We Need to Make “Boring” Cool

The merit of being a boring investor

I prefer evidence-based investing (EBI). It may be boring, but it offers several benefits:

• Less emotional influence: EBI minimizes the impact of emotional decision-making by relying on empirical data and research, which helps investors avoid the pitfalls of market speculation and emotional reactions to market volatility.
• Consistency and predictability: By adhering to a systematic, research-driven strategy, EBI provides more consistent and predictable investment outcomes, which are crucial for long-term financial planning and wealth accumulation.
• Enhanced risk management: EBI incorporates rigorous analysis to evaluate risk factors, leading to more informed and effective risk management strategies, which help construct well-diversified portfolios that align with the investor's risk tolerance and financial goals.
• Improved investment performance: EBI can lead to better investment performance over time.
• Lower costs: EBI emphasizes low-cost investment options, such as index funds and ETFs, which reduce investment fees. Lower costs equate with higher net returns.
• Educational Benefits: Investors who adopt EBI gain a deeper understanding of the investment process, which empowers them to make more informed decisions and fosters a disciplined approach to investing.

Barriers To Accepting A “Boring” Investment Approach

When dealing with millennials and often with more seasoned investors, it’s important to understand their barriers to acceptance of a boring approach to investing.

• Novelty and innovation: Millennials have grown up in an era of rapid technological advancement. They naturally favor innovation and novelty, which investments like cryptocurrencies and NFTs represent. The lure of being part of something new and groundbreaking is a significant psychological driver.
• Peer influence and social proof: Social media's pervasive influence means that investment trends can quickly gain traction. Seeing peers and influencers endorse these "shiny objects" can create a fear of missing out, driving millennials to invest without fully understanding the risks.

• Instant gratification: Investments like cryptocurrencies and NFTs offer the potential for quick returns, appealing to the millennial preference for immediate results. This contrasts with traditional investments, which require patience and long-term commitment.

• Mistrust of traditional financial systems: Many millennials witnessed the 2008 financial crisis, which led to a general mistrust of financial institutions. Decentralized systems like cryptocurrencies offer an alternative that aligns with their desire for financial independence and control.
• Preference for active management: Investors may think active management, which involves frequent trading and attempting to outperform the market, is superior to passive management. The perception that active managers can consistently beat the market is a strong motivator despite research indicating that few managers achieve market-beating returns over time.
• Perception of value through higher costs: There is a common misconception that higher costs equate to better service and higher returns. This belief can lead investors to favor expensive, actively managed funds over lower-cost, passively managed options. The idea that you "get what you pay for" in investing is deeply ingrained, making it challenging for investors to accept that lower-cost strategies will likely outperform (especially over the long term and after taxes) due to reduced fees and expenses.
• Emotional biases and behavioral finance: Emotional biases play a significant role in investment decisions. The allure of active management includes the hope of substantial, quick gains. With its disciplined, data-driven approach, EBI can seem less emotionally appealing.
• Misinformation and Education Gaps: Many investors lack a thorough understanding of EBI and the research supporting it. Without proper education, they might be swayed by marketing from active fund managers who emphasize potential short-term gains and downplay the long-term advantages of evidence-based approaches.

To Overcome These Barriers, Change the Metric

To make boring “cool,” you’ll need to change the metric. An ideal (albeit unrealistic) outcome would be for investors to compete for who has the most boring approach to investments.

You'll know you have made progress when you overhear this at the next social event: “I’ll bet my portfolio is more boring than yours.”

Dan coaches evidence-based financial advisors on how to convert more prospects into clients. His digital marketing firm is a leading provider of SEO, website design, branding, content marketing, and video production services to financial advisors worldwide.

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