Summary of TIP788: Simple Investing w/ David Fagan

Overview of TIP788: Simple Investing w/ David Fagan

This episode of The Investor’s Podcast features David Fagan discussing why indexing is the right default for most investors, how small differences in annual returns compound into large lifetime consequences, what good oversight of outsourced money looks like, and how simple, consistent systems (in markets and life) outperform complexity. The conversation weaves practical allocation and rebalancing rules with behavioral guidance and a leadership-focused discussion on expectations and compounding human potential.

Key takeaways

• Indexing works for the vast majority of people because a very small number of “superstar” companies drive most market gains; owning the broad market captures those winners without stock-picking risk.
• Small differences in annual return matter hugely: missing a few percent per year can cost years of work/retirement time.
• Most active managers fail to beat reputable benchmarks after fees—so always compare a manager’s audited track record to an appropriate benchmark.
• Oversight matters even if you outsource investing: know your returns, compare to benchmarks, understand fees and taxes, and review at least semi-annually.
• Simplicity reduces behavioral errors (turnover, taxes, poor timing) and frees attention for work and life priorities.
• The leadership/expectations theme: the expectations you set (in business or life) compound behavior just like compounding returns.

Topics discussed

• What an index/index fund/ETF is and why it’s powerful
• Evidence for indexing (research/statistics)
• Practical allocation and rebalancing rules used by David Fagan
• Comparing active managers to benchmarks and common pitfalls (survivorship/selection bias)
• Tax and turnover drag on returns
• Behavioral advantages of passive strategies (reducing FOMO, fewer unforced errors)
• How entrepreneurs can use indexing as a “shock absorber” while building businesses
• The importance of overseeing investment results when you use advisors
• Leadership, expectations, and how they compound behavior (Rosenthal & Jacobson, Helen Keller, John Wooden)

Notable numbers & references cited

• Warren Buffett’s recommendation for trustees: 90% stocks (low-cost S&P 500 index), 10% short-term bonds.
• Bessembinder research: a very small percentage of stocks (cited as ~4%) created the net wealth gains across long history—meaning a tiny set of winners drive market returns.
• SPIVA/scorecards:
  • ~90% of U.S. large-cap managers underperformed the S&P 500 (after fees).
  • In Canada over the last 15 years, ~98% of Canadian equity managers failed to beat the S&P/TSX.
• Passive ownership: ~50% of assets classified as passive, but only ~23% in true index funds in the U.S.; ~12–13% in Canada/Europe.
• Index funds account for ~1% of trading volume in the U.S. (they own more but trade little).
• Turnover can cost ~2% of gross returns annually (tax/transaction drag examples).
• Vanguard VT expense ratio mentioned as 0.06% (6 basis points).

Actionable / Practical recommendations

• Default allocation blueprint (David’s approach): 90% low-cost index funds, 10% fixed income. Use the bond allocation to stabilize behavior, not seek returns.
• Rebalancing rule (simple, behavioral): rebalance annually with bands:
  • If fixed income falls to 5% → trim equities (sell high).
  • If fixed income rises to 15% → buy equities (buy low).
• Oversight checklist for investors who outsource:
  • Set clear goals and target returns for each objective.
  • Review actual investment results at least every 6 months.
  • Ask: “What is my return and how does it compare to a balanced index benchmark given my risk profile?”
  • Know exactly what you’re paying in fees (advisor fee + fund expense ratios).
  • If paying > ~2% in management fees, dig into what value you’re getting (tax optimization, bespoke services, unusually high after-fee returns).
  • Demand auditable, benchmarked track records from managers; beware of shifting or proprietary benchmarks that are easy to beat.
• When to consider active investing:
  • You enjoy it and are willing to invest the time to be good at it.
  • You have an edge, or you can validate long-term, audited outperformance vs a reputable benchmark.
  • Use active risk only as a small portion of your net worth (e.g., as David does in 2 of 8 accounts).
• Tax & turnover management:
  • Prefer low-turnover, tax-efficient ETFs/funds for taxable accounts to reduce annual tax drag.
  • Recognize turnover + fees can materially reduce gross returns (example: 12% pre-tax → ~9% after taxes/fees/turnover).

Implementation example (simple indexing blueprint)

• Choose broad global exposure: e.g., a global ETF (Vanguard VT) or a combination of U.S. large-cap and international index funds.
• Allocation: 90% equities / 10% fixed income (adjust to risk tolerance).
• Dollar-cost average contributions (systematic investing).
• Rebalance annually using the 5% / 15% fixed-income thresholds.
• Review performance vs a globally diversified benchmark every 6 months.
• Keep total investment costs (advisor + fund expenses) as low as practical; know what you’re paying.

How to evaluate an advisor or active manager

• Ask for an audited, long-term track record benchmarked to a reputable index (e.g., S&P 500, global index) covering multiple market cycles (preferably 10–20 years).
• Check how returns look during bear markets—did behavior protect capital or accelerate losses?
• Be skeptical of survivorship bias: managers often close/stop funds that underperform.
• Separate genuine value-add services (tax optimization, bespoke planning, behavioral coaching) from portfolio management that you could access cheaply with ETFs.
• Remember: trust is helpful but cannot replace oversight—results are your livelihood.

Behavioral & life lessons highlighted

• Simplicity and consistency compound (both in money and leadership).
• Entrepreneurs often already have concentration/risk in their businesses; a broadly indexed public portfolio can be the stabilizer.
• Expectations set by leaders/parents/teachers change behavior and outcomes (Rosenthal & Jacobson “Pygmalion effect”; Helen Keller story; John Wooden quote).
• Small signals (thank-yous, clear expectations) compound into culture and stronger performance over time.

Notable quotes / soundbites

• Warren Buffett paraphrase: “Put 10% in short-term bonds and 90% in a very low-cost index fund.”
• “Missing a few percent in annual return can cost you years of your life.” (client story: 5% vs 8% over 16 years → ~6–7 additional working years)
• John Wooden: “The best leaders are those who expect greatness from others and communicate that expectation with belief and not pressure.”
• Occam’s razor applied to investing: simplicity often beats complexity.

Who should index — and who maybe shouldn’t

• Indexing is the right choice for most people who:
  • Don’t want to (or don’t have time to) research and monitor individual companies.
  • Need a low-cost, tax-efficient, long-term compounding foundation.
  • Want to reduce behavioral mistakes and free attention for other priorities.
• Consider active investing (a smaller portion) if:
  • You enjoy it and will commit the necessary time.
  • You can demonstrate an edge with audited, long-term outperformance vs an appropriate benchmark.
  • You treat active bets as “for enjoyment/learning” and keep core wealth indexed.

Final summary

Indexing is a practical, low-cost, behavioral framework that suits most investors—especially entrepreneurs and people who value time and mental bandwidth. Use a simple allocation (e.g., 90/10), rebalance with clear bands, measure results regularly against reputable benchmarks, and hold advisors accountable for real, auditable value. Outside of investing, apply the same principle of compounding simplicity to leadership and relationships: clear expectations and small consistent actions create outsized outcomes over time.