How Investment Advice Is Like Medical Advice

Few things you learn as an adult are more important than the simple advice you learn as a kid.

Take medicine.

Advancements in treating lung cancer are astounding, and so important. But not smoking is far more important -- smoking contributes to between 80% and 90% of lung cancer deaths, according to the American Lung Association. Breakthrough drugs are amazing and becoming more effective. But it's unlikely that anything will ever be as effective at fighting lung cancer as the simple and free advice of "don't smoke."

The scientists who develop these treatments are some of the world's most valuable people. But those who can help others quit smoking, or never begin smoking, will probably save far more lives.Alas, the smoking-cessation counselors, social workers, nurses, and primary-care practitioners tasked with this job aren't nearly as prestigious as the medical researcher who pioneers a breakthrough drug.

Same for heart disease. Few complicated and expensive treatments will ever be as effective at tackling heart disease as "eat right and exercise." But who is viewed as more important to medicine: the nutritionist, or the cardiac surgeon?

Here's the problem: Advice that sounds basic but is important isn't as valued as complicated advice that is necessary only if you ignored the basic advice to being with.

It's the same in finance. Advice that sounds complicated -- chart patterns, trends Greek symbols, market timing -- is often more valued than basic advice that is far more important, like saving your money, investing for the long term, and reducing costs.

And just like medical advice, the only reason you need complicated advice is often that you ignored the basic advice to begin with. Do you need derivatives to hedge your portfolio? Maybe only if you don't have a long-term attitude to begin with. Do you need to know when the next recession will come? Maybe only if you don't have a good emergency fund to begin with.

It's natural to assume that if something sounds complicated, it must be more important than the basics. But in many fields, it's the other way around. What's dangerous is that smart people can think the basics are beneath them and focus all of their attention on complicated maneuvers. But since the basics can determine the majority of success, they end up with performance that's far below average. A Vanguard index fund that invests 60% in stocks and 40% in bonds outperformed most hedge funds with less volatility over the past decade. But I guarantee you that if you tried to sell this strategy to endowment and pension funds, they'd shake their heads. It sounds too simple. They want complicated hedge funds managed by rocket scientists.

In my view, those who get people to save more money, teach people about the value of a long-term mind-set, lower costs, and reduce bad investing behavior will always be more valuable than anyone engaging in complicated investing forecasts and techniques. But we'll always be more attracted to those with fancy charts, flashy formulas, and complicated jargon.

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