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 in order to make your living.
Calling someone “unsophisticated”, aside from being 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 policies can even be combined with crummy disability insurance policies and crummy long-term care policies these days. Yet some of the best tools available out there are so simple 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 their thoughts on simplicity:
“Everything should be made as simple as possible, but no simpler. The five ascending levels of intellect are: smart, intelligent, brilliant, genius, simple.”
“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.”
“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.”
“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.”
“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.”
“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 paper-work 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.”
“Simple almost always beats complex.”
“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.”
“Investing is simple. To be sure, you can make it ludicrously complicated.”
“The more real people I get to know, the more I am convinced the simpler the solution, the better the solution.”
“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.”
“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.”
“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.”
“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.”
“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. So 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!