Stay Calm: What Index Funds Still Can't Solve ft. David Booth (EP.271)

0:02Peter Lazaroff:We all need to make smart decisions with our money. The Long-Term Investor Podcast shows you how by distilling complex financial matters into easily digestible lessons. And now, here's your host, Chief Investment Officer at PlanCorp and the author of Making Money Simple, Peter Lazaroff. Low-cost, broadly diversified portfolios are now available to nearly everyone. Yet, investors still trade aggressively, chase forecasts, and panic whenever uncertainty rises. If the technical solution has become so accessible, why is having a good investment experience still so difficult? That's what we talk about in this episode as we welcome back David Booth, founder and chairman of Dimensional Fund Advisors and author of the new book, Stay Calm.

0:51Peter Lazaroff:In our previous conversation, we focused largely on the financial revolution that made evidence-based investing possible, but this time, we focus on the problem that investment science cannot solve by itself, and that is human nature. David takes the time to explain why an intellectually sound portfolio still has to survive real life, how a trusted advisor can help investors live with uncertainty, and why David's optimism about markets is grounded in evidence rather than wishful thinking. Now, as always, you can find detailed show notes at thelongterminvestor.com, but I want to make a special offer for this episode.

1:31Peter Lazaroff:If you leave a review for the podcast, whether it's for this episode or a different episode, If you send me a screenshot of your review, I will send you a free copy of David's book from now through the end of September, 2026. All you have to do is sign up for my newsletter. There's a link at the top of the episode description, and you just reply to that email with a screenshot of your review. Now, it takes a few days for a review to post, so don't panic. We understand that's how it works. But anytime between now and the end of September, send me a screenshot of your review and I will send you a copy of David Booth's new book.

2:07Peter Lazaroff:In the meantime, settle in and let's enjoy the conversation that I had with David Booth.

2:17Peter Lazaroff:David Booth, welcome back to The Long-Term Investor. Well, thanks. Thanks for having me. Last time you were on, we were talking about the movie Tune Out the Noise, and we spent a lot of the conversation on the science of investing, like how markets work and why trying to outguess them is difficult. And the revolution that made evidence based investing possible. Your new book, though, Stay Calm, makes that science feel like only the first half of the argument. Perhaps the harder problem is whether a human being can actually live with whatever they are dealing with within their portfolio. So let me just ask you, let me start there.

2:53Peter Lazaroff:Over the course of your career, low-cost diversified investing has gone from what some might consider a radical idea to mainstream. And yet, investors don't seem much calmer. So what did the investing revolution solve and what problem did it leave unsolved?

3:09David Booth:Well, I think the main problem it solved is that everybody can have a good investment experience because everybody can buy a market portfolio, if you will. My parents are probably like a lot of people. They thought of themselves as outsiders and as insiders who wouldn't make all the money. Well, what the science and research has shown is that the insiders, the Wall Street insiders, can't seem to be able to beat the market. And, you know, in the stock market, for example, yet the stock market is easy. It's easy to buy, you know. So the main implication is that, you know, everybody can have a good investment experience because they can everybody can buy the market.

3:56David Booth:And insiders don't do any better than that. So that's that's pretty cool. So it's really democratization of investing.

4:04Peter Lazaroff:Now, what problem, though, does it not solve? You know, when we think about all of the research that you and many colleagues were doing decades ago, I mean, what is sort of the emphasis here of stay calm and the part that maybe goes unsolved by some of that research?

4:20David Booth:Well, that you're hitting on the thing that it doesn't solve is it doesn't solve the problems of human nature. You know, it's so difficult for people to accept this notion that, you know, it looks like the best you can do is just buy the market and don't trade very often and don't try to time markets and do all those kinds of things that are silly. The problem that it doesn't solve is how to get people comfortable with that idea. We have an advisor client that says, look, I don't have clients with investment problems. I've got investments with client problems. So, you know, and I'll just point out kind of a paradox.

5:08David Booth:Over the last 30, 40, 50 years, you know, there's been a huge growth in index funds. And yet that's been associated with a rapid rise in trading volume. Now, to a casual observer like me, you would think that if half the world is now indexed and index funds really don't have much turnover, how do you explain the rise and turnover? It's because basically one hypothesis would be people have given up on stock picking, but they still think they can time markets. So we haven't done a very good job of convincing them of the science.

5:47Peter Lazaroff:So, David, you bring up index funds, and I'm glad you did because a lot of the investing public thinks that Jack Bogle invented the index fund, which is, you know, he is maybe the first one to bring a product to retail, you know, an index fund. But you tell the story at Wells Fargo of Stagecoach, which is probably a little more intellectually ambitious strategy. And it was a good idea that failed an execution. I was wondering if you could talk a little bit about that.

6:18David Booth:Well, it was a wild time. I went to work at Wells Fargo in 1971 just as they were getting the first indexed portfolio going, the so-called Samsonite account. And these were really hitty times because these ideas were all new. And every month, a new landmark paper would be coming out. And people were coming to grips with the problem. Look, it doesn't look like professional managers can outguess the market. So what are you supposed to do? So people thought, well, what you want is really a broadly diversified portfolio that doesn't trade much. And then people go, well, how do you know that's any good at all?

7:08David Booth:And somebody came up with the idea of an index fund. Well, you know, if you track an index, you know, then you know you got, you know, the index return and the managers don't seem to be able to beat that. So that's a pretty good approach. So I went to work at Wells and with Fisher Black and Myron Scholes, two future, well, Myron got his Nobel Prize. Fisher, unfortunately, had passed away or he would have gotten that as well. Anyway, and they had some great ideas, and one of which was that it was the Stagecoach Fund, which would be a leveraged S &P 500 fund. So that was what I worked on. The only problem was people weren't sure what an index fund, and you immediately confront them, well, we're going to leverage it up 45 % because we want to be able to beat the market.

8:03David Booth:It was a bridge too far.

8:05Peter Lazaroff:Well, and it seemed like it's a really a sound idea, but maybe it has to survive real life. It was one of the stories that stuck out to me as something where you can't take the human out of human nature. and when you have a, you can build the perfect portfolio and then maybe I'm paraphrasing something you've said before. You can build the perfect portfolio, but it doesn't matter one bit if you can't stick with it. And there's so much human stuff going on there.

8:37David Booth:Well, that's right. And I used that experience at Wells, which was, we were, in a nutshell, we were just young, you know, quants running around with theoretically good ideas, but that lack kind of common sense. So 10 years later, over that time, I'd kind of grown up a bit, and we focused on how can we come up with better strategies that people can relate to that make sense and that they can stick with. As you pointed out, if you try to get in and out of markets and try to shift things around all the time over the long haul, you're going to end up losing.

9:17Peter Lazaroff:One of the things that strikes me, and I'd be curious if you felt this way, when you're so close to the data, you can behave well just because of deep familiarity with how markets are supposed to behave, with how products that you're invested in are where the expectations are. You know, for most people, though, that I've worked with over my career, they have to undergo some sort of transformation. And you actually introduced me many years ago to Dave Goetsch, who is a writer for The Big Bang Theory. And you talk a little bit about his emotional journey. Do you mind sharing some of that story with our audience?

9:57David Booth:Well, Dave is this he's a terrific writer and friend. And he was at a stage in his career that a lot of people get to, which is he was making some good money and totally anxious about the market to the point of being dysfunctional. He eventually got under the book by Gordon Murray, which talked about the science and how investing was undergoing a big transformation. And he went to talk to an advisor about it. this advisor set him down on the right path, and his anxiety level went way down, and he found a program he could stick with. You know, it is funny that when people have a serious health problem, they immediately want to go to a doctor.

10:47David Booth:Yet, everybody has a serious financial problem, no matter how much or how little money you have. And many people refuse to go to an advisor. You know, that's probably the first step before understanding how markets work is finding an advisor you trust.

11:07Peter Lazaroff:Well, I'm biased, but I could not agree more. And I think that the business of investing, as opposed to the profession of investing in financial advice, the business of investing really tries to convince you that you don't need help. You just need to tune into their program or their newsletter or their column. And it does, you know, I'm not saying what an advisor does is rocket science, but they're a steady hand. They all are calm, which I think can be as much of a behavior trait as a personality trait. It can be something learned and they're objective. I think also what is difficult for a lot of investors is that there's so much noise out there.

11:51Peter Lazaroff:There's so much development in products and ideas. You mentioned when you were at Wells and when you were at University of Chicago, there were big ideas being published all the time. But today, you know, the ideas, we've all had the same data sets for a long time at this point. There aren't Nobel Prize winning ideas that are going to impact your portfolio every day, every year. Certainly, there are Nobel Prizes every year. But I think in general, long-term investors, you, I, we constantly warn them against changing course. But on the other hand, when there is a genuinely good idea, flexibility is a virtue that you signal pretty strongly throughout a lot of the information that you share.

12:39Peter Lazaroff:I mean, how would you distinguish intelligence adaptation to new information from tinkering because the current path has become uncomfortable?

12:49David Booth:I mentioned it's a good idea to get an advisor, but it should be an advisor that doesn't try and outguess the market all the time. One of the things that's critically important is that you shouldn't be trading very often. So you want an advisor that's not going to be trading all the time. And flexibility is important. I mean, that's one of the flaws of indexing is it's pretty inflexible. But if you have an understanding about how markets work, you're going to be better able to make good investment choices. Kind of the purpose of writing the book is to help people feel more optimistic about investing and more confident they're going to have a good long-term investment process.

13:40David Booth:So that involves paying attention to what's going on in your own personal circumstance as well as the market. Make adjustments as necessary. And if you do that over the long haul, you're probably going to be okay.

13:53Peter Lazaroff:You actually describe your outlook as science-based hope. Talk to me a little bit about, like, what evidence turns optimism from, like, a personality trait into a rational posture.

14:05David Booth:In a nutshell, markets behave the way we hoped they would. Let me explain that. You know, stocks have higher returns over the long haul than bonds. Bonds do better than inflation. They give you a lower return because they're less risky. So stocks have done over 10 % a year. Now, think about that. That's 10 % a year over the last 100 years. So think of all the different time periods we've had. You know, the Great Depression, World War II, Korean War, high inflation, the Great Recession, financial crisis. We've had a lot of down periods. And throughout taking all that together, the stock markets produce 10 % return a year.

14:53David Booth:That's a miracle of markets. So you can, in my view, it's one of the wonders of the world, is that the stock market is a place where the average investor can go in and get a fair return. I don't know why it's so difficult to persuade people of that.

15:11Peter Lazaroff:Now, do you ever feel like optimism can become complacency?

15:17David Booth:Well, sure. I mean, I'm not Pollyannish. I mean, but you have to then ask the question, why do you think stocks return 10 % a year? and ultimately it comes down to, I think, human ingenuity. You know, in life and in investing, human ingenuity plays an important role. When something bad happens to you, you don't just sit there and take it. You figure out what it takes to get back on track. And when you go to work at your firm, you know, if something bad happens, you figure out how can we make things better. This was, you know, reached a crescendo, I view well, when COVID hit in 2020. The market's down about 30 % in the first quarter and a lot of anxiety.

16:09David Booth:What's going to happen? People go, you know, what's going to happen? I go, I don't know what's going to happen. But here's what I believe, that when something like COVID hits, people figure out how to get back on track and make things better again. And, you know, there'll be winners and losers in that scenario. But we might get back on track faster than you might think, which is what happened. I think the recession only lasted a quarter. You know, that's a tribute to human behavior. What it boils down to is dealing with uncertainty and managing uncertainty in life and investing.

16:51Peter Lazaroff:I couldn't agree more. And to me, like being an optimist doesn't mean ignoring the fact that sometimes things are bad and could get potentially worse. But betting against the human spirit has historically been a very, very bad bet. And you mentioned the point in time in COVID. I remember publishing something saying, like, if you think things will never get better, the evidence is stacked against you. You'd earlier, though, mentioned, you know, the importance of having a financial advisor. And I think in general, planning and prediction are different concepts. When you have a financial advisor, it's easier to separate those two.

17:31Peter Lazaroff:In your opinion, what should a financial plan specify in terms of like making assumptions or I'm going to softly say making predictions? And what should it deliberately leave open?

17:44David Booth:In developing an investment plan, it's largely about how much do you want to invest in relatively risky assets such as the stock market and how much in relatively riskless assets like a money market fund or fixed income. And that depends on the particular situation of the investor, you know, not only their endowment, but also their attitude towards taking risk. And somehow you've got to come up with a plan that seems sensible to the end client. And so that's That's basically the idea. And then what it should leave out is trying to predict where the market's going. Basically, the stock market is unpredictable, just like life is unpredictable.

18:33David Booth:People today couldn't have predicted where they would be 30 years ago, or today they can't predict where exactly where they'll be 20 years from now or whatever. So forget about that. It's about developing a plan that gives you the feeling like you're going to be safe. You know, in life and investing, people want to feel safe. And by that I mean there are going to be ups and downs along the way. But if you have the feeling that whatever happens, you're going to be able to get back on track when you're thrown off course in life, then you can feel safe. And that's really the purpose of an investment plan as well as here's the plan we have for you now.

19:19David Booth:And kind of regardless of what can happen, we'll adapt and be flexible and get back on course. And if you do that continually over a long period of time, you're going to be okay.

19:34Peter Lazaroff:Something you said reminds me of a story you told about after your father dying, you'd found$15 ,000 of cash in his safe deposit box. And keeping it there was financially inefficient. But because he had lived through the Depression and seen banks fail, you described the security it gave him as priceless. So can you consider peace of mind part of return?

19:57David Booth:Now you're getting into an area that I feel strongly about, which is kind of true wealth. What is true wealth? You know, if you ask people, you know, rank these things, these items in terms of importance, family, friends, health, you know, so on and so forth, and money. Money isn't usually in the top five or six, you know. You know, money is important. We all agree with that. But what's really important are these things like family and friends. You know, I tell people my parents were wealthy. They just didn't have much money. That's part of developing an overall plan as well. I start with, what is really true wealth to you?

20:41David Booth:So my parents had that$15 ,000 in their safety deposit box, which was a huge part of their wealth. I mean, they had very little other money. And I went back and I looked. I said, look, if they put that$15 ,000 and got the stock market return over the next, when my dad came back from the war, World War II. and held it for 40 years until we opened up that safety deposit box, $15 ,000 would have grown to over a million dollars. And then I thought, well, you know what? That was about 40 years ago because I did this last year. And what did I put that$15 ,000 in the market and got the market return for the next 40 years?

21:27David Booth:Again, once again,$15 ,000 would have grown to over a million. So that's back-to-back 40-year periods, which doesn't prove anything, but it kind of gives you a pretty good idea that markets are amazingly resilient. You know, the stock market is where buyers and sellers come together. And investors don't trade unless each side thinks they got a good deal. And typically, these are large institutions on both sides of the trade. Because anytime prices deviate from kind of fair prices, institutions are all over that. So what happens in that process is what comes out are fair prices. That's really the story.