Investing is Simple Until You Try to Outperform

Investing can be very simple. In fact, all the decision-making can be coded into a spreadsheet. The complication comes when you decide that you want to try to make more money than your neighbours.

Here is one formula for investing long-term savings. Pick a few broad low-cost index ETFs to cover the world’s stock markets and bond markets. Choose percentages for each ETF and how these percentages will change as you approach retirement. Code up a spreadsheet to tell you where to place new money to maintain your percentages and to when to rebalance if necessary. Then for the next few decades, do whatever the spreadsheet tells you to do.

After the initial phase of setting this up, it’s hard to imagine an easier plan to follow:

Friend: “What do you think about the crazy markets this year?”
You: “Dunno. My spreadsheet hasn’t told me to do anything lately.”

All the complications come into investing when you try to go for more than your “fair share.” One obvious attempt to outperform is poring over annual reports trying to picks stocks that will give above-average returns. But other perceived complexities of investing stem from attempts to outperform as well.

If you ask whether stocks are going to drop because you’re considering selling some of them, you are implicitly trying to outperform. At any given moment, someone owns each share of stock. When the market goes down 10%, the average invested dollar loses 10%. So, if you’re trying to avoid this loss, you’re trying to beat the market.

There is nothing wrong with beating the market if you can do it. The ironic thing is that the majority of people who put in serious effort to try to beat the market will actually lose to the market due to added costs such as commissions, spreads, and taxes.

If you decide to let go and just take what the market offers, your investing life can be very simple.