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Complexity is overrated and over-sold within the investing world. Many investors believe that complexity will improve their returns. In truth, complexity often covers up flaws including high costs, illiquidity, and other characteristics that you probably don’t want in your portfolio.
Your Investments Don’t Need to be Complex to Succeed
Humans are complex beings with multiple layers of emotions, but this doesn’t mean you have to bow to complexity. Your financial life doesn’t need to be complicated, but it can easily trend that way if you don’t pay close attention.
Confucius wrote, “Life is really simple, but we insist on making it complicated.”
Financial product marketers work overtime to create investments that are difficult to fully comprehend. If you can’t understand an investment, don’t invest. If you don’t know how a potential investment would help achieve your goals, walk away.
Many investors believe that in order to capture good returns, complexity is necessary. That’s precisely what the investment marketers want you to believe.
Does Complex = Smart?
Complexity usually infers special knowledge or expertise, but is that really true? Does the aura of sophistication that often comes with complexity actually help you?
The question of complexity versus simplicity within financial markets has been widely studied and researched over the past couple decades. Most of these studies have concluded that the complicated approach to investing doesn’t necessarily lead to outperformance.
Financial complexity can actually be a hindrance, rather than a help in your quest for financial independence. We’ve had many clients over the years where the central focus at the onset of our relationship is on unraveling underperforming, complex investments.
Retrace your steps back to a clear understanding of why you’re investing and what you’re trying to accomplish. As you make investing decisions, use these questions as a guide.
How Does Complexity Harm You?
Portfolio complexity comes at a cost, both in terms of increased investment expenses, but also in terms of added emotional stress. The decision fatigue associated with keeping track of all the moving parts that come with overly complicated investments can be an emotional drain.
Complex investments also tend to be hard-to-sell investments. Private equity, private real estate, and hedge funds might have a place in some portfolios, but you always should be aware of how difficult it can be to sell these assets.
Some researchers postulate that investors seek complexity because they believe complexity is necessary to achieve premium returns. Investors fear uncertainty, and they think complexity will help alleviate this fear. In my experience, complexity and uncertainty are very different. Complexity can be managed by behaving rationally, while navigating uncertainty involves your emotions.
Daily financial news can challenge your discipline to stay focused on your personal goals and the foundation of your financial plan. Avoid letting anxiety about the future push you toward adding unnecessary complexity to your financial life. Simplicity wins the race most of the time.
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