfeld explains, for some people, an “idea warden” allows the freedom to reflexively dismiss alternative ideas that don’t fit their accepted narrative. These narratives become very important in determining how choices are made in all realms of life, including personal finance.

Personal Finance…personal economics, is ultimately driven by what you believe. Your beliefs set the course for how you make decisions within your financial life. Within the investment realm, there are those that believe certain investment managers can outperform their benchmarks on a consistent basis, net of fees. On the other hand, there are some (like us), who believe actual empirical data demonstrates the difficulty, perhaps even rising to futility, of thinking you can outsmart the broad market over time. We trust the markets and seek to capture those returns at a low cost. Bethany McLean wrote in Fortune almost 20 years ago “ Building a portfolio around index funds isn’t really settling for average, (or a little better), it’s just refusing to believe in magic.”

 During the more than three decades that we have been providing fiduciary financial advice, much has changed. The sheer volume of information available today dwarfs what was there even a decade ago? What has been much slower to change, however, is actual investor behavior. Most investors have real difficulty separating emotions from their investments. They become anxious as market prices move up and down. As the colloquial expression goes, “this, that, and the other”. The market spends a lot of time in the “other” territory and this should never be a surprise.

Your personal beliefs help you deal with times of stress and adversity. The same should hold true for your financial life. You need a sound philosophy that allows you to withstand the inevitable ups and downs. David Booth, co-founder of Dimensional says, “The important thing about an investment philosophy is that you have one you can stick with.” What do you believe? Ready for a real conversation?

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