The Danger of Dogma In Investing

In 2011, three years into this business, I found myself on stage in front of a few hundred advisors. Hand-picked panel, third chair from the left, mic in hand, suited up, smug confidence illuminated for the auditorium.

The conference was hosted by a famous asset management firm. We had been treated to extravagant buffets, a talk by a Nobel Prize winner, and endless invitations to sample the Kool-Aid. I was up there to testify about how the firm's resources help an advisor run a practice, and I was glad to do it. They were good partners.

A few hours later I decided to stop doing business with them, cold turkey. It was one bold claim, emphatically declared by a senior executive, that killed the smug confidence and replaced it with something closer to "wait, what?" I will come back to that sentence, but the result was I walked out of that building with a principle that shapes every portfolio I build today.

Dogma in investing is dangerous.

Investing is not theology and it is not politics, even when it feels that way. Dogma will detour and delay your financial goals, and at its worst it is ruinous. I have seen my share of it.

Dogma in finance is an unbending belief about a product, a strategy, or a framework. The dogmatic investor pursues every goal, explains every economic development, and sees every opportunity through that one lens. There is usually a tempting body of evidence behind it, tainted or not, that makes it appealing. But if the investor crosses from curious to dogmatically committed, no contrary evidence and no change in the landscape will open the door to an alternative.

Do not confuse dogma with conviction. Conviction is fine. Conviction comes out of due diligence, probability, history, and a certain amount of scar tissue. It says that under these circumstances, in my judgment, this is the best path forward. Dogma does not bother with the circumstances. The answer is predetermined.

Very smart and rigorous people find their way into this trap. The pitch that gets you is rarely the one arguing about returns. It is the one that tells you what kind of person owns this. Prudent. Intellectual. Virtuous. Contrarian. The clever insider. The anti-taxer. The early adopter. Once the answer is a description of you, performance stops being the reason you hold it, and bad performance stops being a reason to move on. You are no longer making a call about reaching a financial goal. You are demonstrating commitment to the tribal belief.

Whole life insurance as a replacement for banking. Cap-weighted indexing as the only rational strategy. Gold. Bitcoin. Buffett-style value. Debt elimination at any cost. Income-first investing. FIRE. Rental real estate. Trend following. ESG. Dogmatic devotion can even explain why an executive has never trimmed the employer stock.

If reading that list started an argument in your head about one of them, that is the one.

Every item there can be a good answer for someone, at some point, for some purpose. Not one of them deserves lifelong, unshakeable devotion.

My father and a lot of retirees his age arrived at the belief that stocks only go up. It was more or less true for the last two decades of his forty-year career. From 1982 on, the market compounded at something close to eighteen percent a year, right up to the month he retired in December of 1999. That will make you a believer. Stocks go up. Patience wins. Anybody who says otherwise is nervous and foolish. Record valuations? A bubble? To a lot of people at the time, reducing equity was blasphemy even as things were hitting extremes.

Then the market handed the believers two punishing drawdowns and a decade of negative returns. For a retiree spending down and selling into the storm, that was a devastating blow. Nobody arrives at a dogma by being careless. He arrived at his by being right for eighteen years. It is easy, looking back, to understand why many people in 1999 felt as though market risk had become a thing of the past.

The lesson was not that stocks were bad. The risk and probabilities had changed while the belief had not. Consider both ends of that lost decade. A couple retires in January of 2000. Markets are at all-time highs, the ten-year Treasury is paying about six and a half percent, and a Fed chairman had warned about irrational exuberance three years earlier.

Another couple retires in March of 2009. Stocks are down more than 50%, short-term rates are near zero, government intervention is occurring on a scale nobody has seen, and Buffett has recently told Americans in print to buy.

The dogmatic investor has the same answer for those very different circumstances and does not even consider the possibility of adjustments. The analytical process that might have led to different conclusions would not be consulted.

By 2019 and 2020 I was the one making the portfolio calls. Ten years of gains had faded the memory of the financial crisis, and index funds had become the default for stock investors and, less understandably, for bond investors.

By early 2021, the Aggregate Bond Index yielded roughly one and a half percent while carrying meaningful duration risk. Stock returns are uncertain. With high-quality bonds, starting yield is a reliable guide to expected nominal returns. The setup for all those who held substantial exposure to the bond index was not appealing.  An expected return of about 1.5% was the upside, and the downside included meaningful losses if interest rates went up. The question was pretty clear, why would you do that? What would happen next was not precisely predictable as I have argued, but a simple risk/reward tradeoff analysis meant the vulnerability was visible and demanded a response.

I asked everyone. Experts, advisors, people I respect. Some had tactical moves and alternatives in response. But many dogmatic allocators, professionals, were doing nothing out of devotion to the sixty-forty index portfolio or a close cousin of it.

In 2022, the Fed was hiking aggressively and the Aggregate Bond Index lost about thirteen percent while stocks lost about eighteen, and the safe half of the portfolio was no refuge at all. Long Treasuries were down closer to thirty. There are a lot of responses investors could justify ahead of 2022, but ignoring the implications of those historic circumstances is not one of them.

That firm I stopped working with? Their fixed approach would not have considered a move away from the bond index. Which brings me back to the conference.

The executive had the stage. He was comfortable in front of a room of professionals who already agreed with him. And he told us, in words I remember very clearly, that the "science of investing had been solved." His firm's portfolios were the output of indisputable science, settled and perfected. We could go home and spend no time thinking about markets because the code had been cracked. All we had to do was find clients and feed their funds into the portfolios.

It was 2011. I had my father and that lost decade fresh in my mind. I was working with dozens of families affected by the great financial crisis. This was not settled science.

I left the Kool-Aid on the table and drove home.

Maybe I romanticize the moment, but I started looking that week for something steadier. What I found was behavioral finance, probability, Bayesian updating, and complex adaptive systems, which is a long way of saying that uncertainty and confident decision-making can live in the same portfolio. It asks for a rigorous process instead of a permanent answer.

It starts with a clearly stated financial goal and the date attached to it, then a look at the client's circumstances, the conditions in front of us, and the opportunity set available now.

I do not know what the next ten years will bring. I know what today's prices imply about the range of things that could happen, and I know which of those outcomes would be unacceptable for somebody's retirement. That is enough to make a decision with conviction.

Nothing has been solved. Nothing about markets is going to be solved, because markets are made of people, technology, innovation, politics, and rules that get rewritten while we watch. Anybody who tells you the code has been cracked is offering you dogma, and dogma is dangerous.