How to be an Index Investor, by Rick Ferri, or The Value of an Advisor

I’m very excited to read this as it is blog-published:

He has identified this as a 3 step process:  Philosophy, Strategy, and Discipline.  Hopefully he will also include a “check your assumptions” list of skills or habits required to even attempt this do-it-yourself investment approach.

All of our clients are on board with the Philosophy and have a strong commitment to the idea that although there may be ways to “beat” the market, the cost of these methods generally match or exceed the alpha generated.  Many of our clients understand and agree with the logic behind the Strategy we employ, and some even have the capacity to work through this themselves and develop similar portfolios.  However, I doubt that any of them have all of those skills and capabilities, along with the Discipline to do the saving, investing, rebalancing, and most of all, to stick with it through ups and downs.   I don’t mean to insult anyone.  I’m saying, I could not do it all by myself either.

The “check your assumptions” list of personal skills and traits would include:

  • A lot of time and energy available to devote to this effort.
  • Data analysis skills to understand the philosophy at its core, not just hear the argument and say, sure, sounds good.
  • Analytical skills to determine what Strategy you want to follow.  There are many ways to set up an index portfolio.  What is “the market”?  What is the ideal stock/bond/alternative mix, and why?  Lots of conflicting research out there to dig through, and lots of due diligence, even on the research itself.  Then you have to pick the investment vehicles.  More analysis and due diligence.
  • Discipline.  This really cannot be over emphasized.  It includes the Discipline to stick with the Strategy (no “tactical” adjustments!!), which is the hardest part, and also the Discipline to rebalance.  It includes the Discipline to budget and save per plan.  I think he is including the saving and rebalancing under Strategy, but to me Strategy is just a plan.  Discipline is what makes a plan happen.  There are a lot of Disciplines here, and the weight of them accumulates.

Our practice is built not only on the process Mr. Ferri has laid out here, but also on the knowledge that it is nearly impossible to carry out single-handedly.  We have always helped each other and our clients with all of these steps.



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