For most things in life, the best things go to those who hustle. Activity and hard work is rewarded. Luck can help, but pluck is the name of the game.
For most services, the more you spend, the better the service you’ll get.
When it comes to investing, however? The riches go to those who wait.
And performance and fees are inversely related.
When it comes to investing, you’re rewarded for doing nothing and being cheap.
It’s remarkable. Get the asset allocation right, invest across diversified index-based low-fee investments, and rebalance periodically, and you’re most of the way there.
But you don’t hear about this often. Why?
Because… it’s boring. From the perspective of financial media, the key part of its name is media – it needs eyeballs and earholes to sell to advertisers, and it needs something more exciting than good, old fashioned, evergreen advice.
So you’ll hear about the latest minor change in the market, and it will be blown out of proportion. But a simple strategy that makes this event a non-event? Where is the incentive?
If you’re planning for the long-run is any piece of news on a given news cycle likely to have a big impact on your long-term outcomes? Of course not.
Enjoying this article? Sign up!
Sign up to the NZ Wealth & Risk mailing list, and receive a free PDF book, plus a series of emails explaining How to build your own financial plan.
The key is to have a plan and stick to it.
In the title I’ve used the word “lazy”, but you could replace it with “discipline” or “consistency”.
Sticking to your guns, regardless of the news of the day, is one of the key parts of an investment strategy.
For support on this, consider the papers “The Behaviour of Individual Investors” and “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” by Brad Barber and Terrance Odean.
All of this seems counter-intuitive. If you buy index-based funds, aren’t you “settling” for the market, when better returns might be available?
No. Over the long-run, your returns are likely to be better with an index-based fund than an actively invested fund. Because: fees.
As the Simple Dollar points out, “Cost is actually the single best predictor of a mutual fund’s future performance. Better than past returns. Better than the fund manager’s track record. Low costs lead to better returns.”
Or as a Monevator article (appropriately titled “Passive investing feels wrong”) explains:
“your active fund manager needs to at least recoup his or her costs just to keep up with the market. Research has repeatedly shown that over the medium to long-term, most fund managers don’t do this – which is no surprise, because fund managers are the market!
“Average them all up, and they will achieve the same returns as the market, minus costs.
“Hence fund managers lag the market on average, despite being paid a fortune and being in the main extremely clever and dedicated professionals.”
“By aiming to be average, you paradoxically do better than the majority of investors who try for more.”
If you want better returns, you need to take on more risk. And that shouldn’t be a function of the specific investments you pick. It should be a function of how you allocate your investments. For example, the proportion of your investments you put into equity-based funds rather than listed property-based funds, or funds relating to fixed interest or cash.
In light of all of the above, why waste your time agonising over specific investments, historical returns, and all of the rest? Why pay someone who thinks this is their value proposition to you?
If you want to invest, treat it as a hobby. A time consuming and expensive one.
The best investment is the easiest one. A cheap, index-based fund, that allows you to focus on the other things that are important to you.
If you want to hear interviews with titans in the world of finance, and advocates of index-based investing, I recommend listening to the following interviews in Barry Ritholz’s Masters in Business podcast: