Simplicity is the ultimate sophistication

Posted by on August 1, 2013 @ 2:15 pm in Investing

If there was ever a person who appreciated the intricacy of the world around us, it would have to be Leonardo da Vinci. His fascination with complex systems from human anatomy to the mechanical world led him to some fascinating discoveries, not the least of which was his statement that ‘simplicity is the ultimate sophistication.’

Lately, the financial press has been critiquing a ‘simple’ portfolio using a few broad-market index funds to implement an asset allocation. What’s been most surprising is the frequency that ‘simple’ was used with negative connotations. I guess I shouldn’t be totally surprised since in today’s investing world everyone seems to be striving to be a ‘sophisticated’ investor. After all, who wouldn’t prefer to think of themselves as a sophisticated, rather than simple, investor? Of course, this also tends to mean they’re buying into a lot of different investments and strategies, often, with only a superficial understanding of what those strategies actually do. That’s sophisticated? To me, it sounds a little like the investment equivalent of a Rube Goldberg machine.

For most investors, whether they are institutions or individuals, the landscape of investment choices and strategies has become an increasingly complex environment and ‘opportunity overload’ abounds. While I believe that two U.S. bear markets over a 12-year period resulted in a lot of second-guessing of investment strategies, the investment industry’s product manufacturing machine has had a lot to do with the increasing number of choices too. In our view, selling complexity as ‘sophisticated’ is as erroneous as claiming that simple is ‘simplistic.’

For many if not most investors, a portfolio that provides them with the simplicity of broad asset-class diversification, low-costs, and return transparency will likely enable them to comfortably adopt the investment strategy, embrace it with confidence, and better endure the inevitable ups and downs in the markets. This isn’t just a theory, it’s how we’ve chosen to construct our single-fund solutions. Complexity is not necessarily sophisticated, it’s just complex. And, if trying to give investors the best chance for investment success is ‘simplistic,’ then we’ll gladly plead ‘guilty as charged.’

I would like to thank my colleague Catherine Gordon for her expert perspective and contribution to this blog.

Note: All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss.

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