I think it is very important that people have realistic expectations about how investments work. I have from time to time met people that were shopping around for the adviser that promises them the highest returns. I always refuse to promise these clients a high double digit return, so no doubt when they eventually did settle on an adviser they wound up with someone far less scrupulous.

Much of my approach is unconventional. One hundred percent fee for service independent advisers are exceedingly uncommon, but this is the only type of adviser likely to recommend an indexed strategy because indexing doesn't pay commissions. My message about indexing is backed up by overwhelming evidence from all the financial research journals, but most people prefer popular newsstand magazines to the Journal of Finance, so the public get very little exposure to quality financial research.

My approach depends very heavily on upper-end academic research. I come from a science background, I'm one of those people that believe in measurement and theories that can be tested and falsified. Much of what people read about investment is pseudoscience, demonstrably false yet widely believed. The advice you hear on television and read in various popular investment magazines and multitudes of newspaper columns is often worse than useless, it is often downright misleading.

I don't assume that you will accept all I say without verification, especially since it is so contrary to common practice, you may need to find it out for yourself.

I have recommended a number of books in another section of this web site, but before you go to the library or the book store I thought you might be interested in seeing what the Internet has to offer. I have listed below a few of the better sites that explain the indexing strategy and "Strategic Global Asset Allocation".

Part one: know your own psychology

Behavioural finance researcher Terry Odean has studied investors for decades, and he has found that the majority of people falsely believe that they can do all of these things. Investors as a group trade too much, they pay too much in fees, they switch out of funds before they go up, they move back in just before they go down, they spend a small fortune on newsletters, useless books and software and they fail to diversify enough, thus incurring unnecessarily high risks.

As part one of your new education here is your first assignment: Read Terry Odean's web site at http://faculty.haas.berkeley.edu/odean/

Spend a few minutes, download some of his papers or just read the extracts. Odean has collected conclusive proof that retail investors do not beat the market, in fact the market beats them substantially.

After reading that, check out the psychology section of my investment FAQ.

Part two: know the market

There are many Internet resources for you to read. Frank Armstrong, a fee for service adviser from the United States wrote a very good investment book that has been published entirely on the Internet. His web site is http://www.fee-only-advisor.com/premier/premiercontent/book/index.cfm#contents. It is fairly short by "book" standards, so it won't take too long to read. The most important chapters are 1, 2, 4, 10, 12, 13, 21, 22 and 23, they should take less than an hour to read, but don't let that stop you from reading the rest of the book. Pay particular attention with chapter 12, because this is the strategy I use.

Another American fee only financial advisory firm is TAM Asset Management. Their web site is http://www.tamasset.com/index.html. Spend a couple of hours reading that site as well. There is a lot of good stuff here, including their newsletter of asset allocation, historical performance of their model portfolios, data on "value vs growth" stocks, small stocks etc. In particular read the TAM Asset presentation and the Tortoise and the Hare article, and I also like their Investment Policy Guidelines & Strategies Within the Context of The Prudent Investor Rule.

A further web site to read is by William Bernstein, author of a book I highly recommend called The Intelligent Asset Allocator. His site is http://www.efficientfrontier.com. Bernstein also has a newsletter on asset allocation, the back issues are essential reading.

Dimensional Fund Advisors have a variety of excellent articles to read, especially the US site. DFA's Australian site is http://www.dfafunds.com.au and the US site is http://www.dfaus.com.

For more fundamental information, Ken French and Eugene Fama are the academics who really set the ball rolling with the whole "value vs growth" and "large company vs small company" debate, their web site is http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/working_papers.html. If you find their papers a little too technical to read don't worry too much, if you look around their site you'll find plenty of graphs demonstrating the value and small company premiums.

Bill Sharpe is another famous worker, in fact he won a Nobel Prize for economics. His web site is http://www.stanford.edu/~wfsharpe/art/art.htm.

If reading academic research appeals to you, the latest developments in financial research are downloadable at http://www.research-finance.com/.

Finally, here are a few articles on managed funds vs index funds for you to read:
http://www.investorhome.com/cherry.htm
http://www.investorhome.com/mutual.htm#do
http://indexfunds.com
http://www.ssga.com/library/index.html

I do use some actively managed funds in my portfolios, mainly because Australia does not have as diverse a range of index funds as the US market does. If I am going to use actively managed funds, there are a lot of things I need to take into account when buying them. Tweedy, Brown and Co is one of the world's great active fund managers. They wrote a very good article on how active funds add value, you can read it by going to http://www.tweedy.com/library_docs/papers/tenways.pdf

I have written a lot of similar information into my FAQ, so add that to your reading list.

Why doing things a little differently can be very profitable

I am concerned with promoting financial education for a number of reasons, some of them altruistic and some related to my business. Altruistic reasons include the fact that I am genuinely disturbed at the total lack of knowledge people have about investment. They lose fortunes again and again because they do things that are reckless and stupid. I am including many financial advisers in this, even professional financial planners rarely have a clue about "Strategic Global Asset Allocation", which is the name of the strategy I use.

Other reasons are for my own business. There are very few firms in Australia that use these types of strategies, even though they are so effective. I say "very few" because although I can't think of a single one of them there may be others out there and I don't want to make a claim I can't verify. If I ever hear about a similar firm I will link to their web site or something, until then as far as I know I have this sector all to myself!

I clearly have a strong marketing interest in making sure that people learn about investment. The more the real truth gets out, the less appealing my many competitors will look. They have more money to spend on marketing than I do, but I'm not trying to attract tens of thousands of clients, I am kept fairly busy by my existing clients. This is good news for my competitors, because it means they can continue to sell the Australian financial services consumer risky, overpriced and underperforming investments, bad news for investors though.

It is partly because of my completely unconventional approach that I am also vulnerable. Many people seek safety in numbers, and they do wonder, "if indexing and Strategic Global Asset Allocation are so good, why doesn't everyone do this?"

The simple answer to that is that the old ways are more profitable to advisers and the funds management industry. My approach relies to a great extent on low cost financial products, which means my approach is less profitable to the industry itself. Many of the funds I use charge less in total fees than most active funds pay out to advisers in trail commission. Of course the beneficiary of these lower fees is the consumer, but this is hardly something you would expect the industry to promote.

If you want verification of what I'm saying, go right ahead and do some research. The deeper you dig, the more convinced you'll be.