Why Investors Should Keep it Simple

Unlike fund managers, everyday investors don't need to consistently outperform rivals, they just need to take logical investment decisions

John Rekenthaler 19 April, 2018 | 8:32AM
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Professional investment managers who have time, resources, and high financial rewards on their side, should be able to outperform 99.9% of their amateur peers, at a bare minimum.

That they probably can. The problem is, outdoing 999 of 1,000 rivals doesn’t get a fund manager very far. If there are 10 million involved investors, then that 1-in-1000 camp possesses 10,000 members. Having the insight to invest simply used to suffice for fund managers. Being a poor man’s Warren Buffett was plenty. Today, there are too many managers who fit that description.

The competition among them has become too steep. Unlike professional managers, who cannot thrive at their roles unless they frequently and consistently out-think the wisdom of the crowd, everyday investors need not be brilliant. They are not required to beat others. Their task is keep things simple, so that they don’t beat themselves.

Which means avoiding the avoidable errors that arise from rushed decisions. The whole idea of long-term investing is to align one’s portfolio with the odds. That means: 1) holding securities that figure to outperform cash more often than not, and 2) keeping costs very low while doing so. That sounds so obvious as to be useless. Yet many fail to observe those rules.

Avoiding Emotional Decisions

Some err by not investing, although they have surplus cash. Others are overly cautious with their retirement assets. Others yet overreact to bear markets. Listening to arguments that previous market conditions no longer apply, so that the maths that historically has favoured equities will not do so in the future, is an emotional decision rather than a logical choice.

With fund costs, much progress has occurred. Whereas two decades ago I would have written that the most fund investors overlooked the damage caused by high investment expenses those times have changed. Jack Bogle, after all, has become the fund industry’s best-known commentator. Still, many investors overcomplicate their lives – and sometimes their taxes – by churning their portfolios.

To the two above items, I would add a third: chasing non-financial assets. Examples including flipping houses, purchasing bitcoin, and trading gold bullion. Many people have made their fortunes in such fashion. However, those are mostly intuitive investments; indeed, I would hesitate to call them “investments”. Such purchases are supported by few – if any – calculations. They replace the transparent logic of owning equities or investment-grade bonds with a decision that is largely emotional.

That strategy can work out well. Investing intuitively does not automatically mean failure. Such an approach certainly has a higher success rate than would picking cards at random. However, keeping things simple has historically been the better option, although not always the easiest to follow.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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John Rekenthaler

John Rekenthaler  is vice president of research for Morningstar.

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