I ONCE JOINED a book club led by an amazingly smart guy. We were reading a challenging book by Nassim Nicholas Taleb, the philosopher, investor and probabilities expert. Our discussion leader was a Chartered Financial Analyst who had solved one of the most enduring riddles at Vanguard Group, where I worked at the time.
For many years—decades, really—Vanguard hadn’t offered an international bond fund. Our founder, Jack Bogle, wasn’t a fan of international investing in general. But he was retired by then, and we did offer several international stock funds.
But there was a big problem with international bonds—they were unreliable. We weren’t just being xenophobic. The issue was currency fluctuations. It could wipe out any gain an investor might make internationally when that gain was converted back into U.S. dollars. Exchange rates—luck, really—mattered more to returns than yield, credit quality or anything else we could analyze.
That’s when the leader of our book group made a brilliant suggestion to top management. Why not hedge international bonds against currency fluctuations, so that risk was taken out of the equation? He had cut the Gordian knot. Vanguard opened an international bond fund on that basis in 2013. It was a huge favorite with bond investors seeking diversification, the only free lunch in investing. The fund had $119 billion in assets by late 2021, in part because it’s a mainstay of Vanguard’s target-date funds.
But this isn’t a tale about bonds or international investing. One day at book club, our leader told us a story about his own investing. Because he was super-smart and a CFA, he was frequently tweaking his portfolio for optimal performance. He had the thing tuned up like a Ferrari. His wife, on the other hand, didn’t work in the investment world. She invested her money in index funds and never made a change.
One day, this smart guy was checking their accounts online and noticed something incredible. His wife’s do-nothing strategy had a higher average annual return than his souped-up portfolio. She was beating him at his own business. To say that he was surprised would be an understatement. Stunned is more like it.
What did he do? Simple. He followed the evidence and switched to an index portfolio and stopped fiddling around with his investment mix. He recommended that all of us do the same.
This is unquestionably great advice. But it’s incredibly hard to follow because we’re all so smart and well informed. The flow of information in the investment world is immense. It tends to suggest that you do something right now—this instant—or miss out on the next Tesla or watch huge sums vanish in the next market crash.
Just sitting there doing nothing has proved to be the smartest move 20 years down the line, providing you own at least some stocks. There’s never been a negative 20-year period for U.S. stocks in the last 150 years, Yale economist and Nobel laureate Robert Shiller has found. But it would help us immensely to be like Rip Van Winkle, asleep the whole time. Let me put it this way: I’m trying hard to do nothing, but it’s been a struggle.
I’ll give the last word to Taleb, whose book The Black Swan explains our problem. “I noticed that very intelligent and informed persons were at no advantage to cabdrivers in their predictions, but there was a crucial difference. Cabdrivers did not believe that they understood as much as a learned person—they were not experts and they knew it. Nobody knew anything but elite thinkers thought they knew more than the rest because they were elite thinkers, and if you’re a member of the elite, you automatically know more than the nonelite.”
Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.