FOOL'S EYE VIEW
Keep Investing Simple, Stupid

By Maynard Paton (TMFMayn)
April 19, 2002

Legendary US investor Warren Buffett once said: "What witch doctor has ever achieved fame and fortune by simply advising: 'Take two aspirins'? "

The quote is a dig at the professionals of the investment world. Their advice for anybody with a financial headache is rarely the equivalent of 'take two aspirins'. Instead, recommendation typically comes in the form of the complex and the mysterious, factors that benefit the purveyor of the suggestion but do little for those who act on it.

As we'll see, successful long-term investing isn't actually very difficult. But with their intricate ways, many in the financial services industry would have you believe otherwise. Those with a vested interest in the investment industry would probably argue that you'd need a qualified surgeon to do a heart bypass, a trained electrician to rewire a house, and a suitable mechanic to repair a car. So why should the ordinary person not need an experienced professional to look after their investments?

Of course, every walk of life has the odd 'cowboy'. But generally speaking, most surgeons, electricians, mechanics, indeed most people in fact, tend to do a reasonable job for their customers. And with your investments, a "reasonable job" is all you're after. Trouble is, the finance industry's professionals often struggle to achieve even that level of performance. 

For instance, the evidence against anybody promoting a managed fund continues to grow. A recent study of such funds stated:

"Nearly two-thirds of active funds (64% - 167 out of 260) failed to beat the FTSE All Share index, before initial charges, during 2001. Over a 20-year period 82% of funds (42 funds out of 51) failed to beat the index, before initial charges.

A "reasonable job" for a professional fund, you'd have thought, would be to at least match the index...

Mis-selling

Then there are professional financial advisers. In recent years, problems have occurred with varying degrees of mis-selling, involving such products as personal pensions, endowments, split-capital investment trusts and technology funds. Have all these products do a "reasonable job" for the purchaser? Furthermore, products such as guaranteed stock market bonds and high yield bond funds have recently gained popularity, the investing merits of which are not exactly clear-cut either. 

Given the generally poor reputation of managed funds and financial advisers, why does the investment industry continue to bombard the public with the unsatisfactory, the esoteric and the opaque?

Firstly, there will always be a steady stream of punters who think they're cleverer than most and can get that little bit extra in return. In order to 'help' such ambition, endless products are developed that imply great times ahead for the buyer. Latching on to trendy sectors and publishing impressive past performance figures is a popular trick.

But perhaps more importantly, by producing a vast range of different investment products, a veil of sophistication is created. With so much on offer, the unwary investor is led to believe that a certain amount of skill and experience is required. If you want to go it alone, won't you need to know about betas, hedging, shorting, asset allocation, risk reduction, moving averages, volatility, emerging markets, options, stop losses, diversification and the rest? Rather than get to grips with the jargon, simply trust your money with the professionals who understand such things...

Truth

Here's the truth of the matter. Successful investment revolves around simplicity. Many professionals will disagree, but complexity and obscurity almost always leads to money down the drain. Never invest in what you don't understand. Keep it simple, stupid! Leave the sophistication to the financial witch doctors.

In the main, DIY finance is within anyone's grasp. Here are the straightforward 'aspirins' that should cure most people's long-term investment headaches: 

* Leave enough cash in a high interest bank account to cover emergencies;

* Invest the bulk of your long-term savings in a cheap index tracker. They'll beat most managed funds and the building society over time (plus you don't need any skill or an adviser to pick one), and;

* Use low-cost savings vehicles like ISAs, stakeholder pensions and SIPPs, where the charging structure is straightforward and transparent.

More: Learn More About High Interest Bank Accounts, Index Trackers ISAs, Stakeholder Pensions and SIPPs