Enrich Your Future 20: Passive Investing Is the Key to Prudent Wealth Management

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 20: A Higher Intelligence. LEARNING: Choose passive investing over active investing.  “Passive investing involves systematic, transparent, and replicable strategies without individual stock selection or market timing. It’s the more ethical way to go.”Larry Swedroe   In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks. Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 20: A Higher Intelligence.Chapter 20: A Higher Intelligence In this chapter, Larry discusses prudent investing.The Uniform Prudent Investor Act The Uniform Prudent Investor Act, a cornerstone of prudent investment management, offers two key benefits. Firstly, it underscores the importance of broad diversification in risk management, empowering trustees and investors to make informed decisions. Secondly, it promotes cost control as a vital aspect of prudent investing, providing a clear roadmap for those who may lack the necessary knowledge, skill, time, or interest to manage a portfolio effectively.Ethical malfeasance and misfeasance in investing In this chapter, Larry sheds light on Michael G. Sher’s insights. Sher extensively discusses ethical malfeasance and misfeasance. He says ethical malfeasance occurs when an investment manager does something deliberately or conceals it (e.g., the manager knows that he’s too drunk to drive but drives anyway). For example, consider the manager who invests intentionally at a higher level of risk than the client chose without informing them and then generates a subsequently higher return. The manager attributes the alpha or the excess return to his superior skill instead of the reality that he was taking more risk, so it was just more exposure to beta, not alpha. On the other hand, ethical misfeasance occurs when an investment manager does something by accident (e.g., the manager really believes that he’s sober enough to drive). Thus, the manager doesn’t know what he’s doing and shouldn’t be managing money.Avoid active investing Larry highly discourages active investing because the evidence shows that active managers who tend to outperform on average outperform by a little bit, and the ones that underperform tend to underperform by a lot. Either they don’t have the skill, and they have higher expenses, and the ones who have enough skills to beat the market, most of that skill is offset by their higher costs. So it’s still really tough to generate alpha.Passive investing is the ethical way to go According to Sher, managing money in an efficient market without investing passively is investment malfeasance.