Index Funds & Pre-Fab Training Plans

Mr. Waxman writes a very readable story here, drawing an analogy that’s easy to follow (at least for me as a finance guy) and apt, for the most part. I want to qualify the heck out of the “Due Diligence” paragraph, though. I think the analogy still holds here, but the assumption about professional help is not quite the whole story, either in investing or triathlon.

Essentially, I would say that your decision about professional help depends very much on the assets you have to invest. If you are a guy/gal with less than, say, a quarter million bucks (just making the number up for illustration) or so to invest, many of the asset allocation options aren’t going to be available to you. You can’t get into a wide range of diversifying instruments (hedge/PE/VC funds, derivatives, etc.), and what you can do with funds of funds and the like are going to be so stacked with fees that any extra return the investment might get is going to be eroded before it gets back to you. Stick it in an index fund and some treasuries and be done with it. There is tons of research on actual returns, if anyone cares to read it. I say all this with the HUGE caveat that I completely agree with Mr. Waxman that the online trading platforms (“Talk to Chuck!” et al.) are marketing a lie. 75% of active money managers (i.e. guys who do this for a living) fail to beat their benchmarks (for example, the S&P 500) in a given year – you’d be a fool to think you’re going to do better day trading, no matter what “heat maps” or other gimmicks a platform has. That means you can put your money in a low fee S&P 500 index fund and beat 75% of active money managers most years.

Now for the triathlon analogue: if you don’t have a lot of assets (time, inherent athletic ability, and money) to invest, the incremental return you’re going to get from a coach isn’t necessarily going to be any better than grabbing a free online plan or digging through the vast wealth of free training info that exists on the web (the equivalent of the low-fee S&P 500 index fund).

If you’ve got little money to invest, drop it in index funds and go run some intervals. Chances are good that if you’re on the smaller end of a money manager’s clients, you’re going to end up with a lot of automated decisions anyway (60% in various mutual funds, 40% in treasuries and muni’s or something like that).

If you’ve got little time to devote to training and little money to spend on a coach, drop a pre-fab plan in your calendar and go swim some 100s. Chances are if you’re short on time a coach would just be throwing hours on your calendar anyway, without a whole lot of specialization.

But other than that qualification, fun article!