Complex by design

Note: I received a lot of feedback from my last post. Some of it actually constructive! This is a followup/expansion/continuation of those thoughts. 

You don't need people like me in your life.

You have probably read enough of me by now to figure out you don't need me in your life. But you also don't need people like me. Financial advisers. Investment managers. Stock pickers. Money gurus. 

Those who would tell you that the best way to add to your net worth is by surrendering a big chunk of it to add to their net worth. 

It's a funny thing, Wall Street. The best strategy, dare I say the most reliable strategy, is about as simple as they come: Buy good companies (or index funds), give them time to grow, and enjoy life. It's hard to find a strategy that works better.

You might need help to execute on such a strategy, but it isn't from a financial pro. The only hard part about that strategy is it requires patience, and holding strong even at moments when things go south. Hire a therapist, not a money manager. 

Obviously, this approach makes it difficult for money managers and financial gurus to afford nice cars, big houses, and mega-yachts. So, the financial services industry has been clever enough to invent layers upon layers of complexity designed to distract away from that core, simple strategy. To confuse you into believing that if not for their assistance, you will end up broke. And, of course, that assistance does not come cheap.

The vast majority of the complexity, sophistication, and gibberish that comes with the financial services industry is not there because it produces superior results for the customer, but rather it produces superior results for the adviser in the form of higher fees. 

I teach an investing class at a local high school. Early in the semester I told the kids there are four factors that go into making money from investing: Smarts, luck, time, and frugality. When investment gurus and portfolio managers make their pitch, they almost always rank those factors in order of importance as: 

1. Smarts (I know things!)

2. Luck (false modesty)

3. Time (handy excuse after a bad quarter)

4. Frugality (please don't pay attention to fees and costs)

When in reality, the true rank in terms of importance: 

1. Time

2. Frugality

3. Luck

4. Smarts

Time cures so many ills. On average, the market indexes go down 33% of the time, about one in every three years. That sort of volatility can make you feel helpless, and feeds into those who would sell you complex Rube Goldberg machines that are marketed as outsmarting the market but in reality, mostly just extract significant dollars from the customer. Step back and see that despite falling one in every three years, the S&P 500 has still grown at an annual rate of nearly 10% over the last century. 

When you are able to back out of the moment, away from the "DO SOMETHING NOW!!!" urgency, and things look decidedly simpler. And perhaps no Rube Goldberg machine is necessary. Even the worst of times, like the 2007-2009 crash, don't look so bad with the context of time.

Smarts, on the other hand, have almost nothing to do with market-beating returns. Or at least a lot less to do with it than the pros like to admit. By some counts 90% of fund managers fail to beat the market. 

Frugality is the one no one wants to talk about. Because that is the direct attack on everything Wall Street offers. The cheaper you are, and by that, I mean the less you pay for stock trades, investment recommendations, and financial advice, the less you need to earn to be financially secure. This is a simple concept: If someone promised to make you $500 but wants to charge you $750 to do so, you would say no. So why pay 2% in fees to try (emphasis on try) to beat the market by a couple of percentage points? 

A few caveats: There are times to pay for financial advice. Everyone should have a will, which is at least in part a financial exercise and something you should not do on your own. At various intervals you might also want to consider a fee-only planner who can look at your accounts and tell you if you are on track to reach your goals. Note though, the fee-only planner is simply charging you a set amount for a specific service, not trying to grab a percentage of your pile in return for promises of riches. 

This also isn't to suggest that anyone can pick stocks and beat the market at any time. It takes a lot of time and energy to pick stocks. For those who enjoy it, it is quite possible to beat the market. But for most, a low-cost index fund will do enough of the work for you without any of the hassle and without taking a significant chunk of what you earn. 

Fear is a powerful motivator. The financial services industry is built around it. The goal is to make things appear as complicated as possible, and position themselves as the superheroes with the ability to navigate through those complexities and save you from financial hardship. 

It's a brilliant and effective wealth extraction machine. Don't fall for it.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK.