Investing Unravelled: Removing Complexity From Financial Planning
What is it about human nature that causes people to look for complex answers over simple ones, particularly where money is concerned? Many people find money and investing hard, yet seemingly seek complexity, perhaps as a means of sidestepping the need to understand.
In my experience, when faced with two competing investment propositions people will usually opt for the most complex. This is despite numerous academic studies showing complex and expensive investment funds generally underperforming simpler cheaper ones.
It’s as though complexity is somehow superior to simplicity
Then there are those who consider themselves competent investors. They have a tendency to gather as much information as possible thus increasing the complexity. It’s as though complexity is somehow superior to simplicity, yet what happens is we reach a point where one cannot see the wood for the trees.
Looking back on my almost forty years as a financial adviser I’ve seen my own approach to investing turning full circle. I started with a scarcity of money and information, and consequently my options to invest were limited and simple. Over time my savings increased as did my options and inevitably I found myself drawn to increasingly complex investment strategies.
Today I see most information as merely noise. There’s little in my control, so I focus on the few things that are. My investment portfolio is simple, and low cost. This shift came over several conversations with a client during their 3 year tenure as a member of the Bank of England’s Monetary Policy Committee, which I’d like to share.
Little is in my control, so I focus on the few things that are.
This person had spent a lifetime working at the very heart of the City. They were steeped in the prevailing wisdom that you invested to ‘beat the market’ by speculating on shares which would outperform, or by choosing a fund manager to do that for you. The era of ‘star’ fund managers like Fidelity’s Antony Bolton and Invesco’s Neil Woodford was very much alive.
I don’t know whether sitting on the committee changes the attitude of all its members, I suspect it does, though perhaps not the Damascene conversion my client experienced.
Our several discussions can be summed up in this abridged version of one of our last conversations. I had been simplifying and consolidating their financial affairs and it was time to talk investment strategy.
“What happens is that eight times a year, for three and a half days, we hear from some of the brightest economists within government and from outside. They present data and hypotheses about the UK and Global economy, and we use this to set monetary policy”.
“Over time you conclude that nobody really knows what is going to happen. It’s mostly conjecture, and they spend as much time explaining why what they thought was going to happen six months ago, didn’t”.
“If the brightest minds from the best resourced organisations cannot accurately forecast what is going happen, what are the chances of finding anybody who will consistently beat the markets? Find me a low-cost global index tracking fund.”
This was heresy! Several years before Vanguard, the pioneering passive investment company came to the UK and before Warren Buffett won his bet that the S&P500 index would out-perform the smartest hedge fund managers over a ten year period. It did and he won.
Article written by Dennis Hall for Exeter Living Magazine.
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