By Dr. James M. Dahle, WCI Founder
I was accused recently of “not being sophisticated.” I had to chuckle a little bit because that is a criticism that is generally used by someone trying to sell you something. Indeed, once I looked into this particular case, it turned out the accuser is engaged in selling whole life insurance to his fellow physicians. What a terrible legacy that would be to get to the end of your life and realize that you spent a good chunk of it hoodwinking hard-working people dedicated to the service of others into buying a crummy financial product from your firm so you can make your living.
Calling someone “unsophisticated” in the financial space is one of the weakest of arguments—an ad hominem attack generally says more about you than it does about the person you are accusing. It tells others that you think complexity and sophistication are worth sacrificing your time and money for when, in reality, that usually is not the case.
Additional complexity generally results in more opportunity cost for your time, more taxes paid, more transactional costs paid, and more advisory fees paid. When it comes to personal finance and investing, the simplest products and methods are usually the best. When you start combining products, you often end up with the worst of all worlds.
Whole life insurance is the classic example—you get a crummy insurance policy combined with a crummy investment. These days, these policies can even be combined with crummy disability insurance policies and crummy long-term care policies. Yet some of the best tools available out there are so simple that a 4th grader can explain how they work:
- Term life insurance policies
- Index mutual funds
- Single premium immediate annuities
- A rental property
- A Roth IRA
- A Health Savings Account
Simple, but powerful.
I'm hardly alone in my belief that the simplest way to accomplish something is often the best way. Let's consider a few wise people and read their thoughts on simplicity:
Albert Einstein
“Everything should be made as simple as possible, but no simpler. The five ascending levels of intellect are: smart, intelligent, brilliant, genius, simple.”
Jack Bogle
“The great paradox of this remarkable age is that the more complex the world around us becomes, the more simplicity we must seek in order to realize our financial goals. Never underrate either the majesty of simplicity or its proven effectiveness as a long-term strategy for productive investing. Simplicity, indeed, is the master key to financial success. I look at indexing as being simple and, sad to say, boring. Be bored by the process but elated by the outcome. In Vegas, it’s the opposite. You’re elated by the process, by the moment, but you’re bored by the outcome because you know exactly what it will be. The more you bet, the more you lose. Investing shouldn’t give you a rush.”
Warren Buffett (on Bogle)
“If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade . . . Jack was frequently mocked by the investment management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”
Warren Buffett
“To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing, or emerging markets. You may, in fact, be better off knowing nothing of these.”
Christine Benz, a WCICON23 keynote speaker
“Simplicity is one of the greatest—but in my view, woefully underrated—virtues when managing a portfolio.”
Mike Piper (on his one-fund retirement portfolio)
“The change my wife and I made was to move every dollar of our retirement savings over to Vanguard’s LifeStrategy Growth Fund. It’s now the only fund in our individual 401(k) and our IRAs. The primary reason we made the change was to defend against what I’ve come to see as the biggest threat to our investment success: me. To be more specific, it’s my temptation to tinker that scares me. Because of my work, I’m constantly reading about different investing strategies. Most, of course, are nonsense—nothing more than methods of using the stock and bond markets as a lottery. But there are still countless ways to invest that are reasonable. And when I go to rebalance our portfolio, I’m often tempted to make little changes. Most such changes would probably be fairly benign, but my fears are that:
- One day I’ll do something truly stupid, or
- I’ll bounce back and forth between reasonable allocations, but do so at exactly the wrong times
My hope is that this automatically-rebalanced, everything-in-one-fund sort of portfolio will keep me from such temptations—both because I won’t have to execute any transactions other than buying more of the same fund and because that fund is an explicit reminder to myself that I’m not supposed to mess with anything. I see two other benefits as well:
- It’s less work, and
- It puts my money where my mouth is, given that the whole point of this blog is to show that investing in a simple, hands-off way really can be quite prudent.”
Rick Ferri
“Don’t assume that a complex strategy is better than a simple strategy. The only thing extra complexity is likely to add is extra cost.”
Laura Dogu
“A simple portfolio is actually the ultimate in sophistication. It almost always lowers cost (including taxes), makes analysis easier, simplifies rebalancing, simplifies tax-preparation, reduces paperwork and record-keeping, and enables caregivers and heirs to easily take over the portfolio when necessary. Best of all, a simple portfolio allows the investor to spend more time with family and friends.”
Morgan Housel
“Simple almost always beats complex.”
Jean Chatzky
“The problem with so much personal financial advice is that it's unnecessarily complicated, often with the goal of selling you something you don't need.”
Jonathan Clements
“Investing is simple. To be sure, you can make it ludicrously complicated.”
Bill Bernstein
“The more real people I get to know, the more I am convinced the simpler the solution, the better the solution.”
J.L. Collins
“The more complex an investment is, the less likely it is to be profitable. At best, they are costly. At worst, they are a cesspool of swindlers.”
Benjamin Graham
“If you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse. In the stock market, the more elaborate and abstruse the mathematics, the more uncertain and speculative are the conclusions we draw therefrom.”
Nassim Taleb
“Don't be enticed by complex investment products that are created by incomprehensible mathematics.”
Henry David Thoreau
“Our life is frittered away by detail. Simplify, simplify.”
Michael LeBoeuf
“Simplicity in investing does not generate fees and commissions. That's the problem financial salespeople have so they try to make investing seem complicated.”
Jane Bryant Quinn
“You shouldn't buy anything too complex to explain to the average 12-year old.”
Scott MacKillop
“People who don’t know any better equate complexity with sophistication. But truly it takes more sophistication to build elegantly simple portfolios.”
I think that's enough to make my point clear. All of these respected investing experts say sophistication and complexity does not beat simplicity and low cost. The next time someone calls you and your investing techniques boring, simple, and unsophisticated, know that you're in good company. If you want to call me unsophisticated, I will reply, “Guilty as charged.”
But that is not because I don't understand how the financial world works; it's because I do.
What do you think? What is the value of simplicity in your financial life? When have you been misled by a complex product or investment? Comment below!
One of my favorite things about our financial life is how simple it is. I can explain it to my wife and kids and they can readily understand it. No debt (including house/cars/credit cards), 3 index fund portfolio, paid off rental property, savings/checking account, term life insurance, Roth IRA, HSA. Absolutely nothing exciting but the peace of mind (and returns on investment) are priceless. Before WCI, I fell into the trap of thinking I needed advanced expensive assistance to manage a complex financial life. The reality is exactly the opposite.
I totally agree! I think this is true in medicine and finance as well – there are people who are complexifiers and people who are simplifiers. And usually the complexifiers selfish goal is just to make it seem like they are the only ones who can do something. I’ve always sought out simplifiers who can break down to basic principles and skills.
I like Rick Ferri’s description of the Four Phases:
Not all of us go through all four, but I did.
“A successful index fund investor goes through four phases:
1) Darkness – takes advice from everyone;
2) Enlightenment – realizes a market return is superior to their return;
3) Complexity – overdoing everything to find optimal;
4) Simplicity – invests in a few total market funds.”
Not sure I completely agree with Rick on this point, but there is some wisdom there. Or maybe I’m just still somewhere between # 3 and # 4.
25+ years of investing, and I still respond exactly the way you describe to Ferri’s 4 stages. There is some wisdom there, he hit the big target, but I’m not convinced he hit the bullseye. Maybe I’ll end up at #4, and conceptually I think I’m in the ballpark – but I maintain a “slice and dice” portfolio that I hope will drive long term value. Only time will tell.
Simplicity is good, but the right balance of simplicity/complexity depends on the area of finance IMO. Investments is actually one of the *least* interesting areas of personal finance for me. When I go on Bogleheads, 90%+ of the time I click on the Personal Finance forum because I find those issues more interesting. My portfolio has 7 different asset classes, which are optimized for asset location, so this was a fair bit of work to set up, but I wrote an Excel macro to help rebalancing, so the maintenance workload is minimal. Most folks will do fine with even fewer asset classes, and frankly asset location is only a small effect in performance which most investors can ignore, especially with bond yields where they are today.
On the other hand, I’ve done some pretty complex analysis when it comes to taxes – choosing traditional versus Roth when the better choice isn’t obvious, optimizing Roth conversions, and also some estate planning tax projections. For Roth conversions, I built a custom spreadsheet that took in marginal tax rate tables, and used a macro plus Excel’s built-in “Solver” optimizer. But the result was finding a ~10% tax savings ($2.0M vs. $1.8M after 10 years) so I’d say the juice was worth the squeeze. I’m an aerospace engineer, so I don’t shy away from this sort of thing, maybe even (perversely) enjoy it.
Another quote, this one for the accuser.
Upton Sinclair
‘It is difficult to get a man to understand something, when his salary depends on his not understanding it.’
That quote can cut both ways, of course.
I don’t think your investment strategy is simple. You have what, 15+ accounts? tsp, 401k, HSA, IRAs, taxable, for each kid Roth, 529, and UTMA. you tax loss harvest, donate appreciated securities, tilt towards small value, rebalance, have a written financial plan, etc. That doesn’t sound simple to me. But it is low cost and historically very successful.
The more accounts you have, the more you need a simple asset allocation.
“So the next time someone calls you and your investing techniques boring, simple, and unsophisticated”
I don’t think your investment techniques could reasonably be called any of those. Even your asset allocation isn’t. You have private equity real estate.
And yet, I’m called unsophisticated because I don’t buy whole life insurance. Go figure.
Most insurance salespersons get out of the business after they’ve gone through their list of family and friends.
Via email:
I agree 100%. I have taught for over 36 years about investing to adults. It is strictly a consumer course taught by a non-commissioned person.
I have noticed over the years, the more financially educated people are, they tend to want the more complicated products because the commissioned people push it on them. The average person wants to hear all about basic index and balanced funds and companies like Vanguard.
Yea, it’s hard to know what level of sophistication/extra work & expense is worth the benefit.
Here’s some extras that seem worth considering. I only do some of these and wonder if I should do more:
– back door Roth
– rebalancing??? (I only kid of do this)
– taxing a business entity as S-corporation instead of sole proprietor
– owning a taxable brokerage account (for some reason I’ve been hesitant on this… need convincing)
– donating appreciated shares or donor advised fund.
– setting up 401k as a business owner
– child savings (529/ugma/utma)
What are some other good ones I’m missing.
Another quote I find useful in investing, and life:
“The enemy of a good plan is the dream of a perfect plan.”
― Prussian General Karl von Clausewitz, 1832.
No plan survives first contact with the enemy.
–Moltke the Elder (and more famously, Dwight Eisenhower)
“Everyone has a plan until they are punched in the face”
M. Tyson
I thought I’d mention one more source, the excellent book on the topic published by Harold Pollack, a University of Chicago economics professor called – “The Index Card: Why Personal Finance Doesn’t Have to Be Complicated.” Not schooled in personal finance, he was thrown into the world of personal finance due to life circumstances, and eventually concluded all the things that regular readers of this blog know.
He and his co author purport that everything you need to know about personal finance can be written on an index card:
1) Max your 401(k) or equivalent employee contribution.
2) Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20xx funds.
3) Never buy or sell an individual security. The person on the other side of the table knows more than you do about this stuff.
4) Save 20% of your money.
5) Pay your credit card balance in full every month.
6) Maximize tax-advantaged savings vehicles like Roth, SEP and 529 accounts.
7) Pay attention to fees. Avoid actively managed funds.
8) Make financial advisors commit to the fiduciary standard.
9) Promote social insurance programs to help people when things go wrong.
There are 2 excellent podcasts interviews of the author and are available at Freakonomics.com with Stephen Dubner and at Bloomberg’s Masters in Business podcast with Barry Ritholz. More evidence that when it comes to personal finance, complexity almost assures you are paying too much.
– Dr. Scott
I love simplicity. Whenever I go out, I avoid wearing fancy clothing, even if people perceive me differently as a result. I love the peace of mind that comes with it more so than what other people think of me.
When simplicity translates over to investing, that’s when you can truly start consistently winning over the long term.
I definitely love simple! My wife and kids are complicated enough!
Yeah, I feel simple is just a lot less stress and anxiety, whereas complicated investing adds a lot of vulnerability to make mistakes via emotional decisions, etc.
For me personally I feel like simple investments have made far bigger returns for me than complicated ones. And it’s less work.
Simple is superior! This made me think of Harry Sit’s excellent pineapple article. Two of my favorite personal finance writers 🙂
Thanks for your kind words. Here’s the pineapple article for those interested:
https://thefinancebuff.com/make-fewer-things-matter.html
This reminds me of when I was taking advanced math classes in engineering school and I eventually realized that my professors were using “elegant” as a synonym for “simple.”