The calming genius of passive investing
It’s become an internet meme that “never in the history of calming down has anyone ever calmed down by being told to calm down.” (There are various versions.) I nonetheless urge investors, especially those in the retirement risk zone, to give Stay Calm a read. This new book is written by one of the pioneers of the passive investment management (a.k.a. indexing) industry: David Booth, founder of Dimensional Fund Advisors. Whatever the online pundits say, it is truly reassuring.
Full disclosure: I have long invested a portion of our family’s portfolio in DFA index mutual funds and more recently DFA exchange-traded funds (ETFs), and have also sat in on a few investor presentations from DFA Canada. They are famously champions of taking a passive set-it-and-forget it approach to investing while minimizing the noise of what they have dubbed “financial pornography” propagated by traditional and social media, and self-appointed experts who claim they can pick individual stocks or consistently time the markets.
I found Booth’s Stay Calm to be a refreshing reminder of the sound principles that underlie DFA and its competitors like Vanguard and BlackRock iShares. And I say that as someone who takes a decidedly hybrid approach to investing in ETFs in various asset classes. I should confess first that I also occasionally indulge in a bit of high-conviction “index skimming,” to use a term popularized by Cut The Crap Investing blogger Dale Roberts, who is also behind the Retirement Club for Canadians. But after reading Booth’s book twice, I’m less sure about that approach.
Embracing uncertainty in life and in investing
Stay Calm was published early in September by Authors Equity and is aptly subtitled “Learn to embrace uncertainty in investing and life.” The book is divided into three main parts. Part one is on the science of investing and includes chapters titled “The gift of being an outsider,” “How markets work” and “How to harness public markets.” The main takeaways are to accept that stock picking is a losing game and to trust markets rather than marketing.
Part two is titled “The mindset to stay calm” and its four chapter titles all make for excellent bullet points: “Flexibility is the key to navigating life’s uncertainties”; “Don’t predict, plan”; “Control what you can control and manage what you can’t”; and “Tune out the noise.”
Part three is a more philosophical take about life in general, titled “True wealth: What winning means to the author, and why he remains optimistic about the future.”
The meat of the book is part two, which starts with a reminder that the whole DFA indexing concept began with the idea that public markets, when left to do their work, usually reward long-term investors. The pioneering research by financial academics like Gene Fama and Ken French proved that “a broadly diversified, low-cost investment approach makes sense.”
Fama coined the term “efficient market” in 1965 in a University of Chicago paper titled “Random walks in stock-market prices.” Booth explains that the efficient market hypothesis means investors can accept prices in public markets (notably U.S. stock and bond markets) as being correct. As Fama explained at the time, “prices change as new information comes into the market.” (Fama and French and many others have all worked for or with DFA at some point in their careers.)
Chapter two, “How markets work,” describes how research built around Chicago’s Center for Research in Security Prices showed just how high market returns actually were. U.S. stocks earned an annualized compound return of 9% per year from 1926 to 1960, before taxes. Booth says that was “a lot higher than most people expected.”
More to the point, it was also “greater than what had been achieved by most Wall Street money managers who were charging high fees.” Even as the actively managed priesthood tried to downplay these findings, the data got even better for the indexing crowd: from 1961 to 2025, the return has been 10.7%! And it’s 10.2% for the 100 years between 1926 and 2025.
Over time, the market as a whole goes up. Booth estimates the reward for sticking it out over the long term is huge: “$100 invested in the stock market in 1960 would be worth $75,800 today… Markets do the work so you don’t have to.”
You need the temperament to stay the course
But just understanding all this on an intellectual level isn’t enough: “You also need the temperament to stay the course through both good times and bad.” Ay, there’s the rub! Which brings us back to the essential advice to Stay Calm.
It took decades to evolve, but Booth says there is now more money passively invested in indexed products than in expensive, actively managed investments. But there is a paradox: while indexing makes it easy to avoid picking individual stocks, the same funds also make it easier to be tempted to try and time the markets. As Booth writes, “it’s never been easier for people to gamble under the pretense of investing. And it’s only getting harder to tune out the noise.”
One of the chapters I particularly enjoyed is the eighth: “Tune out the noise.” Between news email alerts, 24/7 cable, podcasts, and social media there are growing demands on our attention. As Booth writes, “The financial media has grown not because investors need more information to succeed but because our attention has become valuable… This is what noise looks like. And the real danger is not only distraction; it is the pressure it creates to act.”
But really, tune out the noise
Indeed, there is actually a full-length documentary film called Tune out the Noise, created by filmmaker Errol Morris, who after making the film decided to become a Dimensional investor himself! As Booth says at the end of Chapter eight, “Errol went from magical thinking to evidence-based investing.” And he wryly notes about the noise generated by TV pundits, social media and self-appointed stock-picking geniuses, that “the only thing likely to go up following their red alerts is your blood pressure, and the only thing likely to go down is your net worth.”
Booth makes a useful distinction between “signal” and “noise.” For him, noise is information that feels important but has no bearing on your long-term investment success. Contrast that with signal, “which represents genuine insights that can improve decision-making.
Booth writes that, in 2024, investment scams were the largest single category of fraud losses at US$5.7 billion, with 70% of people contacted through social media losing money. Globally, more than half say it’s getting harder to know what is true and what is false online.
Whether artificial intelligence (AI) will improve matters remains to be seen. Booth himself is apparently skeptical: “while no one knows exactly how artificial intelligence will change things, many believe it will only make the difference harder to see.” Even if the U.S. president is trying to change the name to “super intelligence,” I doubt that will improve matters, which is why some have taken to calling it “superficial intelligence.”
That in itself is just another distraction and more noise. All the more reason to return to the basic principles so eloquently presented in Stay Calm.
P.S. For readers likely to read Stay Calm, let me draw your attention to a similar book also just published. Long-time Wall Streeter Matt Ludmer has just released The Right Mountain. He was interviewed early in October on the Motley Fool Hidden Gems podcast but so far I’ve only read the introduction to the book. It challenges the notion that financial success alone can lead to a fulfilling life. He has built on the multi-disciplinary practices of Ken Wilber’s Integral Theory, simplifying and adapting them for the needs of investors.
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