The Simplicity Dividend
"Life is simple, but we persist in making it complicated" Confucius (apparently)
The best bit in Masterchef, in my opinion, is when the professionals cook for the critics. I can’t imagine the stress someone who gets paid to cook for a living will go through having their food judged live on television. It gives me palpitations just thinking about it.
Over the years, I’ve noticed a couple of rules of thumb for these episodes.
One, never cook a soufflé - it’s going to be a disaster.
And two, the critics detest anything that is needlessly complicated. Nothing is guaranteed to send Jay Rayner over the edge like a deconstructed carrot cake served in a plant pot.
When we first start out in our careers, or turn our hand to anything new, we begin with first principles. The basics.
As time develops and we learn more and more about our chosen field, we are naturally keen to demonstrate how much we have learnt. We want to prove to others (and to ourselves) that all those hours of graft, all those student loan payments were worth it. “Look at me mum, I’m doing the thing!”
We serve wackier food. We write longer sentences. We recommend more complicated financial products and structures to our clients. More, more, more.
But when you hear from almost anyone who has achieved mastery of their given field, it is really interesting to me to how often they preach the power of less. Over time they strip back almost everything that they have learnt over the decades to return, hyper focussed on the delivering the basics at 10x the level of everyone else.
The trouble with searching for simplicity is that the modern world is designed to sell complexity. More features, more benefits.
More fees.
There are a lot of products out there, sold by financial services companies to maximise margins and support share prices, that you reading this absolutely do not need.
But you buy it, because a bloke in a smart suit and an Hermes tie welcomes you into his nice office and makes you feel good about yourself. Because we associate complexity with cost and if I have more money, I’ll get more access to the good stuff - right?
Wrong. I hate to break it to you but there isn’t a secret club, protected by a red velvet rope, that has the good stuff behind it. Investing isn’t like that - everyone has access to the good stuff. The good stuff being a globally diversified basket of stocks.
And even better than that, in the modern world everyone has access to this magical asset class at very low cost.
What does ruthless simplicity look like, in practical terms, when it comes to your finances?
Having all of your investments, as much as possible, on a single platform.
In terms of structuring, sticking to pensions, ISAs and taxable investment accounts. Very few have a real need for anything funkier.
Holding as few investment products/strategies as possible. Ideally one.
If we succeed in our pursuit of simplicity - then a couple of amazing benefits will surely follow.
Our affairs are easier to maintain, because there are fewer moving parts.
Getting everything into one place may cost you a little more, it may not, but having all of your investments held on one platform allows you to ensure that you have a coherent approach, and makes monitoring your overall position significantly easier. It is also easier to gather information for your accountant each tax year and, I am sorry for bringing this up, your executors when the time comes.
By stripping everything back, and cutting out the noise, we can focus all of our energy on what is actually important - principally our savings rate and our behaviour as investors.
These are, by far, the inputs that have the biggest impact on future financial outcomes. Why devote excess time and attention anywhere else?
Research shows us that investors who follow simpler strategies see behavioural benefits as well. Having fewer investments, means fewer decisions and decisions are the devil. When it comes to investing - we are in the business of less activity, rather than more.
Do not assume that more holdings within a portfolio equals more diversification. If I buy a single S&P 500 index tracker, which by definition holds the 500 largest publicly listed companies in America within it, I am more diversified than if I buy 30 individual stocks myself.
If one investment fund gives you all of the diversification that you need, then why buy more?
Finally, and most powerfully, accepting simplicity buys you time. Time that you can spend on doing things that you enjoy with the people that you love.
Together, these benefits create a hefty simplicity dividend.
Despite this dividend, selling complexity is rather easier than selling simplicity.
A complex solution feels like a lot of work has gone into it. A simple solution? Well, Dave* down the pub can come up with that.
But the challenge with investing is not finding the right approach, we broadly know that already. You invest in a globally diversified basket of global stocks, at low cost, and then you go away and live your life. For bonus points, keep buying over time.
Good investing is simple. But simple doesn’t mean easy.
To lean on an analogy that I have used before, we all broadly know how to live a healthy life. We eat properly, exercise and get enough sleep. This is common knowledge, but the reason that my BMI is 26 and I am stalked by gout at every turn is not down to knowledge. It is because executing on that knowledge is really difficult.
It is the same with investing, and that’s what keeps people like me in a job. It’s difficult enough, why make your life harder still with needless complexity?
Have a great weekend.
*Why is it always Dave?
Very relateable post! … and it’s not just the Gout