Keep It Simple

The biggest trick in all of finance: simple is often the most sophisticated thing you can do.

It is counter intuitive, but we as humans are trained to believe that the more we pay for something the better it must be. We assume that there is a correlation between high prices and high quality. But when it comes to your personal finances, the opposite in fact usually turns out to be true. Researchers have shown over and over again, that the higher you pay for an investment, the worse-off you do, net of fees. So why do we pay for complicated and expensive financial products and strategies if they almost always do worse than simple, transparent ones? Large companies are spending billions of dollars on advertising to convince you that expensive and complicated must be better and more exclusive. Don’t buy the hype. Let’s dispel a few scarily common myths that an entire your-money-as-entertainment industry is trying to convince you of (Think of: every show on CNBC, every E-Trade commercial, new apps for your phone advertising free stock trading).

Here is the hard truth: 90% of professional money managers fail to beat the market over any sustained period. That’s right: those people who have spent their entire careers, and in fact get paid (by you and the investing public), get it wrong 90% of the time over sustained periods. Why would you even try to buy and sell stocks, and “time the market” if experts lose 90% of the time?

We have been trained as a culture to believe that stock trading is a skill, like being an engineer or a doctor. We know by now that it is not a skill. By all means, buy and sell stocks, but do it as a fun game with very small amounts of your money, recognizing that it is for fun. Do not do this with your nest egg. Anyone telling you that you or they can beat the market is selling you false hope, and perpetuating a myth that this is even possible over the long run. For the most part you would be way better off watching the History Channel than CNBC. You will certainly learn more.

Foie gras. It is an extremely expensive delicacy that is 86% fat. It is sophisticated. Rich people eat it. But while people may enjoy a few bites of it, is it good for you over the long run? If you eat it every day, will you be more or less healthy? With your money, do not get lured into sophisticated or “exclusive” products that are expensive. They may be enjoyable for one minute, but they will ruin your financial health. Personal finance should be kept ultra-simple and clean – like a good diet. Lean proteins, vegetables, healthy fats and carbohydrates are the best way to stay in good health. So what does this diet mean in financial terms?

What should you do? Keep it ultra-simple by controlling the things we as humans know how to control: start saving as early as possible in life. Save more money every opportunity you can. Increase your savings percentages every time you get a raise. Keep your fees as low as possible. Have an appropriate risk allocation for your age and time to retirement. Use passive index funds. Rebalance every so often. Stay the course in the markets for decades (that is the only way they work well!) Make sure you are optimizing your taxes and saving enough to get any matches from your employer (this is as close to free money as there is, yet millions of Americans don’t even know about this or don’t contribute enough.) Be careful about who you take money advice from. Hint: it should always and only be from someone who is a fiduciary and has to act in your best interest (usually this is not your neighbor’s stockbroker!)

That’s it. If talking heads on CNBC are being honest with you, they will tell you that doing anything complicated, frequent, interventionist, sophisticated with your money, will almost certainly lose you your hard earned savings. So don’t do it!

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