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Index Investor Profile: Interview with J.D. Roth of Get Rich Slowly

Most buy & hold index investors seem to be converts from various schools of active investing. At the same time, I’ve met very few investors (none, off the top of my head) who have moved from being index investors to being fund pickers or stock pickers.

There seems to be some sort of lesson there. 🙂

In that vein, I thought it would be interesting to hear the stories of a few different investors, and what paths they followed to becoming buy & hold indexers.

On Tuesday, J.D. Roth from Get Rich Slowly was kind enough to answer a few questions about his own path to index investing.

Mike: You’ve mentioned before that the bulk of your retirement portfolio is invested in index funds. When you began investing for retirement, did you immediately opt to use index funds, or did you try anything else at first? If you did try something else first, how did it go?

J.D.: I didn’t actually move to index funds until recently. I kept thinking that I could beat the market with my superior stock-picking skills. So, I picked Countrywide. And GM. And Washington Mutual. And The Sharper Image. After losing several thousand dollars of retirement money, I finally admitted to myself that I ought not be allowed anywhere near a stock ticker, and I began to invest in a variety of index funds. That has worked much better.

Mike: Was there any particular book or article that you read–or discussion you had with somebody–that led you to use index funds? If so, what was the most compelling part of the argument in favor of index funds–what was it that really convinced you that this is what you should do with your money?

J.D.: I was introduced to index funds by an early GRS reader named Vintek. He offered this guest post: Intro to Index Funds

But it was really Mark Dowie’s article in San Francisco Magazine that pushed me over the edge: The Best Investment Advice You’ll Never Get.

I still didn’t move into index funds just yet, but I began to watch for information about them. After I read The Four Pillars of Investing and The Random Walk Guide to Investing, I was essentially converted. The strongest argument I can think of is that over the long term, 90% of professional money managers fail to beat index funds. Are individual investors going to do better? (And, more to the point, am I going to do better?)

Mike: I heard you mention in a recent interview on Behavior Gap Radio that you once dabbled in stock picking with an investment club and that it didn’t go as well as you might have hoped. Were there any lessons you learned from that experience that readers might benefit from hearing?

J.D.: Oh my word. There are dozens of lessons. I need to tell that story at Get Rich Slowly.

I think the number one lesson I learned is that you can’t succeed by investing “by gut.” Our investment club was six guys contributing $50 per month during the height of the tech bubble. We thought we were going to get rich. Our primary strategy seemed to be: Buy the stock that went up the most the previous month, and then watch as it crashes to the ground. We were idiots. We were buying high and selling low, panicking when our “sure things” proved not-so-sure after all.

Part of the problem was that we didn’t have a procedure. We didn’t have a system. We’d each bring a stock to suggest to the group, and then we made our decisions not on any sort of logic, but based on who could carry his argument (which usually meant yelling louder than the other fellows).

We weren’t investors. We were speculators. We were gamblers. We wanted to pool our money together to get rich quickly. It didn’t happen.

Mike: Do you ever feel that you’re missing out because your funds are guaranteed to never outperform the market? And if so, are you ever tempted to try any other investment strategies?

J.D.: Yes, I do feel like I’m missing out. On the other hand, I remember very well all of the losses I’ve had before. Those underperformed the market by substantial margins. I cannot guess which stocks are going to increase and which will decline. I’ve given up trying.

All the same, I do allocate a small percentage of my money to purchase individual stocks. Right now, I’m not making use of that. The only individual stock I still own is The Sharper Image, which at 3.5 cents per share is worth $39.04 for me today.

Mike: Final question (if you’re comfortable sharing): Can you give us a rough breakdown of your current asset allocation in terms of percentages?

J.D.: Actually, my current allocation is in flux. I’m in the process of consolidating all of my accounts at Fidelity, and as I do that, I’m shifting things around. Most of my money is in cash right now, which has been making me cranky. (How I wished my money was moved by early March.)

Of the money I do have invested, most of it is temporarily in FFNOX, which is the Fidelity 4-in-1 Fund (55% S&P 500, and 15% each of Extended Market, International, Bonds). I hope to write more about asset allocation in the future at GRS.

Thanks again to J.D. for taking the time to share the story of his conversion to index investing. 🙂

If you haven’t already, I highly recommend subscribing to Get Rich Slowly.

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  1. “On the other hand, I remember very well all of the losses I’ve had before. Those underperformed the market by substantial margins.’

    Remembering that, why doesn’t JD guuarantee that will never happen to him?

    Passive investing is only half the gae.

    the other half is owning insurance against a disatser. And you can own that at no dollar cost. The only cost is that profits must be limited.

    Why don’t you, and other personal financial bloggers get it? Options reduce risk, protect your assets, and allow you to remain a passive investor.

    I wish you well with the ostrich strategy. But there’s more to having a nest egg when you are ready to retire than passive investing.

  2. Mark: You say “The only cost is that profits must be limited.”

    How can you also say that that is “at no dollar cost”?

    I’ve asked you that question (in various forms) on several occasions, and you have yet to answer.

    I’m not trying to be snide here–I’m genuinely curious.

  3. When you hedge with a collar you buy a put option (that’s similar to entering a stop-loss order); and you sell a call option.

    The cash from the call sale is usually sufficient to pay for the puts. Sometimes you collect a little extra, sometimes you collect a little less.

    Those call options act as a cap on potential earnings, but in return – you get insurance. If preservation of capital is the goal – and I admit it’s not for everyone – then this is an ideal way to achieve that goal. And this strategy can be used on a portion of one’s portfolio. This is not an all or nothing approach.

    Not everyone wants that insurance, but for the conservative investor who does, collars truly protect assets.

    I apologize for not replying to other requests for more information.

  4. Thank you for replying.

    Purchasing a put (the first part of a collar) certainly reduces risk. But it comes at a cost. I think that much is obvious.

    Selling a call (the second part of a collar) raises cash, but limits your upside.

    Even if the cash from selling the call covers the cost of the put, you still have to account for the fact that a limit to your upside is a real cost–that is, a decrease in expected return.

    (If it were not a real cost, selling covered calls–whether as a part of a collar, or simply on their own–would always increase return. And I suspect that is not really the case.)

    In short, yes, a collar will reduce your risk. But that reduction in risk comes at a cost. Is that any better than simply reducing your stock allocation (which would also reduce risk, but at a cost of decreasing expected return)?

    Can we take this discussion to email if you’d like to continue it? This isn’t what the post is about at all.

  5. I had the blessing of not having too much in the market before the housing bubble burst & took 40%+ of most retirement accounts.

    After seeing these huge losses, I began doing research and have decided to invest heavily in index funds from this point forward.

    I have only recently realized the incredible importance of investing and would like to thank Mike, JD, & many others for their excellent advice, and sometimes painful trial & error that have saved me (and many others) from having to reinvent the investing wheel.

  6. It’s nice to hear about the investing side of JD. He seems like a good fellow, but I stopped reading his blog because a large percentage of the content had to do with debt reduction, which is not where I’m at in life. Nice interview OI.

  7. I’m a big fan of passive, lazy, “ostrich” strategies. I’ve also been a long time reader of GRS. Great interview.

    I think part of being a successful oblivious investor is knowing what’s worth listening to and what’s not. That means realizing that trying to reduce risk by hedging with options as insurance for long-term investors is nothing but noise.

    There is no need to insure your investments against a decline in value as long as you are not planning on selling them. Mark Wolfinger is essentially advocating buying trip insurance for a trip you’re not even going to take. Insurance only lowers risk when there is a real risk, not an imagined one. Otherwise it just costs you with no real benefit, and limiting your gains is definitely a cost.

    Also, Mike asked, “do you ever feel that you’re missing out because your funds are guaranteed to never outperform the market?”

    The market is comprised of investments and investors. You are guaranteed to never outperform the aggregate of investments (because of costs), but your are guaranteed to out perform the aggregate of investors (because of costs).

    But does performance relative to anything other than the ability to most efficiently fund one’s own goals really even matter?

  8. Dylan, your thoughts on the question of “do you ever feel like you’re missing out?” mirror mine very closely. (That is, I sure don’t feel like I’m missing out with a 100% index fund retirement portfolio.)

    I asked because I’m curious how other people feel about the question. Many index investors seem to be mostly, but not entirely, indexed–they still use a portion of their portfolio to try other strategies. I always find it interesting to hear the motivations behind that.

  9. Mike, I think the reason why some people will mostly index but still use a little active management is because they accept the notion that indexing is superior, but they don’t fully understand why it’s superior.

  10. I’ve met very few investors (none, off the top of my head) who have moved from being index investors to being fund pickers or stock pickers.

    I think there must be investors who have made the switch from indexing to stock picking. I think it makes all the sense in the world to proceed that way. Indexing is best for those who don’t have the knowledge base to pick stocks effectively (which is most of us). But stock picking delivers better return for the small number who really know what they are doing. The smart thing is to start out indexing and then over time shift to stock picking.

    I agree that it is probably a greater number that starts out stock picking and moves to indexing.


  11. My retirement is all in index and bond funds.
    My outside retirement investments are picked stocks. I just wish I could go back and revisit my decision to buy GE just before they cut their dividends.

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