We believe that simple investment strategies beat complex investment strategies most of the time. There are three basic reasons for this.
First, investing itself is a simple thing. Investment gains from bonds come from interest income. Investment gains from stocks come from dividends and earnings growth. Since we know it is extremely difficult to pick winning stocks or winning bonds, it’s best to not pay someone money to try and find a needle in the haystack and instead “buy the haystack” by simply owning the entire stock and bond market through low-cost index funds. The key is to determine an asset allocation (mix of stocks and bonds) that will help you realize your long-term financial goals, and keep fees at an absolute minimum. Minimize how much intermediaries take out of your pocket. Investing can and should be simple.
Second, simple investing promotes discipline and a long-term focus. When we understand the drivers of investment gains (bond interest income, dividends, and earnings growth) then we realize that a long-term focus is essential. We accept the fact that the stock market is volatile over the short-term and we no longer try and time the market. We realize that the key is to invest over a lifetime and that keeping it simple will help us get our fair share of long-term stock and bond market returns.
Third, simple investing is less stressful. The reason it is less stressful is that it is easier to understand and to grasp than complicated investing. The more we understand something, the greater confidence we can have moving forward.
“Simplicity is the ultimate sophistication.” -Leonardo Da Vinci