Roth: Simple ETF Strategies Work

January 24, 2014

First, it has the lowest costs, and we all know costs matter.

Second, it uses the broadest index funds. Research demonstrates that narrow index funds have larger gaps between fund and investor returns—geometric versus dollar-weighted—than broad funds. That’s to say we do more performance chasing on narrow funds than broad funds.

Again, the conclusion is that broader is better.

Third, rebalancing resulted in investor returns exceeding the funds’ returns. While simple, it’s not easy to ignore the media, which usually predict the continuation of the past.

Even though it’s human instinct to want to know the future, that instinct gets in the way of maximizing investing returns.

Instead, investors must accept the lonely truth: No one knows the future of markets. No one can predict which sectors will be hot this year.

And before one bails on bonds based on the predictions of economists, one should keep in mind that even the top economists have predicted the direction of interest rates less accurately than a coin flip.

Low cost, broad investing is dull as dishwater, no question about it. But considering the financial advantages of such a strategy, it’s too bad most investors will never dare to be dull.

Allan Roth is founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice.

Roth also writes for CBS MoneyWatch.

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