I'm always surprised when people who are very smart, and who happen to be really good at math, express fear and apprehension about investing. Long-term investing can be incredibly simple. You don't have to, and really shouldn't, wait until you have the time to figure out all the complicated stuff before you begin investing for long-term goals.
Does it seem too easy?
Passive investing follows broad market indexes. There aren't too many decisions to make. You can buy a few index funds and get better returns than most other investors. Divide your investing dollars among funds representing major asset classes and revisit once or twice per year to rebalance. When combined with regular saving, earning the returns served up by the market while keeping costs low is a proven way to achieve your goals.
On the other hand, not doing anything because it's all too complicated as well as jumping from one complex strategy to another are both proven ways of not reaching your goals.
When it gets complicated
Is buying investments and holding them for the long term with regular rebalancing a quaint relic of a simpler time? Are things really different now? Probably not. And it's funny that the people who claim that buy-and-hold is dead also earn their living selling other options. That's not to say that all active management is bad, but it better be worth the added cost.
"As far as I'm aware, there's no academic study that shows any evidence that adding complexity, through convoluted products or multifaceted trading, will result in better returns," says Rick Salmeron, a CFP professional and founder of Salmeron Financial in Dallas. "Even with the absence of that evidence, there are still plenty of people who claim these tactics will outperform a low-cost, buy-and-hold investment strategy. They insist that settling for the simple path is settling for mediocrity.
"Active trading and complexity is alluring, even sexy at times. Yet I worry that people who have just begun to embark down this path recently might be guilty of confusing a rising market with their own genius. There's also nothing in the research that says that consistent outperformance with this viewpoint is impossible. It's just highly improbable," he says.
Carl Richards, the brains behind the BehaviorGap website and contributor to The New York Times, spoke at this week's CFA Conference in Seattle. Lauren Foster wrote a blog about the presentation for the CFA Institute on Tuesday. Here's a snippet of what she wrote about what he said.
"We're nervous to make things too simple," said Richards. "We have a belief that complexity is some sort of sign of intellectual gift, or we think of it as a selling tool in our industry. I'll dig a hole, throw the client in it, and say: 'Hey, I'm the only one with the rope.' Either way, it is a bad model. People just want you to make it simpler."
Richards said people often get confused between "simplistic and elegantly simple."
A very smart person said, "Rely on simplicity," when it comes to investing. It's hard to argue with that.
Is indexing too simple? What do you think?
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Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.