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Low-cost, broadly diversified portfolios are now available to nearly everyone. Yet investors still trade aggressively, chase forecasts, and panic whenever uncertainty rises. If the technical solution has become so accessible, why is having a good investment experience still so difficult?
In this episode, David Booth, founder and chairman of Dimensional Fund Advisors, returns to discuss his new book, Stay Calm: Learn to Embrace Uncertainty in Investing and Life.
Our previous conversation focused largely on the financial revolution that made evidence-based investing possible. This time, we focus on the problem that investment science cannot solve by itself: human nature. David explains why an intellectually sound portfolio still has to survive real life, how a trusted advisor can help investors live with uncertainty, and why his optimism about markets is grounded in evidence rather than wishful thinking.
We also discuss planning without predicting, judging decisions separately from outcomes, recognizing when you have enough, and using money in ways that contribute to a life well lived.
The central question of the episode is simple: How do you turn sound investment science into a process you can actually live with?
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What the investing revolution solved—and what it left unsolved (00:29)
I begin by asking David what low-cost, diversified investing has accomplished after moving from a radical idea to the mainstream.
David says its greatest achievement was the democratization of investing. Ordinary investors no longer need privileged access to Wall Street insiders to have a good investment experience. Anyone can own a broadly diversified market portfolio, and decades of evidence suggest that professional investors do not reliably outperform it.
But easier access to sensible portfolios did not eliminate the problems created by human nature. Investors still struggle to accept that buying the market, trading infrequently, and resisting market timing may be the best approach available to them.
David points to an apparent paradox: The enormous growth of index funds has occurred alongside a large increase in trading volume. One possible explanation is that many investors have stopped trying to pick individual stocks but still believe they can successfully time when to enter and exit the market. The investment solution may be widely available, but that does not mean investors are comfortable enough to leave it alone.
Stagecoach and why good ideas still have to survive real life (04:00)
David takes us back to 1971, when he joined Wells Fargo just as one of the earliest indexed portfolios was getting underway for Samsonite.
It was an unusually creative period in finance. New research was challenging the belief that professional managers could reliably outguess markets, and researchers were searching for practical ways to build broadly diversified portfolios with low turnover.
David worked on Stagecoach, a leveraged S&P 500 strategy that would have purchased $145 of stocks for every $100 invested. The theory was that investors who wanted to outperform the market could use leverage rather than attempting to identify mispriced securities. But asking investors to embrace both indexing and leverage at the same time proved to be “a bridge too far.”
Looking back, David describes his colleagues as young quantitative investors with theoretically good ideas but not enough common sense about implementation. That experience influenced how he later approached investment design: A strategy is not truly successful unless investors can understand it, relate to it, and remain committed to it when conditions become difficult.
Investor anxiety, the value of advice, and adapting without tinkering (07:29)
David shares the story of Dave Goetsch, a writer and executive producer of The Big Bang Theory, who became deeply anxious about markets as his career and wealth grew.
After reading about Gordon Murray and then reading The Investment Answer, Goetsch met with a financial advisor who helped him develop an investment philosophy and plan he could trust. His anxiety declined—not because uncertainty disappeared, but because he finally had a process he believed he could follow.
David compares financial advice to medical advice. People instinctively seek professional help when they face a serious health problem, yet many resist getting help with financial decisions even though everyone faces consequential financial tradeoffs.
The advisor David has in mind is not someone who trades constantly or continually tries to forecast markets. The value comes from helping investors understand how markets work, establish a sensible plan, make thoughtful adjustments, and remain disciplined when emotion makes the plan difficult to follow.
This leads to an important distinction between flexibility and tinkering. A durable investment process should be capable of adapting when evidence or personal circumstances change, but flexibility should not become an excuse to react to every headline or uncomfortable period in the market.
Science-based hope, human ingenuity, and rational optimism (12:05)
David describes his outlook as “science-based hope.” His optimism is not based on assuming that bad events will not happen. It is grounded in the long-term evidence that investors have been rewarded for bearing uncertainty.
He points to the historical relationship among stocks, bonds, and inflation. Stocks have delivered higher long-term returns than bonds, while bonds have generally outpaced inflation. Those differences make sense because investors expect greater compensation for accepting greater uncertainty.
The market’s long-term record includes the Great Depression, wars, inflation, recessions, financial crises, and countless other disruptions. Yet businesses and markets have repeatedly recovered and moved forward.
David believes human ingenuity is the engine behind that resilience. When people and companies encounter problems, they do not simply accept them—they look for ways to adapt, innovate, and improve. COVID provides a vivid example. David could not predict how the crisis would unfold, but he believed people would work to solve problems and get the economy back on track.
Optimism, in this framework, is not complacency. It is confidence in people’s capacity to respond to uncertainty without pretending to know exactly how or when that response will succeed.
Planning without predicting—and why feeling safe matters (15:02)
David distinguishes financial planning from market prediction.
A financial plan should help determine how much an investor can reasonably allocate to risky assets such as stocks and how much should remain in relatively safer assets such as cash and fixed income. That decision depends not only on the investor’s financial resources, but also on their ability to tolerate uncertainty and remain committed to the plan.
What the plan should leave out is a prediction about where markets are heading. Markets are unpredictable in much the same way life is unpredictable. Most people could not have accurately described their present lives 20 or 30 years ago, and they cannot know exactly what their lives will look like decades from now.
David says a good plan should create a feeling of safety. But safety does not mean avoiding every loss or disruption. It means having confidence that if life or markets knock you off course, you have enough flexibility to adapt and get back on track.
I ask whether peace of mind can therefore be considered part of an investor’s return. After David’s father died, he and his siblings discovered $15,000 in cash inside a safe-deposit box. His father had lived through the Great Depression and watched banks fail, so keeping that money close gave him a sense of security—even though it was financially inefficient.
David later calculated that the money could have grown to more than $1 million if it had earned the stock market’s return during either of two consecutive 40-year periods. The opportunity cost was enormous, but the security it gave his father was also real.
That story broadens the definition of wealth. Family, friends, and health often matter more than the number on a portfolio statement. As David puts it, his parents were wealthy; they simply did not have much money. A good financial plan should recognize those nonfinancial forms of wealth rather than treating portfolio value as the only score that matters.
Process over outcomes and controlling what you can (20:40)
Ken French has advised his children to judge themselves by the quality of their decisions rather than their outcomes. I ask David how investors can maintain confidence in a sound process when the results may look disappointing for years.
David begins with first principles. The anxiety investors experience during difficult markets is not separate from the returns stocks offer—it helps explain why investors expect to be compensated for owning them. If stocks never produced uncertainty or discomfort, they would not need to offer higher expected returns.
Over a long investing life, investors should expect severe downturns. A sensible plan will not prevent those losses, but it can prepare someone to determine what action—if any—is appropriate when they occur. Once an investor has made the best decision possible using the available evidence, the eventual outcome is beyond their control.
That does not mean an investment process should never be questioned. David says investors should continue monitoring the evidence behind their approach. If the underlying facts change or an important belief proves false, the process should change too. But he believes changes in an investor’s life—such as retirement, marriage, divorce, or a health event—are far more likely to justify a portfolio adjustment than short-term market developments.
David shares the story of his colleague Bryce Skaff, who suffered a heart attack and repeated, “Control what you can control,” on the way to the hospital. David applies the same principle to investing: Control what is controllable and manage the uncertainty that remains.
When circumstances become stressful, he returns to a short list of first principles: Plan rather than predict, control what you can, remain flexible, and judge the quality of the decision separately from its outcome.
True wealth, knowing when you have enough, and separating investing from gambling (27:13)
David tells the story of taking his daughter to Las Vegas for her 21st birthday. He set aside $600 for each of them to gamble, knowing in advance that losing the money was part of the entertainment.
They had a great time, and David felt he received his $600 worth of enjoyment. But he is careful to distinguish what they were doing from investing. Gambling is entertainment in which the odds eventually work against you. Investing is a long-term process designed to participate in the positive returns markets offer.
This becomes part of a broader discussion about “enough.” Accumulating money and using it well are different skills, and people sometimes become more anxious after acquiring substantial wealth because they become increasingly afraid of losing it.
We also discuss investors who enjoy selecting stocks, backing a neighbor’s business, or pursuing other speculative opportunities. David believes it can be reasonable to reserve a limited amount of money for those interests—he uses 10% as an example—as long as the investor maintains a sense of humor about the outcome and does not confuse speculation with the serious work of investing.
The larger lesson is that investors do not have to maximize every financial number. Money is valuable because of what it allows people to do with their lives, and sometimes the best use of a dollar is enjoyment rather than additional compounding.
Mac McQuown and the meaning of “keep on truckin’” (32:08)
We close with John “Mac” McQuown, David’s mentor at Wells Fargo and one of the central figures behind the development of the earliest index portfolios.
David remembers Mac as a polymath whose curiosity extended far beyond finance into farming, winemaking, and food. A restaurant Mac and his wife helped create would eventually earn three Michelin stars, an achievement that speaks to the breadth of his interests and ambition.
Near the end of his life, Mac called David to say goodbye and left him with one final instruction: “Keep on truckin’.”
To David, those words mean continuing to advance ideas that matter and refusing to give up. They provide a fitting close to a conversation about markets, uncertainty, and life: No plan unfolds exactly as expected, but progress remains possible when people keep adapting and moving forward.
Resources:
- Stay Calm: Learn to Embrace Uncertainty in Investing and Life
- Stay Calm Investing newsletter
- David Booth at Dimensional Fund Advisors
- Tune Out the Noise documentary
- EP 194: The Science of Investing and Tuning Out the Noise With David Booth
- The Investment Answer by Gordon Murray and Daniel Goldie
- Remembering John “Mac” McQuown
The Long Term Investor audio is edited by the team at The Podcast Consultant
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