Who needs complexity?

There’s no need to complicate the business of investing

Some people are wedded to complexity. Not content to live an uncomplicated life they’re drawn to difficult situations, convoluted solutions and elaborate constructions. When it comes to investments some are attracted to the most complex and hard-to-understand products, often being drawn in by thinking that “complicated” is a synonym for “lucrative”. This isn’t always the case.

The complexity of some may mask the inadequacies of the product. In the past there have been a number of investment products which were marketed for their tax advantages rather than their investment merit. Other investment schemes, such as those made infamous by organisations such a Storm Financial (you can read about them here), used excessive borrowings and margin loans, as well as supposed tax concessions, to lure investors into a fee-heavy, and ultimately devastatingly poor, investment choice. The convoluted nature of the investment often makes for interesting barbecue conversations which can make some unsophisticated investors sound like masters of the universe.

On the other hand there are investors who are content to “get rich slow”. They usually opt for lower complexity, favouring indexed investment funds and low-risk investments over high-octane, high-risk products. Their conversations are a little less interesting because they’re not concerned with the latest investment fad or a supposed tax-advantaged agricultural scheme. There are many advantages of a lower-complexity approach, not the least of which is that there’s much less to worry about. Most people’s lives are busy enough and don’t need the added anxiety of fretting over market movements, interest rates, margin calls and global politics.

By periodically investing in an index fund … the know-nothing investor can actually outperform most investment professionals.

Warren Buffett, 1993

While a convoluted investment portfolio may sound sophisticated, it’s often the case that simple portfolios are best, even for the ultra-wealthy. Having a large amount of capital to invest doesn’t mean that the usual rules of investment no longer apply. A well-planned, broadly diversified investment portfolio  is still the best vehicle for long-term wealth accumulation. Lower complexity usually means lower fees so you get to keep more of your money and not give it away to a fund manager. Whose pocket do you want your money to end up in?

A slow and steady investment approach may not sound sophisticated and might not get so much attention at parties. After all, complexity can make you feel like a big-shot investor but the added burdens of finding time to manage and worry about your money may not be worth it in the return that you achieve.

The choice for investors is whether they can be content to choose an investment approach that, while appearing quite simple, gradually accumulates wealth over a long period. The “get rich slow” approach might not sound cool or hip, but even Warren Buffett is an advocate. Do you need a better endorsement than that?