What Investors Need vs. What Investors Want

Last Friday Jim Cramer looked straight out of the telly screen and told me to read John Bogle's column in The Wall Street Journal. O.K.

A decade ago, Bogle notes, equity index funds represented only about 5% of the market value in the equity mutual fund universe. Now it's 17%. But the market share of conventional index funds, such as the Vanguard 500 Index Fund, has flattened off at about 10%. The new growth is coming from exchange-traded funds (ETFs).

ETFs such as "spiders" are a perfectly acceptable substitute for conventional index funds as long-term holdings, Bogle concedes. Trouble is, most ETFs focus on narrow market segments. (Would you believe a "HealthShares Emerging Cancer" ETF?) And speculators are trading them like mad.

The resulting commission costs and taxes, not to mention the inevitable poor timing, lead to inferior returns for the great majority of ETF traders.

Bogle hopes serious investors eventually will realize this is no way to make money. On the other hand, there's human nature to contend with:

Surely the amazing growth of ETFs says something about the focus of money managers on gathering assets, the marketing power of brokerage firms, the activities of financial advisers, the energy of Wall Street's financial entrepreneurs, and the willingness -- nay, eagerness -- of investors to favor complexity over simplicity, continuing to believe, against all odds, that they can beat the market.

What investors need to prosper is not, alas, necessarily what they want. You can see this conflict embodied in Jim Cramer himself, says Henry Blodget in this Slate column.

The Good Cramer, the Harvard Law grad who writes astute columns and apparently did OK running a hedge fund, is an adviser any long-term investor might want to seek out. But the Bad Cramer, the clowning TV showman who blends hot tips with sound effects, is the one that draws multitudes of viewers. To Blodget, the clash between needs and wants is clear:

The two Cramers—brilliant James J. and vaudeville comic Jim—embody the essential conflict in the American financial industry:the war between intelligent investing (patient, scientific, boring) and successful investment media (frenetic, personality-driven, entertaining).

Basically, that leaves us with two questions to ponder:

How do you give investors what they need without looking like such a do-nothing dullard that you lose their business?

How do you give investors what they want without doing irreparable damage to their financial health?

Do we hear any answers?