How Lawyers Can Beat Wall Street (and Most Financial Advisors) (Ep. 142)
If you’re a law firm owner juggling the demands of growing your practice and planning your financial future, you’ve probably wondered: How am I supposed to handle investments on top of everything else? The good news is, you don’t need to be a Wall Street hotshot or spend hours studying financial charts to build lasting wealth. In fact, the smartest investing strategies are often the simplest and the most effective.
In this episode, we’ll break down the essential investment lessons every ambitious attorney needs to know. We’ll explore how a straightforward portfolio of index funds and smart diversification can outperform complicated, actively managed strategies. These methods aren’t just easier, they’re proven to build long-term financial security.
Why Law Firm Owners Need a Simple, Efficient Investing Strategy
Many law firm owners focus on the day-to-day of running their business, assuming their “big cash out” will come when they sell their practice. However, as Darren Wurz points out, only a small fraction of law firms actually sell for substantial sums—and even if they do, the proceeds rarely replace your current cash flow. The realization can be sobering, especially if you’re counting on that sale for retirement.
That’s why starting early and consistently investing outside of your business is critical. The right investment approach means your wealth grows independently, giving you flexibility, peace of mind, and true financial freedom.
The Truth About Active Investing and “Hot Stock Picks”
Let’s clear up a common misconception: most professional fund managers do not beat the market. Stock-picking and market-timing might sound exciting, but the data proves they underperform about 99% of the time. As Darren Wurz shares, getting lucky on a single stock, like Nvidia, is usually just luck, it is not a skill you can repeat.
Why? Because financial markets are what experts call “efficient.” This simply means the prices of stocks already reflect all known information so it’s nearly impossible to consistently outsmart the market. Even investing legends like Warren Buffett and Benjamin Graham recommend that most investors stick with index funds.
The Power of Index Funds and Diversification
So, what are index funds, and why should law firm owners care?
An index fund is a simple, low-cost investment that tracks the performance of a wide range of companies, such as the S&P 500. You don’t need to pick winners instead, you buy a slice of the entire market. This “boring” approach actually outperforms most actively managed portfolios over time.
But there’s more: Modern Portfolio Theory shows that you can maximize returns and reduce risk by diversifying such as holding different types of assets that don’t all move in the same direction. For example, large U.S. stocks, small company stocks, international stocks, and some bonds. When one part of your portfolio lags, another may be rising. The overall result? More steady growth, with fewer nerve-wracking swings.
Think of portfolio building like assembling a strong legal team: you want balance, not dependence on a single superstar.
Bonds: Not Just for Conservative Investors
You might think bonds are boring or unprofitable. But adding a modest amount of bonds to your investment mix is about reducing risk not shooting for flashy results. Bonds help stabilize returns during market downturns, so your portfolio weathers all kinds of economic storms.
How to Build a Successful Law Firm Owner’s Portfolio
Here’s how you can put these strategies to work right now:
Keep it Simple: Avoid a long list of expensive, actively managed mutual funds. Instead, focus on a handful of broad index funds or ETFs that cover the main asset classes: large-cap, small-cap, international, and bonds.
Review Your Portfolio: Log into your investment accounts and take a look. If you see dozens of overlapping, high-fee funds, it might be time for a change.
Seek Professional Guidance: If your investments feel confusing, a straightforward conversation with an advisor who understands the needs of law firm owners can help you clarify and optimize your strategy.
Stay Consistent: The secret to wealth isn’t timing the market—it’s sticking to a disciplined plan year after year.
Make Your Wealth Plan Work for You
Success doesn’t come from chasing the next big tip, it comes from building a resilient, systematic investment plan. By focusing on low-cost index funds, smart diversification, and steady discipline, you put the odds firmly in your favor.
Resources:
A Random Walk Down Wall Street: The Best Investment Guide That Money Can Buy by Burton G. Malkiel
The Lawyer Millionaire: The Complete Guide for Attorneys on Maximizing Wealth, Minimizing Taxes, and Retiring with Confidence by Darren Wurz
Connect with Darren Wurz:
Transcript:
Darren Wurz [00:00:00]:
Guess what? You don't need to be a hedge fund manager to make a killing on Wall Street. Nor do you need to pick the next Nvidia. A collection of boring old index funds will do the trick. In fact, you'll do better than 99% of the fund managers and investment advisors that are out there. Well, today we're talking about the efficient market hypothesis and modern portfolio theory. What it is, what it means, and how you can use it to optimize your portfolio's performance. Now, don't lose me just yet, because I know I said a bunch of big words, but I'm going to break it down and make it really, really simple for you and give you some key steps that you can take to be very successful long term with your investments. If you're ready to master your money, you're in the right place.
Darren Wurz [00:00:49]:
And why does this matter to you? You've got enough to do managing your law practice. Why do I need to be bothered with the efficient market? Whatever it was? Well, good news, friend. We're not here to make more work for you. You won't have to scour pages of the Wall Street Journal or spend hours glued to an Excel spreadsheet. In fact, this will save you a lot of time and more importantly, a lot of money. You see, investment mistakes cost a lot, and the cost is usually not obvious. It's the opportunity cost that really is the gotcha. You know, missing just a few percentage points of return can add up to tens of thousands, even hundreds of thousands, even millions of dollars over time.
Darren Wurz [00:01:39]:
Trust me, I've seen it. I've seen investors who tried to time the market and wound up broke. Warren Buffett's biggest advantage was that he started young and stayed consistent. He wasn't effing around. More importantly, you need to grow wealth in the stock market, my friend. You desperately need it. I talk to so many law firm owners who are getting close to retirement age and don't have a lot of invested assets. They're depending on the future sale of their law practice.
Darren Wurz [00:02:17]:
And to be quite honest, many of them are a bit delusional. And that's okay. Maybe you're suffering from a little bit of delusion as well. But there's so many law firm owners, and a lot of other business owners, too, who think they're going to cash out for this enormous sum. The truth is, professional services businesses, while they can sell, they don't command high multiples. And most law firms are just not sellable. Even if you can sell your practice, the money you get will not replace the cash flow that you're used to. I am dealing with this right now with one of our clients who is trying to sell 25% of his practice to a junior associate and make that person a partner.
Darren Wurz [00:03:10]:
And it sounds great and it's a, you know, great long term plan to kind of transition ownership slowly. There's a lot of good things here. But what this person realized is that, oh, crap, that means that 25% of profits aren't going to go to my pocket, they're going to go to the other attorney's pocket. Yes. Because that's what means, what it means to be a 25% owner. You're going to get 25% of the distributions. Hmm. Well, when he thought about how much he was going to originally he was going to just give away 25%.
Darren Wurz [00:03:48]:
Big mistake. And then we looked at what the actual valuation was and what was a reasonable number. But even that, he's like, well, I'm only going to get that. That's not going to be anything compared with what I'm used to receiving from the business. You need another source. You need investments. The best retirement strategy, the best risk management strategy, the best fallback strategy, a big old pile of cash. So let's dive into it.
Darren Wurz [00:04:19]:
You know, what is the efficient, what was it? Efficient market hypothesis. I jest. What does it mean and how can law firm owners apply it? Well, on this show we've been talking about lessons from one of my favorite books, A Random Walk Down Wall street by Burton Malkiel. And we're actually reading this book right now in our community. And if you want to get in on our next masterclass event in December, be sure to check the show notes for that link. We're going to be talking about a lot of great takeaways from the book. That'll be our book discussion coming up in December. And you'll have a great chance to meet a lot of other great law firm owners from around the country.
Darren Wurz [00:05:04]:
But as we've been discussing this book on this show, we've learned that stock picking is really a loser's game. We learned that fund managers, and there's two reasons why. Number one, it's hard to pick the right stocks. Number two, a great strategy that's often used is to just pick the stocks that are hot because everyone else is picking them well. As we've learned, looking back through all of the bubbles and crashes of history, that that does well for a period of time and then the party stops and it's always the Same thing. And every single time it happens, investors in Wall street think, this time it's different. Those are the four most dangerous words in investing. We also learned that fund managers and active traders underperform the market almost 99% of the time.
Darren Wurz [00:05:59]:
Some funds do outperform. Some people get lucky. You hear like, but wait, my neighbor made a killing in Nvidia last year. Yes, some people get lucky and they pick the right stocks. The same number that we would expect though from random chance. And that's what we talked about last time. Statistically, it is not a statistically significant variable. Active management is not a statistically significant variable.
Darren Wurz [00:06:31]:
If you've studied statistics, you know what that means. You think back to your statistics course in college. If you took one, maybe you didn't, but anyway, it means that adding that component makes literally no difference when we look at the broad data set. And that's what we need to do. Not hone in on specific anecdotal evidence. But many times investors who think they're geniuses are just getting caught up in the crowd and they will learn their lesson at some point. So efficient market hypothesis is what, what comes out of all of these realizations? It's the conclusion, the conclusion that we arrive at, which is that information is already priced into the market. The market already knows what everyone knows.
Darren Wurz [00:07:21]:
It's impossible to gain an edge. And any edge that you can gain by signals or patterns or reading the tea leaves gets arbitraged away. And arbitrage just means that other investors are going to hop on it before you do and you're never going to be able to use it. The market is basically efficient. Those signals and patterns and, you know, things that maybe used to work once upon a time don't work anymore because they are ultimately self destructive. They destroy themselves inherently. And here's why. Nobel laureate Paul Samuelson said it best when he wrote, if intelligent people are constantly shopping around for good value, selling those stocks they think will turn out to be overvalued and buying those they expect are now undervalued.
Darren Wurz [00:08:16]:
The result of this action by intelligent investors will be to have existing stock prices already have discounted in them, an allowance for future prospects. That means if stock A is expected to double in value next year, there's no reason it shouldn't double in value today. Right? So it's, it's the profit maximizing behavior of individuals. If everybody's trying to maximize profits and everybody's trying to buy things that are undervalued and sell things that are overvalued. The net result is nothing's undervalued and nothing is overvalued unless everybody has different opinions. But basically, the market is efficient. Legendary investor Benjamin Graham, maybe you heard of him, 1976, wrote this after a long and very successful career in stock picking, essentially. And he used fundamental analysis, which we talked about before in the show, and he was pretty good at it.
Darren Wurz [00:09:16]:
But in 1976, as markets became more and more efficient, he said this. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago. But the situation has changed. Warren Buffett himself has advocated that most investors would be better off in an index fund. And guess what? He has directed that his estate will be invested solely in index funds. So if the market is efficient, what do we have? How can we build a portfolio? Just buy index funds? Well, there is a new investment technology called modern portfolio theory. And Burton Malkiel talks about this in the book.
Darren Wurz [00:10:10]:
I'm just going to break it down for you quickly because, you know, if we went into the math of how it all works, I am sure I would lose you. So modern portfolio theory is simply a framework for how you build an investment portfolio to maximize return for a given level of risk. We want to optimize the risk return ratio. More return, less risk, as much return as possible at a given level of risk. It's about not putting all your eggs in one basket, but also about doing that scientifically and mathematically. So the basic theory is that there is a way to combine assets, a ratio at which you arrive at this maximum return, minimum risk point. This idea was introduced in 1952 by economist Harry Markowitz. His paper portfolio selection revolutionized investing and later won him a Nobel Prize.
Darren Wurz [00:11:08]:
So what does modern portfolio mean in practice? Well, the core idea is diversification. You have a portfolio made of a variety of different index funds representing a variety of different assets. Mixing assets that don't move in the same direction reduces risk without sacrificing return. That's the key element. So a great example is large caps and small caps. The S&P 500 is large caps, the 500 largest capitalization companies in the United States. The Russell 2020is small caps. It's the 2000 smallest capitalization companies in the United States.
Darren Wurz [00:11:51]:
Now, you know, markets tend to be very correlated, right? So think Covid crash. You know, think the big surge after Covid, right? Markets tend to move pretty synchronously. But there are a lot of times when Large caps behave differently than small caps. We call that being non correlated. And we can measure the degree to which two assets are correlated or not. And we want two assets that are going to both give us a generous return, but we want them to have a low correlation because that means that together we can get our great rate of return, maybe even a better, slightly better rate of return, and we can reduce the overall risk of the portfolio. Huh. You can take something like small caps are considered generally a little bit more risky than large caps.
Darren Wurz [00:12:50]:
You can take small caps and large caps, combine them together and come up with an overall portfolio that's actually less risky than either of the two by themselves. Same thing with domestic and foreign. Now I hear, ya know, there are periods of time where one performs a whole heck of a lot better than the other. Small caps have been unloved for some time. International has been unloved for some time. This is not about what happens in any one particular year. This is about what happens over decades. This is about designing a portfolio that's going to be resilient over time and give you the most optimal rate of return over time at the lowest, hopefully lowest level of risk potentially.
Darren Wurz [00:13:39]:
Now you can also bring in bonds, right? So bonds are non core, you know, not very correlated. I should say to stocks they behave differently. Usually when stocks go down, bonds go up. You know, it's a fear response. You get a flight to safety. And so by combining the two together. Now I hear a lot of people say I don't want bonds in my portfolio because bonds suck. I've invested in bonds.
Darren Wurz [00:14:05]:
You know, I never made any money in bonds. Probably not, you know, but that wasn't the point. That's not the point. That's never the point of putting bonds in your portfolio. The point of putting bonds in your portfolio is to reduce the risk level, stabilize the returns over time. So that is the point. And the reduction in risk can be dramatic. So you know, it can really, really greatly reduce the risk just by having a small amount of bonds in there.
Darren Wurz [00:14:40]:
And it can actually produce a portfolio that gets you a greater return and less amount of risk than just adding up the two together or averaging the two together. I should say it's like building a strong legal team if we want to compare it to law firm ownership. You don't want to rely on any one superstar. You want to build a balanced team where each person covers different areas and specialties. A well diversified portfolio works the same way. The pieces complement each other so that the whole system is, is stronger than any Single part. Instead of trying to pick winners, instead of trying to be, oh, I think tech is going to do that really well this year. Let's buy a tech fund.
Darren Wurz [00:15:26]:
Or I think small caps are going to do really well next year. Let's buy small caps instead of trying to pick winners. Winning asset classes. Modern portfolio theory focuses on structuring the right mix so that your money grows consistently over time with less volatility. This reduces the emotional roller coaster of typical investing and it protects your wealth while still generating generous long term returns. It also makes investing systematic and strategic and not reactive. And that's what we want. We want a portfolio that's going to be resilient.
Darren Wurz [00:16:04]:
Now we, you know, us, large cap has done tremendously well over the last 10 plus years. There was a moment we thought international was coming back, you know, the beginning of this year. We, you know, so, but that may not be the case next year. We just don't know. And that's the point. We don't know who the winners are going to be long term. So we want to build a portfolio that combines a variety of ingredients that can give us a great rate of return and manage our risk effectively. So what should you do with this information? Well, look at your portfolio, look at your investments.
Darren Wurz [00:16:44]:
I want you to do that today. Today when you get home, I want you to open up your investment account. Your Schwab, Fidelity, Merrill lynch, wherever it is. Look at your investments. If you have 100 different actively managed mutual funds, your financial advisor is committing malpractice. I'll say it. I will stand by those words. I will stand by those words.
Darren Wurz [00:17:10]:
That is a disgrace because it's been disproven scientifically and mathematically that that is not a smart and efficient way to invest. You're just loading yourself up with unnecessary fees. Do you have, you should have a simple list of index funds or index ETFs that cover all the basic components. Large cap, small cap, international, domestic, maybe some bonds and maybe some of those can be broken down into smaller sub components as well. That is a good portfolio. Now if you're looking at your accounts and you're like, what the heck is going on? Give me a Book a call with me. The link to book a call with me is in the show notes. I'd be happy to review your investments with you and give you my honest to goodness opinion.
Darren Wurz [00:18:05]:
Okay? Now another way to do it would be to own stocks. You could do something we call direct indexing, which is instead of owning an index fund, you try to create Your own index by owning a hundred representative companies of the S&P 500 or something like that. That is actually a really good strategy for a variety of reasons that we won't get into right now. Fractional ownership, zero commission trades has made that possible in today's world for a lot of people. But index funds will do just fine. And you know, there's a question I get all the time, actually, I got this question today, so I want to answer it. What's the difference between a mutual fund and an etf? They're the same almost. Mutual funds only trade at the close of market.
Darren Wurz [00:18:53]:
Okay. ETFs, which stands for exchange traded funds, trade during the day. Now, we won't get into the mechanics of exactly how they work, but just know this. ETFs tend to have even lower expense ratios. In many cases they can achieve lower expense ratios. And there are passive indexed mutual funds just like there are passive indexed ETFs, right? So in that regard they are pretty much the same. Success in investing is not about luck or talent, although those are nice to have. It's about practice.
Darren Wurz [00:19:31]:
It's about discipline. It's about using the right skills. It's about learning the lessons of everyone who's come before you, who's ever invested. I'm literally giving you the blueprint for being a successful investor. Don't get swayed by market timers, the day traders, the insurance salesperson, hocking complex insurance products or annuities, or the investment advisor pitching complicated things you've never heard of, like derivatives or options. Repeat after me. Index funds. Boring is the way.
Darren Wurz [00:20:10]:
Boring is better. Now my friend, if you want help growing your business and your wealth, schedule a call with me. You know here at the Lawyer Millionaire, we are your one stop shop. Your total financial and business team. When you work with us, we give you the whole team. A business coach, a certified financial planner, a cpa, an investment advisor, bookkeeper, et cetera. We're like your private family office designed exclusively for law firm owners. Now, if you want to get a taste of what we're like and you want to get to know us a little better, join our community.
Darren Wurz [00:20:49]:
The link is in the show notes. You can go to it real easy. It's community.lawyermillionaire.com Remember my friend, the ultimate form of wealth is freedom. I'm your host, Darren Wurz. This is the Lawyer Millionaire. I'll see you next time.