Financial Planning & Wealth Management

Keep it Simple

We are naturally drawn to complex ideas. Maybe it’s because they sound sophisticated and smart, but when it comes to your money, simplicity beats complexity. The more complicated an investment approach is, the more error-prone it tends to be. Even the best investment strategies can be undone by a single mistake.

 

Complex strategies often seem more appealing because they appear sophisticated. They give the impression that a lot of expertise and thought have gone into them, making it easier for someone to sell the idea. It also makes us feel smarter and more capable if we believe we understand a complicated concept.

 

When it comes to investing, keeping it simple often leads to better results, while greater complexity typically leads to the following:

 

  • More cost for less net return
  • Increased taxation
  • Illiquidity and/or surrender charges
  • Confusion

 

Here are some typical errors –

 

Market Timing

 

How hard can it be to time the market? You just sell before the market crashes and buy back at the bottom. Easy peasy, right?

 

Some of the biggest money managers in America pour hundreds of millions of dollars into developing systems and signals to time the market, but they are wrong most of the time. Research shows that over a decade, more than 90% of active managers underperform compared to indexes like the S&P 500 or the JSE All Share Index. In this case, a simple, cost-effective approach often yields better outcomes without sacrificing returns.

 

Don’t Try to Find the Needle—Just Buy the Haystack

 

Let’s talk about active trading. It might seem straightforward: just buy stocks that are going up, and when they stop rising, sell them. Easy, right?

 

But here’s the reality—most U.S. stocks, over their lifetime, underperform even Treasury bonds. It’s a small number of exceptional stocks that really drive the market’s performance.

 

Think of today’s stars like NVIDIA, or a few years ago, Apple. Before that, it was companies like Southwest Airlines and Monster Energy. In hindsight, these successes seem obvious, but predicting them in advance is another story entirely.

 

As John Bogle, the founder of Vanguard, famously said: “You don’t need to look for the needle in the haystack. Just buy the haystack.” By owning the whole market, you ensure you capture those big winners, which can lift your overall returns.

 

The Emotional Toll

 

There is an emotional toll when it comes to active trading that is often overlooked. It’s not just about the monetary costs; the real price is the emotional strain it puts on you. The constant need to absorb news, develop narratives, and translate those into trades can become an exhausting cycle. When trades don’t go as planned, the stress and anxiety can start to creep in, occupying your thoughts day and night.

 

For many, what begins as an exciting challenge quickly turns into an emotional rollercoaster. The initial thrill of trading can give way to sleepless nights, as the highs and lows of the market take a toll on your mental well-being. It’s a lot like being in a casino for an extended period—while there are moments of euphoria, the longer you stay, the more likely you are to experience negative emotions.

 

If trading is just for entertainment, the emotional swings might seem manageable, but if you’re doing it with serious financial goals in mind, the stress and negative energy can far outweigh any potential rewards.

 

Practical Steps to Avoid These Errors

 

Start by clearly defining your financial goals—how much money you need, when you need it, and what other sources of income you have, such as a policy payout, employment, rental property, or proceeds from selling a business. Once you understand what you need from your portfolio, you can then determine the appropriate allocation between bonds, stocks, and cash. If your situation requires more complexity, you might consider incorporating structured products, trusts, or estate planning strategies, especially for wealthier individuals.

 

It’s crucial to avoid the allure of overly complicated strategies that promise high returns but come with high risks and error potential. Focus on straightforward, proven methods to achieve your financial goals with minimal hassle.

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About

 MattFin is a blog that focuses on wealth management, investments, financial markets and investor psychology. I build financial plans and portfolios for families and individuals

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