A Monevator reader writes:
“I’m wondering if you have any general advice for someone on the edge of choosing between Vanguard’s LifeStrategy [1] fund or going DIY (i.e. a Slow and Steady [2] rip-off, adjusted for risk I’m comfortable with)?
I’ve been going over it all for too long, devouring this site and others. I’ve also read Smarter Investing [3], as well as a handful of other books on the topic.”
Dear Reader,
You’re not alone – a lot of people freeze at this stage. I was personally stuck in analysis paralysis for over a year before I made my first investment.
I was going round in circles, like a plane awaiting permission to land. Eventually I realised that I already had all the permission I was going to get.
I was frightened of doing the wrong thing and was hoping that the ‘right answer’ would somehow strike me like lightning.
But the truth is that if you’re deciding between different shades of a diversified passive investing strategy [4] then you’re already as close to the right answer as you can get.
Like crack parachutists, most passive investing strategies will land you in roughly the same ballpark [5], and it’s fruitless to try to predict which one will come closest to the bullseye.1 [6]
Jump out of the plane! You won’t break your legs so long as you:
- Diversify across [7] global equities and high-quality government bonds.
- Take a conservative approach to risk tolerance [8]. If you have no experience in the market and you’ve got more than 15 years of investing ahead of you, choose a 60:40 or 50:50 global equity:government bond split until you have some idea of how you will respond in a crisis.
- Keep your costs low [9]. The evidence against high fees is overwhelming. The UK’s financial regulator, the Financial Conduct Authority (FCA), published a report [10]showing that benefiting from cheaper – but typical – passive fund costs could mean you 44% better off versus typical active fund costs.
- Take action over a difference of 1% or 0.5% in fund and broker fees – but don’t sweat less than 0.1%.
- Begin! The sooner you start investing [11], the easier it will be for you to reach your goal. So just start. Put away what you can into your ISA or in your pension – but stop putting it off. Get some momentum going, then work out the finer details like how much you should be investing later. (In fact do this next, once you’re investing monthly. It’s not hard [12].)
- Automate your plan [13]. Don’t panic sell and don’t chop and change.
Even though I was committed to the passive way from my earliest investing years, I still sought advantages through optimisation.
That’s a very human thing to do, but the most important lesson I’ve learned since is to keep things simple.
Don’t take my word for it, ask Warren Buffett
Warren Buffett is one of the world’s richest men and one of the greatest investors of all time. He doesn’t need your money, he has nothing to prove, and he is a legend in his own lifetime.
He recommends plain vanilla passive investing.
Buffett makes his case in three pages of condensed and delightful wisdom that you can read in his 2017 Berkshire Hathaway shareholder letter [14]2 [15].
To condense Buffett’s wisdom still further:
The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.
Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund.
To their credit, my friends who possess only modest means have usually followed my suggestion.
I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.
Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something ‘extra’ in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else.
The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”
If you want hard evidence instead of sage advice, read about Buffett’s winning bet against the hedge fund industry. The gory details are recounted from page 21 of the same letter.
Warren Buffett, pah! Enter The Accumulator!
It’s tough to follow a Warren Buffett mic drop (are people still dropping mics?) but I think I can do it with the tale of The Accumulator versus The Accumulator’s Mum.
The Accumulator’s Mum knows naff all about investing – having outsourced all responsibility to her family office, aka The Accumulator.
The Accumulator can at least claim he knows more about investing than his mum.
The Accumulator’s Mum has beaten The Accumulator over the last seven years.
The Accumulator put his mum into a Vanguard LifeStrategy fund.
While The Accumulator knew his mum needed the simplest strategy possible – and so gave her one – he himself wanted to ‘optimise’ through factor investing [16], REITs, over-balancing into the lowest P/E ratio investments, yadda yadda, yadda.
All that effort left The Accumulator trailing The Accumulator’s Mum’s higher passive exposure to the US market and her lower exposure to value equities [17].
The Accumulator hasn’t told his mum about this. If you’re reading mum, you’re welcome.
Please don’t go on about it.
Oblivious investing
You’ve heard from Warren Buffett and the Accumulator’s Mum. What more do you need?
Allow me to cite one last source – a wise and unassuming US financial blogger called Mike Piper, aka The Oblivious Investor.
Piper is one of those rare bloggers who risked their reputation by announcing that they’ve reduced their strategy down to ‘The Accumulator’s Mum’ level of easy-peasy-ness.
Piper made a succinct case for simplicity [18], stating:
The primary reason we made the change was to defend against what I’ve come to see as the biggest threat to our investment success: me.
To be more specific, it’s my temptation to tinker that scares me.
Piper’s evidence-based approach taught him that asset allocation is not precise – he calls it a sloppy science. Moreover, he realized that his expertise could be counterproductive and that the smartest move he could make was to reduce the chance that he’d screw up his own plan.
Piper’s answer [19] was to move everything into a Vanguard LifeStrategy fund.
(In the interests of balance, please note that alternatives [20] to Vanguard’s LifeStrategy fund are available.)
Take the plunge
My own experience has been similar to Piper’s: simplicity has a value all of its own.
The promise of complex strategies often goes unfulfilled, as illustrated by our recent look at the last 10-years of investment returns [21].
I’ve had to learn a lot to realise I don’t need to know as much as I thought.
The no-brainer approach [22] really is a no-brainer.
Take it steady,
The Accumulator