There is an increasing consensus that the greatest enemy of investors is themselves. So the great question for investors is where can they acquire some measure of discipline? For some investors it means turning over the reins of the portfolio to a robot that goes about its business come rain or shine. For others it means trying to slog it out alone.

Does adhering to a strategy that strictly focuses on low-cost, indexed investments help or hurt? Don Phillips at Morningstar argues that the index-first crowd has overstated the argument in favor of index funds BECAUSE it helps enforce investment discipline. He writes:

Indexing is a great tool, but it is not a panacea for all investment problems. Index funds can be easily misused…To use index funds wisely, one needs to be either highly disciplined or extremely inattentive. The temptation to tinker often undermines one’s results. “Don’t just do something, sit there,” Bogle counsels. But, as financial advisors can’t ignore the market, they must acquire discipline somehow, and one proven means to do so is through the cultlike overstatement of the righteousness of one’s cause. The belief that you follow the morally pure approach will keep followers on the proper path during the dark hours of doubt.

In contrast with this a recent post by Rick Ferri, a noted advocate for indexing, highlights a six point plan that forms a highly disciplined approach to investing. He notes the many ways in which discipline can be lost and notes:

Investment discipline is easy to read about. It’s the same as a doctor telling you to exercise regularly, eat right and get plenty of rest. It sounds so easy when someone else says it! Yet, in real life, it’s not so easy to do. That’s why we have to be reminded to be disciplined. My advice is to re-visit this post whenever you may doubt your discipline.

The fact of the matter is we all make choices about our investments. Cullen Roche at Pragmatic Capitalism has been writing regularly about the “myth of passive investing.” In short, there is no such thing as a purely passive approach to investing. Roche thinks we need to arm ourselves so that we can parse the many arguments for and against index investments. He writes:

The rise of index funds has turned us all into “asset pickers” instead of stock pickers yet the “passive” indexing community has tried to sell indexing as though it’s something totally different from stock picking. The reality is that we are all discretionary decision makers in our portfolios. Even the choice to do nothing is a discretionary decision.  Therefore, all indexing approaches aren’t all that “passive”. They’re just different forms of active management that have been sold to investors using clever marketing terminology like “factor investing” and “smart beta” in order to differentiate the brands.

If discipline is the key to investment success then it should matter very little where you acquire that discipline. A few basis points here or there will not be the difference between success and failure. If you have to tell yourself a “noble lie” or offload the decision making to some one else, so be it. But being informed is a prerequisite for everyone in their investing lives.


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