The Investment Mistake Killing Your Returns
The Hidden Cost of Complexity: Why Simple Investing Wins in the Long Run
The financial industry often projects an image of delivering superior returns through complex strategies. This portrayal has worked well, and it’s why many people naturally find sophisticated or "exclusive" options more appealing.
We see this in a bias for complexity, where investors fall into the trap of layering portfolios with additional products, strategies, or structures, convinced that it will lead to superior outcomes.
But does added complexity actually translate to better outcomes?
The Allure of "Sophistication"
For decades, a simple balanced portfolio (like a 60% equities and 40% bonds mix) was a gold standard. In recent years, however, the trend has shifted towards embracing more complex portfolios, with retail investors now having access to alternative investments once reserved for large institutions.
This hasn't been without trade-offs. It complicates things for investors and raises a key question: is this added complexity and the higher fees that come with it worth it?
Counterintuitively, simplicity can be hard to appreciate in an industry focused on proliferating new products. Investors often have a profound bias toward complexity, which can be driven by two things:
The incentive for asset managers to justify higher fees by promoting complex strategies.
An investor's perception that intricate markets demand an intricate response.
The industry often earns higher fees by selling sophistication. However, it is well-documented that the majority of high-fee active fund managers fail to survive and beat their low-cost, passive counterparts over the long term.
Ultimately, investing is a game of trade-offs. There will always be a portfolio that outperforms yours in hindsight. But that doesn’t mean it’s the right approach for the future or for your specific goals. Staying grounded in your objectives and strategy is essential to avoid overcomplicating your portfolio.
When Complexity Fails
The allure of alternative asset classes can draw investors into intricate products where the mechanics and risks are difficult to grasp. This lack of understanding can have serious consequences.
We have seen cases in Australia where funds investing in complex, opaque debt instruments have collapsed when markets turned, as the underlying risks were not well understood by investors. When the market turned, margin calls were made, and the funds were forced to sell assets in a plummeting market, resulting in enormous losses.
Just because a product is well-rated or sold as "institutional-grade," it doesn’t imply that it belongs in your portfolio.
Managing complex financial products requires more time, effort, and resources. This can create inefficiencies and result in a directionless portfolio with lower overall returns. On top of this, there are significant cost implications. These naturally eat into your ability to compound returns over time.
Our Philosophy: Simplicity and Discipline
Successful investing is rarely about finding the "magic" product. It is about discipline and mastering the fundamentals.
A low-cost, broadly diversified portfolio, aligned with your personal goals and risk tolerance, is the most reliable path to building long-term wealth. The wealthy are often sold the idea that their money should buy them something superior to what the masses receive.
But in investing, the best choice is often the simplest one.
The search for superior investment advice often leads investors to high-fee managers who promise the world. Large fees flow to these managers if they recommend small shifts every year, often delivered in esoteric gibberish.
Our challenges as investors have shifted from a lack of access to a lack of understanding. The temptation to chase complex strategies should be grounded by a clear view of what you are trying to achieve.
Source: https://www.morningstar.com.au/personal-finance/investment-mistake-killing-your-returns
If you are interested in learning more, give us a call on 08 7477 8252. Our Adelaide based advice team can help you create a long-term portfolio, to generate both growth and income for your future.
General Advice Warning:The information on this website is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making an investment decision in relation to a financial product.