It’s not just individual investors that fall prey to the complexity trap.
“Any intelligent fool can make things bigger and more complex… It takes a touch of genius – and a lot of courage – to move in the opposite direction.” -E.F. Schumacher
“Finnegan’s Wake” is a work by Irish writer James Joyce. It considered one of the most difficult works of fiction in the English language. Written in Paris over a period of 17 years, Finnegan’s Wake was Joyce’s final masterpiece. Almost every sentence is crafted to have double meaning. It’s so impossible to understand that you need a guide to follow while you read it. Regardless, the work is considered a masterpiece. Why is complexity so alluring?
Recently, one of our clients asked us to review his dad’s portfolio. Our client is the de-facto guardian for his elderly father. His dad unfortunately had already lost half of his life’s savings in very complex strategy. He told me, “the strategy is so sophisticated the advisor can’t even explain it.” Unfortunately, no unraveling of strategy can bring back these lost dollars. Over the years, we’ve come across many, so called “complex” investment schemes. People assume complex means sophisticated and sophisticated equates to higher returns. It becomes very easy to get conned by artful salespeople who are adept at sales, low on morals, and incompetent in finance.
In my business, I often speak with “wholesalers” of mutual fund and exchange traded fund companies. Wholesalers are used by investment companies to market and educate advisors on the merits of their product offerings. Their job is to create a persuasive case so that my firm may invest assets into their funds.
Nowadays, whenever I talk with a wholesaler, the conversation is a very complex, jargon-fueled, intellectual duel. For whatever reason, the investment community leans toward complexity when marketing portfolios and offering advice. Let’s face it, a venture capital investment on a Silicon Valley bio-med company that cures obdormition is far more attractive than investing in the low cost, plain vanilla index fund. Complexity sells, and investors typically choose the complicated over the simple. For the record, obdormition is the pins and needles sensation of numbness that occurs when one of your limbs “falls asleep.” While I doubt obdormition will garner any venture capital money, stranger things have happened.
Fortunately, simple has a footprint in the investment community. No investment company better exemplifies investment simplicity better than the plain vanilla index shop called Vanguard. In February, Vanguard surpassed $4 trillion in assets under management. Last year, Vanguard took in more money than the rest of the mutual fund industry combined (source: Morningstar). The top five mutual funds that took in the most money in 2016 were all, “simple to understand” Vanguard index funds (Source: Bloomberg). Full disclosure, I often work with Vanguard products. However, this article is not about promoting Vanguard, but rather, to illustrate investment simplicity is alive, well and thriving.
You’ll never hear anyone brag about simplifying their investment strategy at a cocktail party. While simple doesn’t make for a compelling sales pitch, simpler is likely the better route for most of us. Stay clear of complex strategies. When it comes to investing, never assume you’ll be rewarded with extra dollars by a factor of difficulty. Oscar Wilde once said, “Life is not complex. We are complex. Life is simple, and the simple thing is the right thing.” The moral of the story is advice doesn’t have to be complicated to be good. Keep it simple!