There’s an idea which is difficult to shake off even for those that should know better. And it is the idea that complicated and arcane strategies are better than simple investment strategies. Thus the more complicated an investment strategy is, the more pride the proponent takes in it.
There are a few reasons I can think of that make this idea prevalent. The first one is that simple investing strategies, such as buying and holding stocks and government bonds, are crowded. With everyone doing it, the potential abnormal returns supposedly reduces. Another reason is the existence of unique individuals who have made fortunes by making large, risky bets on macroeconomic outcomes. The worst reason I can think of is that people want investing to appear more complex than it actually is so that they can appear smarter and command higher fees from clients.
The first reason appears to me to be the most valid. But as I discussed in an old post, the main purpose of investing is not to make you rich. It’s to ensure that you can meet your financial commitments as and when they are due. In that case it is better to go for methods proven over the long-term, even if it is crowded, than arcane methods. For more about this read this brilliant post by Cullen Roche.
The second reason is the easiest to dismiss. Yes, exceptional fund managers like George Soros and Ray Dalio exist but there is a reason why there are so few of them. The fact that Floyd Mayweather made millions from boxing does not mean that you will fare better by jumping into the ring instead of finding a regular job.
Even though I think the final reason is the worst, I can understand why it exists. People unfamiliar with investment sometimes are disappointed when they ask for financial advice and don’t get much beyond the importance of saving and buying stocks and bonds. This expectation can push investment advisers to play the part of alchemists – cooking up complicated investments to produce absurd returns. But I believe it is better to be honest and keep a client’s expectations realistic than to promise the moon and be exposed as either incompetent or fraudulent when you can’t meet it.
It is possible that these complex strategies could deliver more, but not everyone is suited for the risk. As I’ve said before, many people who claim they are willing to accept higher risk are actually unable to accept loss. A good example of this is the DKM saga in which a microfinance company collected about $30 million from investors with the promise of ridiculously high returns. The kind of pressure the investors in DKM have exerted for the return of their monies (which I believe they cannot fully recover) from the liquidated firm is an indication that they were never willing to accept the high risk that came with a promise of such high returns. Investment advisers should keep that in mind.
At the end of the day, meeting your financial goals is more important than how you meet them. When you’re able to retire comfortably, it would not matter that it was as a result of following the standard boring investment advice.
Further Reading
The stock market isn’t where you get rich by Cullen Roche
Simple vs Complex by Josh Brown
Don’t chase waterfalls with your money by Jerome Kuseh
The uncomfortable truth about investing by Jerome Kuseh