At a conference in Austin, Texas a few weeks ago, one attendee commented that since I teach investments I must be a pretty good investor. I told him that I was actually a pretty boring investor. I confess, I don’t do anything fancy. I don’t try to time the market, I don’t sell short, and I don’t use options or futures contracts. This is not to say that I never have or never will again, I just tend to focus on asset allocation and the long term using primarily low cost exchange traded funds and no-load mutual funds (mostly index funds). Students have sometimes seemed disappointed that I didn’t have war stories to tell of outsmarting the markets and making a killing. You may think I am an aberration. Surely others who teach this stuff are glued to their computers looking for “mispriced” assets on which to pounce. Actually, as this article from Vanguard Investments reveals, I am the norm.
Practice what you teach? Finance profs tend to keep it simple
You hear it all the time: Don’t try to beat the market. Buy and hold. Long-term investing trumps market-timing. It’s sound advice – at least according to many of the nation’s finance professors.
A recent academic survey found that most U.S. college finance professors consider themselves "passive" investors—that is, they tend to favor mutual funds over individual securities and resist trying to outperform the market through frequent trading.
Finance professors "study financial markets, but they also invest in the markets," said Colby Wright, assistant professor at Central Michigan University, who conducted the study with James S. Doran, Ph.D., of Florida State University. "Considering how knowledgeable they should be on the subject—and considering they are entrusted to teach others how to invest—we thought it would be interesting to find out what they do with their own money."
A tilt toward mutual funds
Of the 642 academics who responded to the survey, 67% identified themselves as passive investors, with most investing primarily in mutual funds.
"I think finance professors tend to be more risk-averse than the typical investor," said Dr. Doran. "They've done their homework, they've read the research, and they've taken to heart the philosophy that over the long run it's hard to do better than a broad-market index fund."
Gus Saulter, Vanguard’s chief investment officer, agreed with Dr. Doran’s assessment.
“It may seem counterintuitive that finance professors embrace long-term investing through mutual funds,” he said. “However, they typically have a sophisticated understanding about investing and a respect for the difficulty of beating the market. It's not surprising that a sophisticated investor would go with the odds and settle for market-like returns provided by index funds."
Their academic expertise notwithstanding, many respondents had never bought a futures contract, traded on margin, or purchased an exchange-traded fund. Likewise, a sizable minority had never traded an individual stock.
Beating the market: Do as I say, not as I do?
Nearly half the respondents agreed that stock markets are "efficient"—in other words, that it's practically impossible to outperform Wall Street over the long run because, at least in theory, all relevant information about every security is already "priced in" by the market before trading even begins.
Interestingly, however, a portion of those who believe beating the market is a fool's errand also confessed to ignoring this wisdom; almost a quarter acknowledged trying to beat the market with their own investments.
"That's a pattern we see all the time," said Mr. Sauter. "Whether you're an expert or not, it's human nature to imagine that you have some unique insight into the market, something that's eluded everyone else."
Dr. Doran concurs. "It comes down to confidence," he said. "Whether they're academics or professional investors, people who try to beat the market do so based on their confidence that they know something most other people don't—that they're privy to insights that the rest of us lack."
"That's a rare gift," he added, noting that—particularly when it comes to saving for retirement—most people do better to "keep it simple."
