What funds should you buy? Should it be index funds or exchange-traded funds, or low-cost actively managed funds, or should you pay an adviser for access to special products like DFA funds? This is an important question — but it’s often the wrong question.
The products used to construct a portfolio are a function of a portfolio’s purpose. Get the purpose right first and then select the product.
Many people don’t invest this way. They generally want to talk about products, not purpose. They put the cart before the horse. They invest like they buy automobiles.
Walk into an auto dealer and a salesperson will likely say, “Thanks for coming in. How can I help you?” You’ll talk about a particular model or certain characteristics such as mid-sized car with good gas mileage. People generally don’t talk about the purpose for the vehicle until well into the conversation. But isn’t that the best place to start?
If you know what the vehicle is going to be used for, why not tell the salesperson so they can help you? It’s the same logic when investing.