David Booth, 79, is founder and chairman of Dimensional Fund Advisors, an investment management company with over $1 trillion in assets. He was a pioneer of index investing, collaborating with five Nobel laureates over the course of his career, during a transformational time for finance. He is the author of Stay Calm: Learn to Embrace Uncertainty in Investing and Life.
Here, he talks to Kiplinger about what’s changed in investing in his lifetime and what makes a good investor.
KIPLINGER: You said in your book that you’d rather be an investor starting out today than in 1971, the dawn of your career in passive investing. Why is that?
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BOOTH: First, the world has gotten much more efficient, and administrative costs have come way down. Second is the opportunity. My parents never invested in stocks and bonds. They viewed themselves as outsiders, and they felt that insiders made all the money and would just take advantage of them.
That all changed with the development of indexing and other types of portfolios. It’s very easy today for people to buy the stock market at low cost. If you do that, you can do as well as or better than most professional money managers. That’s as good of a story as I can tell you about markets. The outsiders have as good a chance of winning as the insiders — that’s the democratization of investing that’s happened over the past 60 years.
How does managing uncertainty in life help people manage uncertainty in investing?
Start off with the idea it’s uncertainty that creates opportunity. That’s hard for people to accept. But suppose there was no uncertainty in life, and your life was predetermined. That’d be pretty boring.
Similarly, in investing, if there was no risk, no uncertainty, then all investments would have the same riskless rate of return. People don’t seem to be able to predict the market.
So instead of trying to, come up with an investment plan. Pay attention to it, make adjustments as necessary, and be flexible. That’s true in life: You get out of school, start down a path, then you adapt. That’s how you get through life, and that’s how you get through an investment program.
A lot of individuals are worried about a catastrophe, because if you invest in any one stock, it can go to zero. That’s an enormous uncertainty. But if you buy the whole stock market, through a passive portfolio, the market — and this is a prediction I’m happy to make — is not going to zero.
Figuring out how much you put in the market is the other way of controlling uncertainty. For most…
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