The Cost of Complexity

They say simplicity trumps complexity. I’m a big believer in that statement, especially when it comes to the investment world. The financial world is a big bullshit machine. Our industry is simply trying to sell shit to investors and profiteer during the process. Facades, charades, charlatans, smokes and mirrors is the game. Here one day, gone the next.

I get it. The scarcity. The exclusivity. The complexity. The money. It’s all enticing.

The most recent National Association of College and University Business Officers (NACUBO) Study of Endowments was released a week ago. It’s based on 802 U.S. college and university endowments and affiliated foundations, representing nearly $617 billion in endowment assets.

These are some of the largest, most sophisticated and powerful endowments from around the world. The resources at the finger tips of these institutions are incredible. They have specialist teams dedicated to analysing sectors and stocks – their job is to analyse investments every-single-day. They employ economists and strategists who are some of the brightest people in the finance world. Their investment committees and boards include some of the world’s most highly educated and connected people. These people spend their days meeting money managers and undertaking due diligence on investment opportunities, both locally and globally.

They’ve literally got one job. To make great investment decisions. That’s it.

Here’s how they performed:

Here are some relative indices for comparison:

Here are the funds’ asset allocation:

These funds have not only over-complicated their investment strategy, but they’ve also taken on more risk, yet achieved a lower rate of return. For reference, a Vanguard 10/90 (defensive/risky) portfolio returned 9.70% and 7.10% pa over 5 and 10 years respectively.

The more sophisticated a system and strategy, although it may appear attractive on paper, often fails to bear fruit. Why? The people behind them and their (and your) behavioural errors – buy high, sell low, derails the most seasoned investor. Your IT help desk actually has an acronym for this issue – PEBKAC, or “problem exists between keyboard and chair.”

By understanding our own cognitive biases, we can design an investment portfolio to bypass our behavioural errors. One way is to simplify your investment strategy. Here are a few ways of doing so:

  1. Go passive. Here’s a dirty little secret – stock picking is totally over-rated. Just click here.
  2. Diversify your portfolio (properly) across and within major asset classes.
  3. Keep your investment costs low. If you’re paying more than 0.50% pa., you’re paying too much. It’s like taking an Uber-Black when an Uber-X would have got you to the same place, in the same time, but would have cost you (at least) half the price.
  4. Re-balance your portfolio – annually is ideal for a variety of reasons, which I won’t bore you with here.

Investors spend far too much time and money trying to beat the market. When in fact they should be trying to make sure the market doesn’t beat them.