"Why Simple Beats Complex"

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Rowan Oak
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"Why Simple Beats Complex"

Post by Rowan Oak » Sun Jan 21, 2018 10:36 am

Some very good points by Ben Carlson in this article:
Simple is harder. You have to fight to keep things simple because our natural human impulses make us susceptible to stories and narratives. Simplicity is more of a psychological exercise while complexity is more about trying to outsmart the competition.
Why Simple Beats Complex
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

snarlyjack
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Re: "Why Simple Beats Complex"

Post by snarlyjack » Sun Jan 21, 2018 11:01 am

Thanks Rowan,

I believe "Simple Beats Complex".

Another article I just read is "Go Deeper Not Wider".
Which is another interesting article.

Maybe investor's need to go "Simple & Deep" ?

Enjoy this article...

http://www.raptitude.com/2017/12/go-deeper-not-wider/

snarlyjack
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Re: "Why Simple Beats Complex"

Post by snarlyjack » Sun Jan 21, 2018 11:18 am

In follow up to my thinking on my own account.

Maybe a investor needs 3 huge funds not
10 smaller funds, (Like the 3 fund portfolio).

Which is better...1 large Battleship or 10 smaller Boats?
Same amount of money but positioned differently...

Fallible
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Re: "Why Simple Beats Complex"

Post by Fallible » Sun Jan 21, 2018 1:30 pm

Rowan Oak wrote:
Sun Jan 21, 2018 10:36 am
Some very good points by Ben Carlson in this article:
Simple is harder. You have to fight to keep things simple because our natural human impulses make us susceptible to stories and narratives. Simplicity is more of a psychological exercise while complexity is more about trying to outsmart the competition. ...
Another good article from Ben Carlson, and it certainly shows why simple is not easy.

Thanks for posting. I read Carlson's 2015 book, A Wealth of Common Sense, and recommend it for more on simplicity.
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jhfenton
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Re: "Why Simple Beats Complex"

Post by jhfenton » Sun Jan 21, 2018 1:59 pm

As simple as possible, but no simpler.

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Rowan Oak
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Re: "Why Simple Beats Complex"

Post by Rowan Oak » Sun Jan 21, 2018 2:47 pm

jhfenton wrote:
Sun Jan 21, 2018 1:59 pm
As simple as possible, but no simpler.
Do you view the Three-fund portfolio which does not slice and dice as too simple?

Or maybe even just Vanguard Total Stock Market Index Fund and a short-term bond fund such as Vanguard Short-Term Treasury Index Fund.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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jhfenton
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Re: "Why Simple Beats Complex"

Post by jhfenton » Sun Jan 21, 2018 4:25 pm

Rowan Oak wrote:
Sun Jan 21, 2018 2:47 pm
jhfenton wrote:
Sun Jan 21, 2018 1:59 pm
As simple as possible, but no simpler.
Do you view the Three-fund portfolio which does not slice and dice as too simple?

Or maybe even just Vanguard Total Stock Market Index Fund and a short-term bond fund such as Vanguard Short-Term Treasury Index Fund.
For me, yes. I've been tilting to small value and emerging markets for 20 years. It has served us very well.

I also don't like Total Bond. The split between treasuries and corporates isn't determined by the market, but by government borrowing needs. I prefer something closer to 50/50, like Intermediate Term Bond Index. But in that fund and Total Bond, if you need to sell some treasuries to rebalance equities, you're forced to sell corporates at the same time. So I own separate Intermediate Treasury Index and Intermediate Corporate Index funds instead. It's a bit more complex, but there is added value.

But I try to keep things as simple as possible. I no longer own a large-cap developed international fund, only small cap and emerging markets. There was no diversification benefit from international large cap that wasn't captured and exceeded by international small cap. So I dumped it when our accounts allowed me too.

Where possible, I try not to own multiple funds in the same asset class.

But there are inescapable restraints like 401(k)s to complicate things. We own 3 small-cap value/blend funds and will soon add a 4th in my wife's new 401(k). My 401(k) has only DFA Small Cap I. We own Vanguard Small Cap Value Admiral (VSIAX) in tax-advantaged. And we own the more tax-friendly VIOV (Vanguard S&P 600 Small Cap Value) in taxable. And soon, we will add DFA Small Cap Value I in my wife's 401(k).

And my HSA is at TD Ameritrade through Lively, so I use a non-Vanguard emerging markets fund on the commission-free list (SPEM at 11 bp), while we own VEMAX in our Vanguard accounts (and the sister ETF class VWO in taxable).

But most of our accounts are simple, with 1 to 2 funds:

My Roth: 2 (SCV, IntlSC)
My Rollover: 1 (LCV)
Wife's Roth: 1 (EM)
My 401(k): 2 (MCV, SCB)
Wife's 401(k): 1 (starting in May) (SCV)
My HSA: 2 (EM)
Taxable: 3 (OH muni, SCV, EM)

I confine the complexity to our largest account, my wife's rollover IRA. It contains LCV, SCV, EM, IntlSC, and all of our fixed income (except for the munis in taxable). I do most of our rebalancing in that one account. I have a spreadsheet that aggregates all of our accounts and shows me the variance from our target allocations. I allocate new contributions accordingly and rebalance when I have to.

It's not nearly as complicated as it sounds, and it's all pretty standard stuff. Mostly Vanguard, some DFA, iShares, and SSgA.

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Rowan Oak
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Re: "Why Simple Beats Complex"

Post by Rowan Oak » Mon Jan 22, 2018 9:05 am

jhfenton wrote:
Sun Jan 21, 2018 4:25 pm
Rowan Oak wrote:
Sun Jan 21, 2018 2:47 pm
jhfenton wrote:
Sun Jan 21, 2018 1:59 pm
As simple as possible, but no simpler.
Do you view the Three-fund portfolio which does not slice and dice as too simple?

Or maybe even just Vanguard Total Stock Market Index Fund and a short-term bond fund such as Vanguard Short-Term Treasury Index Fund.
For me, yes. I've been tilting to small value and emerging markets for 20 years. It has served us very well.

I also don't like Total Bond. The split between treasuries and corporates isn't determined by the market, but by government borrowing needs. I prefer something closer to 50/50, like Intermediate Term Bond Index. But in that fund and Total Bond, if you need to sell some treasuries to rebalance equities, you're forced to sell corporates at the same time. So I own separate Intermediate Treasury Index and Intermediate Corporate Index funds instead. It's a bit more complex, but there is added value.

But I try to keep things as simple as possible. I no longer own a large-cap developed international fund, only small cap and emerging markets. There was no diversification benefit from international large cap that wasn't captured and exceeded by international small cap. So I dumped it when our accounts allowed me too.

Where possible, I try not to own multiple funds in the same asset class.

But there are inescapable restraints like 401(k)s to complicate things. We own 3 small-cap value/blend funds and will soon add a 4th in my wife's new 401(k). My 401(k) has only DFA Small Cap I. We own Vanguard Small Cap Value Admiral (VSIAX) in tax-advantaged. And we own the more tax-friendly VIOV (Vanguard S&P 600 Small Cap Value) in taxable. And soon, we will add DFA Small Cap Value I in my wife's 401(k).

And my HSA is at TD Ameritrade through Lively, so I use a non-Vanguard emerging markets fund on the commission-free list (SPEM at 11 bp), while we own VEMAX in our Vanguard accounts (and the sister ETF class VWO in taxable).

But most of our accounts are simple, with 1 to 2 funds:

My Roth: 2 (SCV, IntlSC)
My Rollover: 1 (LCV)
Wife's Roth: 1 (EM)
My 401(k): 2 (MCV, SCB)
Wife's 401(k): 1 (starting in May) (SCV)
My HSA: 2 (EM)
Taxable: 3 (OH muni, SCV, EM)

I confine the complexity to our largest account, my wife's rollover IRA. It contains LCV, SCV, EM, IntlSC, and all of our fixed income (except for the munis in taxable). I do most of our rebalancing in that one account. I have a spreadsheet that aggregates all of our accounts and shows me the variance from our target allocations. I allocate new contributions accordingly and rebalance when I have to.

It's not nearly as complicated as it sounds, and it's all pretty standard stuff. Mostly Vanguard, some DFA, iShares, and SSgA.
Thank you for your detailed response. Maybe just adding Vanguard small cap value index to the three-fund portfolio would be the simplest version of your strategy. A tilt to small cap value, but only 4 index funds total.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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jhfenton
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Re: "Why Simple Beats Complex"

Post by jhfenton » Mon Jan 22, 2018 9:17 am

Rowan Oak wrote:
Mon Jan 22, 2018 9:05 am
Thank you for your detailed response. Maybe just adding Vanguard small cap value index to the three-fund portfolio would be the simplest version of your strategy. A tilt to small cap value, but only 4 index funds total.
If I had no account constraints or tax considerations, I could live with four equity index funds (two U.S., two ex-US) and two bond index funds. I do see value in splitting international (developed from emerging markets) and splitting treasuries from corporates. (If you're going to own corporates at all.)

It's when you start adding munis, 401(k)s choices, HSA choices, etc., and multiple uncombinable accounts that things get unavoidably a little more complex.

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Rowan Oak
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Re: "Why Simple Beats Complex"

Post by Rowan Oak » Mon Jan 22, 2018 9:39 am

jhfenton wrote:
Mon Jan 22, 2018 9:17 am
Rowan Oak wrote:
Mon Jan 22, 2018 9:05 am
Thank you for your detailed response. Maybe just adding Vanguard small cap value index to the three-fund portfolio would be the simplest version of your strategy. A tilt to small cap value, but only 4 index funds total.
If I had no account constraints or tax considerations, I could live with four equity index funds (two U.S., two ex-US) and two bond index funds. I do see value in splitting international (developed from emerging markets) and splitting treasuries from corporates. (If you're going to own corporates at all.)

It's when you start adding munis, 401(k)s choices, HSA choices, etc., and multiple uncombinable accounts that things get unavoidably a little more complex.
Got it. So if you had no account constraints or tax considerations it would look something like this (allocated accordingly):

U.S. Stock funds:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX/VTI)
Vanguard Small-Cap Value Index Fund Admiral (VSIAX/VBR)
International funds:
Vanguard Developed Markets Index Fund Admiral Shares (VTMGX/VEA)
Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX/VWO)

Bond:
Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares (VICSX/VCIT)
Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX/VGIT)
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

bogglizer
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Re: "Why Simple Beats Complex"

Post by bogglizer » Mon Jan 22, 2018 9:56 am

I recently switched from something very like the above to the standard BH three-fund portfolio. Just to simplify.

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jhfenton
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Re: "Why Simple Beats Complex"

Post by jhfenton » Mon Jan 22, 2018 10:18 am

Rowan Oak wrote:
Mon Jan 22, 2018 9:39 am
Got it. So if you had no account constraints or tax considerations it would look something like this (allocated accordingly):

U.S. Stock funds:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX/VTI)
Vanguard Small-Cap Value Index Fund Admiral (VSIAX/VBR)
International funds:
Vanguard Developed Markets Index Fund Admiral Shares (VTMGX/VEA)
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS/VFSVX)
Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX/VWO)

Bond:
Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares (VICSX/VCIT)
Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX/VGIT)
I'd use the small-cap international fund instead, which is what I do now. I dropped VTMGX because it doesn't add much diversification to the portfolio compared to VSS. VSS/VFSVX is our largest position at 30% of equities.

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telemark
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Re: "Why Simple Beats Complex"

Post by telemark » Mon Jan 22, 2018 2:15 pm

See also https://www.farnamstreetblog.com/2018/0 ... xity-bias/
Complexity bias is a logical fallacy that leads us to give undue credence to complex concepts. Faced with two competing hypotheses, we are likely to choose the most complex one. That's usually the option with the most assumptions and regressions. As a result, when we need to solve a problem, we may ignore simple solutions...

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Rowan Oak
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Re: "Why Simple Beats Complex"

Post by Rowan Oak » Mon Jan 22, 2018 3:53 pm

telemark wrote:
Mon Jan 22, 2018 2:15 pm
See also https://www.farnamstreetblog.com/2018/0 ... xity-bias/
Complexity bias is a logical fallacy that leads us to give undue credence to complex concepts. Faced with two competing hypotheses, we are likely to choose the most complex one. That's usually the option with the most assumptions and regressions. As a result, when we need to solve a problem, we may ignore simple solutions...
And his suggestion for overcoming complexity bias: Occam’s razor

That's a good site. I particularly enjoyed his posts about Richard Feynman:

Cargo Cult Science: Richard Feynman On Believing What Isn’t True

“The first principle is that you must not fool yourself—and you are the easiest person to fool.”
— Richard Feynman

Richard Feynman: The Difference Between Knowing the Name of Something and Knowing Something

The Feynman Technique: The Best Way to Learn Anything

Richard Feynman on Refusing an Honorary Degree, Being Driven, and Understanding his Circle of Competence
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Rowan Oak
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Re: "Why Simple Beats Complex"

Post by Rowan Oak » Tue Jan 23, 2018 5:12 pm

jhfenton wrote:
Mon Jan 22, 2018 10:18 am
Rowan Oak wrote:
Mon Jan 22, 2018 9:39 am
Got it. So if you had no account constraints or tax considerations it would look something like this (allocated accordingly):

U.S. Stock funds:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX/VTI)
Vanguard Small-Cap Value Index Fund Admiral (VSIAX/VBR)
International funds:
Vanguard Developed Markets Index Fund Admiral Shares (VTMGX/VEA)
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS/VFSVX)
Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX/VWO)

Bond:
Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares (VICSX/VCIT)
Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX/VGIT)
I'd use the small-cap international fund instead, which is what I do now. I dropped VTMGX because it doesn't add much diversification to the portfolio compared to VSS. VSS/VFSVX is our largest position at 30% of equities.
Thanks. I always appreciate being able to know an investor's personal definition of the "As simple as possible, but no simpler." quote.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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