(<2 min read time)

"Complexity is your enemy. Any fool can make something complex. It is hard to make something simple." - Richard Branson

I saw this quote from Sir Richard Branson in a small local newspaper last week and it reinforced to me one of the most common misconceptions I see held by investors and advisers all the time.

We as a species have developed the incorrect notion that the more complex our investments are, the better the product and return must be.

My experience over the last 15 years has shown me that nothing could be further from the truth. In reality, the more complex investment strategies are, the easier and more prone they are to “breaking”. Very much like a Formula 1 race car, they can go incredibly fast but they can also crash and burn when you least expect it, with devastating effects.

We forget that added complexity almost every time adds risk and cost to your strategy without necessarily providing the potential for greater return.

I can say that almost every time I have seen someone who has permanently lost money via poor investment choices or advice, it has been because they have invested in a product or strategy that was extremely complicated or that they didn’t truly understand.

Imagine investing in a strategy or product that is far too complex for you to understand, with little increased potential for return, much greater risk and to boot you pay up to 2-300% more in fees. Sounds a little bit like a “duh” moment, doesn’t it?

It is also reassuring to see Warren Buffett and Richard Branson (among many others), arguably two of the most successful investors of all time, both agree with me.

"I want to be able to explain my mistakes. This means I do only the things I completely understand." - Warren Buffet

Hence, as all my clients know, our recommended investment philosophy is well thought out, well researched, diversified, low in costs but overall simple and robust in its operation.

The kicker is, you don't have the sacrifice long term return on your investments just because they are simple. The only qualification being, it must be the right strategy not just any strategy!

Action for the month:-

Review your superannuation or investment portfolio and ask yourself the following two questions:

  1. Do I actually understand the investment strategy and products I am invested in?
  2. Have I stripped out all the unnecessary complexity (or risks) without impacting my potential for return?

Have a great month.

Cheers,

Ben Law.