"4 Reasons Why We Overcomplicate Investing"

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Taylor Larimore
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"4 Reasons Why We Overcomplicate Investing"

Post by Taylor Larimore » Sat Jul 21, 2018 1:45 pm

Bogleheads:

AARP has an excellent article about the importance of Simplicity written by Boglehead advisor, Allan Roth, CPA, CFA. These are excerpts:

"Though investing should be simple, simplicity can be quite difficult. There are powerful forces in play that compel us to overcomplicate."

"With a Vanguard Total Stock Market Index Fund (VTSMX) and a Vanguard Total International Stock Index Fund (VGTSX), you own more than 9,700 companies across the planet. And with a Vanguard Total Bond Market Index Fund (VBMFX), you own more than 8,000 of the highest-quality investment-grade U.S. bonds. Together, they maximize diversification and minimize expenses and taxes."

"4 forces preventing simplicity (condensed):

The belief we know the future.

We chase income.

The financial services industry.

Taxes."

4 Reasons Why We Overcomplicate Investing

Thank you, Allan Roth.

PS: Use my "Simplicity" link below to read what other experts say about the importance of simplicity.

Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by Jazzman » Sat Jul 21, 2018 2:01 pm

Thanks for posting the article...a good read.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by FIREchief » Sat Jul 21, 2018 2:22 pm

"The financial services industry. Quite frankly, my industry is not only a powerful force because it is for-profit; it is the most powerful force because it controls the narrative. Advisers probably couldn’t charge you a whole lot for this simplicity since you could likely do it yourself. So we build complex portfolios using complex jargon like smart beta, correlations, standard deviations, alpha and the like. This complexity is intimidating enough to make you dependent upon us so we can keep charging you more, year after year."

Great quote! :sharebeer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by abuss368 » Sat Jul 21, 2018 5:43 pm

A very good article! Let's keep spreading the message of our mentor, Jack Bogle's, investment advice!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by abuss368 » Sat Jul 21, 2018 5:43 pm

FIREchief wrote:
Sat Jul 21, 2018 2:22 pm
"The financial services industry. Quite frankly, my industry is not only a powerful force because it is for-profit; it is the most powerful force because it controls the narrative. Advisers probably couldn’t charge you a whole lot for this simplicity since you could likely do it yourself. So we build complex portfolios using complex jargon like smart beta, correlations, standard deviations, alpha and the like. This complexity is intimidating enough to make you dependent upon us so we can keep charging you more, year after year."

Great quote! :sharebeer
Hi FIREchief -

In my opinion that was the best line of the article!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by columbia » Sat Jul 21, 2018 9:15 pm

Paraphrasing here, but Mr. Bogle once said that most investors would be well served by putting half their money in stocks and the other half in bonds and continuing that through their investment endeavors.

I believe him to be a wise man.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by SGM » Sun Jul 22, 2018 5:34 am

For me the top reason preventing more simplification is the tax issue. In the days when I invested in individual stocks I accumulated a lot of future capital gains. One of my chores is determining which sales if any I should make on a yearly basis in order to simplify.

I also prefer muni bond funds to the total bond market fund in taxable accounts. There is some increased risk of default compared to treasuries, but I think Vanguard's muni bond funds are not too risky in terms of defaults.

Advice in this article by Allan Roth is spot on concerning financial industry motivation and obfuscation.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by MnD » Sun Jul 22, 2018 8:22 am

It would be peachy if we could have all our investments in 1 (or 2-3) accounts and those accounts had the lowest cost versions of the latest and most complete total market index fund options. And we had no tax gains from what were very good low-cost active and older index fund options of yester-year. But that's not reality when you throw in individual and joint accounts, employer and past employer retirement accounts, various flavors of individual retirement accounts, state education accounts, ESOP's that include "free money" from employers if participating......

So I'd add reason number 5 - Reality.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by sometimesinvestor » Sun Jul 22, 2018 8:58 am

Do you believe interest rates will be higher a year from now? I do and I even believe Taylor does . Therefore put your bond investment in a money market fund now(tax exempt if it produces a better after tax return) and decide in a year if bonds are a better choice.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by columbia » Sun Jul 22, 2018 9:30 am

It seems that the legacy funds/individual stocks issue can be easily addressed during the next crash: TLH in to index funds.

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Taylor Larimore
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Forecasting interest rates?

Post by Taylor Larimore » Sun Jul 22, 2018 10:17 am

sometimesinvestor wrote:
Sun Jul 22, 2018 8:58 am
Do you believe interest rates will be higher a year from now? I do and I even believe Taylor does . Therefore put your bond investment in a money market fund now(tax exempt if it produces a better after tax return) and decide in a year if bonds are a better choice.
sometimesinvestor:

I believe it is impossible to forecast interest rates. In any event, what people expect is already priced into the bond market.
John Markese, PhD, President, American Association of Independent Investors: "Nobody, but nobody, has consistently guessed the direction of the bond or stock market over any meaningful length of time."
My suggestion: Pick a low-cost, good quality, short-or intermediate-term bond fund--then stay the course.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by UpperNwGuy » Sun Jul 22, 2018 10:19 am

sometimesinvestor wrote:
Sun Jul 22, 2018 8:58 am
Do you believe interest rates will be higher a year from now? I do and I even believe Taylor does . Therefore put your bond investment in a money market fund now(tax exempt if it produces a better after tax return) and decide in a year if bonds are a better choice.
Since when did Taylor start recommending money market funds over the Total Bond Market Index Fund?

Edit: I see Taylor has already responded. He's quick!

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by nedsaid » Sun Jul 22, 2018 10:27 am

A fifth force against simplicity is the desire to maintain a steady return while minimizing volatility. We all would like our accounts to grow at a steady 8% year after year, not up 15% one year and down 5% the next. In other words, we want a smoother ride.
A fool and his money are good for business.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by Fat-Tailed Contagion » Sun Jul 22, 2018 10:34 am

5. The "Mainstream" Media Industrial Complex

Remember that the Media companies are a highly concentrated conglomerate working hand in hand with the Financial Services industry to frame and drive the false narratives.

Another major barrier that the average normie must overcome to find investment success.

Best wishes,

Fatty
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” | ― Benjamin Graham, The Intelligent Investor

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by LarryG » Sun Jul 22, 2018 10:42 am

Is there a comparison of the 2 fund portfolio (Total Stock Market Index Fund and Total Bond Market Index Fund) to the 3 fund portfolio. Even less complicated !
Larry G.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by UpperNwGuy » Sun Jul 22, 2018 10:59 am

LarryG wrote:
Sun Jul 22, 2018 10:42 am
Is there a comparison of the 2 fund portfolio (Total Stock Market Index Fund and Total Bond Market Index Fund) to the 3 fund portfolio. Even less complicated !
Larry G.
There are numerous threads on here about the merits (or lack thereof) of Total International Stock Index funds. Those discussions are essentially about two funds vs three funds in a portfolio.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by LarryG » Sun Jul 22, 2018 1:18 pm

The numerous discussions about the merits of international funds are almost entirely theoretical.
Vanguard’s site gives actual figures. The expense ratio of VTSAX is .04%, VTIAX .11%., YTD VTSAX is 3.28% VTIAX -3.62%, 1 year VTSAX 14.8% VTIAX 7.1% 5yr VTSAX 13.26%, VTIAX 6.42%
I agree with Mr. Bogle who has stated many times that holding funds containing large US companies provides significant international investment.
Keep it simple
LarryG.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by jhfenton » Sun Jul 22, 2018 1:51 pm

MnD wrote:
Sun Jul 22, 2018 8:22 am
So I'd add reason number 5 - Reality.
+1 Reality is juggling 8 separate accounts earmarked for retirement (taxable, 2x Roth, 2x Traditional Rollover, 2x 401(k), HSA) that cannot legally be combined, some of which have limited satisfactory investment options.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by 2015 » Sun Jul 22, 2018 2:19 pm

I would add the following:

1) Ego. (See also overconfidence, and all the other behavioral biases).
2) Bias towards action.
3) Narrative Fallacy coupled with an obsession of seeing patterns where none exist.
4) Failure to study the nature of complex adaptive systems in which all investing, personal finance, economics reside.
Last edited by 2015 on Mon Jul 23, 2018 2:54 pm, edited 1 time in total.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by Barry Barnitz » Sun Jul 22, 2018 2:52 pm

jhfenton wrote:
Sun Jul 22, 2018 1:51 pm
MnD wrote:
Sun Jul 22, 2018 8:22 am
So I'd add reason number 5 - Reality.
+1 Reality is juggling 8 separate accounts earmarked for retirement (taxable, 2x Roth, 2x Traditional Rollover, 2x 401(k), HSA) that cannot legally be combined, some of which have limited satisfactory investment options.
Very true. Not to mention that these 8 accounts can increase if (or when) the couple inherits parental IRAs. This can swell the accounts to 10.

regards,
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Re: "4 Reasons Why We Overcomplicate Investing"

Post by Hockey10 » Sun Jul 22, 2018 3:05 pm

Taylor - thanks for the link.

Quote from Allan Roth in the article:

"Taxes. I admit that my own portfolio is far more complex than these three funds. That’s because these funds didn’t exist when I started investing and I’d have to pay very high capital gains taxes to reach simplicity."

This is so true, as I have the same problem that Allan does. After following Bogleheads for the past 2 years, I have now lost my appetite for buying individual stocks. If I had only discovered Bogleheads earlier, I would have a much simpler portfolio......

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by Allan Roth » Mon Jul 23, 2018 1:34 pm

sometimesinvestor wrote:
Sun Jul 22, 2018 8:58 am
Do you believe interest rates will be higher a year from now? I do and I even believe Taylor does . Therefore put your bond investment in a money market fund now(tax exempt if it produces a better after tax return) and decide in a year if bonds are a better choice.
Join the nation's top economists who have missed the direction of interest rates 70% of the time over the past few decades. "If the market actually knew that rates were going up on this bond, it would bid a price that has already taken that into account. It seems obvious enough, but sometimes obvious points aren’t so obvious."

http://www.etf.com/sections/index-inves ... nopaging=1

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by nedsaid » Tue Jul 24, 2018 11:18 am

Allan Roth wrote:
Mon Jul 23, 2018 1:34 pm
sometimesinvestor wrote:
Sun Jul 22, 2018 8:58 am
Do you believe interest rates will be higher a year from now? I do and I even believe Taylor does . Therefore put your bond investment in a money market fund now(tax exempt if it produces a better after tax return) and decide in a year if bonds are a better choice.
Join the nation's top economists who have missed the direction of interest rates 70% of the time over the past few decades. "If the market actually knew that rates were going up on this bond, it would bid a price that has already taken that into account. It seems obvious enough, but sometimes obvious points aren’t so obvious."

http://www.etf.com/sections/index-inves ... nopaging=1
Wow. If I wrote a newsletter that made economic and market forecasts and just flipped coins to make my forecasts, I suspect that I would outperform most such newsletters. I smell opportunity here. . .
A fool and his money are good for business.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by White Coat Investor » Tue Jul 24, 2018 11:23 am

Taylor Larimore wrote:
Sat Jul 21, 2018 1:45 pm
Bogleheads:

AARP has an excellent article about the importance of Simplicity written by Boglehead advisor, Allan Roth, CPA, CFA. These are excerpts:

"Though investing should be simple, simplicity can be quite difficult. There are powerful forces in play that compel us to overcomplicate."

"With a Vanguard Total Stock Market Index Fund (VTSMX) and a Vanguard Total International Stock Index Fund (VGTSX), you own more than 9,700 companies across the planet. And with a Vanguard Total Bond Market Index Fund (VBMFX), you own more than 8,000 of the highest-quality investment-grade U.S. bonds. Together, they maximize diversification and minimize expenses and taxes."

"4 forces preventing simplicity (condensed):

The belief we know the future.

We chase income.

The financial services industry.

Taxes."

4 Reasons Why We Overcomplicate Investing

Thank you, Allan Roth.

PS: Use my "Simplicity" link below to read what other experts say about the importance of simplicity.

Taylor
Surprised chasing higher returns or more diversification wasn't on the list. Those are the primary reasons I complicate my investing. Doing things like tilting the portfolio toward small value or adding on accredited syndicated real estate etc. It's a continual balance to decide whether the increased complexity is worth it or not.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by 2015 » Tue Jul 24, 2018 4:12 pm

White Coat Investor wrote:
Tue Jul 24, 2018 11:23 am
Taylor Larimore wrote:
Sat Jul 21, 2018 1:45 pm
Bogleheads:

AARP has an excellent article about the importance of Simplicity written by Boglehead advisor, Allan Roth, CPA, CFA. These are excerpts:

"Though investing should be simple, simplicity can be quite difficult. There are powerful forces in play that compel us to overcomplicate."

"With a Vanguard Total Stock Market Index Fund (VTSMX) and a Vanguard Total International Stock Index Fund (VGTSX), you own more than 9,700 companies across the planet. And with a Vanguard Total Bond Market Index Fund (VBMFX), you own more than 8,000 of the highest-quality investment-grade U.S. bonds. Together, they maximize diversification and minimize expenses and taxes."

"4 forces preventing simplicity (condensed):

The belief we know the future.

We chase income.

The financial services industry.

Taxes."

4 Reasons Why We Overcomplicate Investing

Thank you, Allan Roth.

PS: Use my "Simplicity" link below to read what other experts say about the importance of simplicity.

Taylor
Surprised chasing higher returns or more diversification wasn't on the list. Those are the primary reasons I complicate my investing. Doing things like tilting the portfolio toward small value or adding on accredited syndicated real estate etc. It's a continual balance to decide whether the increased complexity is worth it or not.
When you chase complexity you have to ask, "at what cost?" Complexity exists in a system in which many of the inputs are unknown and unknowable. Our lives are complex adaptive systems and our actions have consequences, secondary consequences, and unintended consequences. Estate planning, for example, is made onerous for our heirs the extent to which we create complexity in our financial lives. More importantly, life is more amenable to subtraction than to addition. Figure out the very worst thing that could happen from tilting or adding that real estate deal and seek to avoid that. As our lives exist in complex adaptive systems, the very worst thing might not be financial, it might just be divorce an alienated child as a result of neglect, for example.

The problem with being a "student of investing" is oftentimes life's forest is missed for the investing, personal finance, and economic trees.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by GAAP » Tue Jul 24, 2018 6:01 pm

The financial services industry:
If you’ve ever worked at a Casino before or known anyone that works at a Casino, they all will tell you the company motto: “If you’ve got a system, we’d love to see it”. That’s because from a mathematical perspective, there is absolutely no way a gambler with a system can consistently come out ahead. Having a system usually requires a long series of play, meaning your continued odds are always rising in the house’s favor.
https://www.doughroller.net/personal-fi ... as-winner/

Oh, wait -- that was about Las Vegas. Somehow still appropriate though...

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by Allan Roth » Thu Jul 26, 2018 1:38 pm

White Coat Investor wrote:
Tue Jul 24, 2018 11:23 am

Surprised chasing higher returns or more diversification wasn't on the list. Those are the primary reasons I complicate my investing. Doing things like tilting the portfolio toward small value or adding on accredited syndicated real estate etc. It's a continual balance to decide whether the increased complexity is worth it or not.
That's part of the belief that we think we know the future. Most times I complicate things, I end up regretting it. And that covers more than investing. :sharebeer

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by Allan Roth » Thu Jul 26, 2018 1:45 pm

nedsaid wrote:
Tue Jul 24, 2018 11:18 am

Wow. If I wrote a newsletter that made economic and market forecasts and just flipped coins to make my forecasts, I suspect that I would outperform most such newsletters. I smell opportunity here. . .
I wouldn't compare coin flippers to writers of market newsletters who study stocks and have compelling logic. In my opinion, it insults the coin flippers who do much better! :greedy

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by nedsaid » Thu Jul 26, 2018 2:12 pm

Allan Roth wrote:
Thu Jul 26, 2018 1:45 pm
nedsaid wrote:
Tue Jul 24, 2018 11:18 am

Wow. If I wrote a newsletter that made economic and market forecasts and just flipped coins to make my forecasts, I suspect that I would outperform most such newsletters. I smell opportunity here. . .
I wouldn't compare coin flippers to writers of market newsletters who study stocks and have compelling logic. In my opinion, it insults the coin flippers who do much better! :greedy
Human emotion is the thing that throws all of our beautiful forecasts out of kilter. Greed and fear.
A fool and his money are good for business.

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by shum » Thu Jul 26, 2018 3:10 pm

“As I tell people, if you can’t explain your investing strategy to an 8-year old, you’re doing something wrong.”

This is the final line and a test I think we need to pass. Those that can, really do understand what they are doing.

Great finish.

Thank you for sharing!
-shum

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Re: "4 Reasons Why We Overcomplicate Investing"

Post by White Coat Investor » Fri Jul 27, 2018 5:12 pm

shum wrote:
Thu Jul 26, 2018 3:10 pm
“As I tell people, if you can’t explain your investing strategy to an 8-year old, you’re doing something wrong.”

This is the final line and a test I think we need to pass. Those that can, really do understand what they are doing.
I guess I'd counter that with:

"Make things as simple as possible, but not simpler." Sometimes it is hard to know if you've done that.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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