In my last post, Why Simplicity Beats Complexity, I covered why simplicity often beats complexity, especially when investing. To quote myself: “Simplicity is … the art of designing good, simple habits you can effectively implement and readily sustain.” This keeps you on track toward your personal financial goals, with minimum fuss and maximum cost-management. But simple investing is not quite that simple.
Why doesn’t everyone invest simply? Because simple investing isn’t easy. We’re often done in by a host of human habits like fear, greed, loss aversion and herd mentality. These and many other instinct-driven biases trick us into abandoning our good, simple investing plans whenever the next “all you need to do …” trend comes along.
“All you need to do is buy some dividend-paying stocks and you’ll have the income you need.”
“All you need to do is buy a few ETFs and you’ll be all set.”
“All you need to do is buy a couple hours of financial advice to get you up and running.”
While dividend-paying stocks, ETFs, and hourly advice might still have valid roles to play in your plans, these sorts of “how to invest” fads shouldn’t override why you’re investing to begin with. Plain and simple, your “why” should be guided by your long-term financial goals, like how much wealth you’d like to create or preserve over what period of time. Your “how” should be grounded in robust academic evidence and time-tested solutions.
Unfortunately, the data tells us investors are often unable to take it easy on hyperactive trading. For example, a 2017 Vanguard white paper, “Principles for Investing Success,” found that investors would move in and out of mutual funds and ETFs alike in reaction to market mood swings. They’d also pile into and out of funds according to recent Morningstar ratings. Instead of patiently embracing an efficient, long-term discipline, they were buying hot, high-priced funds and selling them low, after they’d cooled off.
Vanguard concluded (emphasis ours): “Investors should employ their time and effort up front, on the plan, rather than in evaluating each new idea that hits the headlines. This simple step can pay off tremendously in helping them stay on the path toward their financial goals.”
Simple investing? You bet. Easy? The evidence suggests otherwise. That’s why I prefer to work with families upfront and ongoing with respect to their planning and investing. That’s the only true way I know to ease their way over the long haul.