Simplicity is the ultimate sophistication.—-Leonardo di Vinci
This quotation doubles as the title of a Vanguard piece discussing the merits of a simple fund portfolio. However, it occurred to me that their guidelines that make the simple fund portfolio work are the same for making any investment strategy work. They are:
- adopt the investment strategy
- embrace it with confidence, and
- endure the inevitable ups and downs in the markets
Perhaps this seems obvious, but we see many investors acting differently, more like this:
- adopt the investment strategy that has been working lately
- embrace it tentatively, as long as it has good returns
- bail out during the inevitable ups and downs in the markets
- adopt another investment strategy that has been working lately…
You can see the problem with this course of action. The investment strategy is only embraced at the peak of popularity—usually when it’s primed for a pullback. Even that would be a minor problem if the commitment to the investment strategy were strong. But often, investors bail out somewhere near a low. This is the primary cause of poor investor returns according to DALBAR.
Investing well need not be terribly complicated. Vanguard’s three guidelines are good ones, whether you adopt relative strength as we have or some different investment strategy. If the strategy is reasonable, commitment and patience are the big drivers of return over time. As Vanguard points out:
Complexity is not necessarily sophisticated, it’s just complex.
Words to live by.