When I spoke with Chuck Schwab that day in his office, our conversation turned to active versus passive management. “You and I both know that 99 percent of investors should be in an index fund because they’re better off with that,” he said. “The problem with index funds is they can be boring.”
But does that matter? Let me share a quick analogy to illustrate how I view this topic. Every year, my father, some friends, and I hike the Grand Canyon from rim to rim. It’s a stunning place and the hike has its hazards, but if you sufficiently train and prepare, it’s an amazing experience.
Not everyone who sets out to hike the Grand Canyon has either trained or prepared. There’s actually a book called Over the Edge: Death in the Canyon that describes all of the folly people have undertaken to get themselves killed while hiking there. I call it a catalog of inanities. People run down the trail and get exhausted, wander off the trail and get lost, or lean out over the edge and fall.
The job is to hike down, enjoy the views and some peace of mind, and then hike back up. That process can easily take over ten hours of hiking to complete. So, some people get all kinds of crazy ideas about how do it faster, to push the limits, or make it more thrilling. It reminds me of a lot of the active investing I’ve seen over the years.
In contrast there’s a pack of mules that carry supplies and sightseers from the rim of the canyon to the base and up to the rim again. Now, a mule is a dumb animal—but you put a mule on a mission and you know what it does? It acknowledges its limitations and ceases to be dumb. How many times do you think a mule got itself killed because it tried to pee off the edge of the canyon to impress its friends? The answer is zero. Mules don’t try to make their hike exciting. They just get the job done. Does it look boring? Yes, it can. But does it work? Yes. That to me is passive investing.
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Jonathan Bird, CFP®
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