Keep It Simple: Your Investment Strategy

Businessman analyzing investment charts at his workplace
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As was made clear in 2008, complexity has a habit of blowing up. Simplicity is more likely to endure the cycles of markets and human competence.

Bill Bonner’s Wealth-Building Principle no. 7: Keep It Simple

We are spoiled for choice…food, clothing, TV channels, dating sites, motor vehicles just to name a few.

It’s a far cry from the consumerism of the early 1900s when Henry Ford said ‘Any customer can have a car painted any colour that he wants so long as it is black

And in my youth, food selection in our Aussie household was always a slight variation on the standard fare of meat and 3 veg.

Ironically, with so much choice these days more people are choosing procrastination. Paralysis by analysis.

In the book The Paradox of Choice: Why More is Less US psychologist Barry Schwartz, argues our abundance of choice has led to increased anxiety levels, depression and countless hours of wasted time.

The fear of making a poor choice in many cases leads to no choice. Then for those brave enough to make a decision, there’s the anxiety that comes from comparing your choices with those made by others. The potential for ‘buyers remorse’.

In my opinion the three most important areas of our lives are family, health and wealth. Making sound choices about our physical and financial wellbeing is absolutely essential.

All the money in the world will be of little use to you if you don’t have good health…to me, health and wealth are intertwined.

The health and wealth industries (like all others) offer endless choices — some good and some not so good.

Fad diets, miracle weight loss tonics, detox drinks, superfoods. Also it seems that never a year goes by when some research determines something (meat, eggs, red wine etc.) is good for you, and next year it’s bad for you. Confusion reigns supreme.

The same goes for the investment world, where choices range from the simple savings account to complex opaque structured products loaded with leverage and derivatives.

In between these two poles of caution and cavalier there are managed funds, superannuation (self-managed or not), negative gearing, the latest hot share tip, options trading. The deregulation of the financial industry has opened up a world of investment possibilities and pitfalls.

Some offerings — be it in health or wealth — seem to sound good. And as they say in the classics — ‘if it sounds too good to be true, it usually is.’

Life has taught me that simple is the best — in health and wealth.

My approach to health management consists of a few basics. Regular exercise — walk, swim, ride, Pilates. Where possible eat real food — if it comes in a tin, plastic or all packaged up with preservatives then chances are it’s slightly less than real. Eat plant based foods grown with the least amount of pesticides. Eat moderate portions.

These are a few simple guidelines that make it easy for me to decide what to include and exclude when it comes to choices with my health.

The same simple approach is applied to the management of our family wealth.

My approach to long term wealth creation (and retention), is based on the primary lessons learned from nearly thirty years in the investment business:

1. Be patient. Be patient. Be patient and be patient some more. Trends can (and often do) take a long time to play out. This is by far the most important lesson I have learned. Markets take their own sweet time to do what they have to do — appreciate or depreciate in value. No amount of wishful thinking on your behalf will hasten or slow the market’s task.

2. Only invest in things you understand and can make a valued assessment on the risks associated with the investment. Far too many people invest in products they have little understanding of. They are seduced by the potential riches on offer and fail to appreciate the capital destroying risks embedded in the product. Being wise before the event is far better than paying the hefty cost of gaining wisdom after the event. If you do not understand the investment and those selling you the investment seem a little too eager…walk away. If the urge is too great to resist the ‘once in a life time’ investment opportunity — limit your exposure to 5% to 10% of your wealth. This way if the investment ‘blows up’ you haven’t lost everything.

3. Long term ‘Beta is better’. Invest in the asset class (e.g. share index) rather than individual stocks. Countless studies show over 80% of professional stock-picking fund managers (Alpha) fail to outperform the relevant index over the medium term.

4. Evaluate the downside. Never calculate the upside. Being able to assess the possible damage to your capital if the world goes ‘pear shaped’ is far more critical than dreaming of potential riches. This is why you must only invest in things you understand. The better you understand the investment, the better the judgement call you can make on whether the reward outweighs the risk.

5. Be very wary of those with a vested interest. Everyone deserves to make a living. However you are equally as entitled to exercise caution and seek second and third opinions to ensure any advice given is actually in your best interest. If the investment doesn’t pass the ‘sniff test’ walk away…no matter how good you think it may be.

6. Keep costs (brokerages, taxation and management fees) to an absolute minimum. The investment industry are very clever at layering costs — the majority of fees are unnecessary. The more fees you pay, the richer someone else is getting at your expense. The ability to control costs is one of the reasons so many people have made the switch to self managed superannuation funds

7. Never, ever invest if the primary purpose is to save tax. The taxman is not your greatest enemy. The vast majority of tax minimisation schemes — trees, films, cattle, olives — have failed. Investors would have been better off paying the taxman his dues rather than losing their entire capital. Borrowing to invest (negative gearing) to save tax is another furphy. Personally I’d rather borrow to invest in deeply discounted assets that generate significant levels of income (in excess of holding costs). Creating an income tax ‘problem’ and eventually a massive capital gains tax bill. Losing money to avoid tax is just plain dumb to me.

8. There is no new way to go broke. It is always too much debt. Better to err on the conservative side when considering whether or not to go onto debt. If you are already in debt, make it a priority to pay off any non-tax deductible debt (mortgage, credit card, personal loan etc.) as a priority. And in spite of your accountant’s protest, then focus on reducing tax deductible debt. To hell with being negatively geared. There is nothing more liberating than being debt free with a passive income stream coming entirely to you rather than it being diverted to a bank loan.

9. Control your emotions. Ask yourself why you are thinking of buying or selling. Is it out of greed or fear? Are you reacting to external influences — media, friends, family — and following the herd? If you have followed the basics, then you’ll be in a better position to act rationally. Keeping your head while those around you are losing theirs.

When the mirrors have smashed and the smoke has cleared, my experience has left me in no doubt it’s the simple, boring investment strategy that always stands the test of time.

Keeping it simple assists in making choices less complicated.

The less complicated life is, the more time you’ll have to enjoy the real wealth in this world…quality relationships and the love, laughter and enjoyment they bring.

Regards,

Vern Gowdie,
Editor, Gowdie Family Wealth

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Vern Gowdie

Vern Gowdie

Vern Gowdie has been involved in financial planning in Australia since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top 5 financial planning firms in Australia. He is a feature contributing editor to The Daily Reckoning and is Founder and Chairman of the Gowdie Family Wealth advisory service and editor of the Gowdie Letter To follow Vern's financial world view more closely you can you can subscribe to The Daily Reckoning for free here.
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