I am a Chicago Cubs fan. It has been nothing short of miraculous to watch how Joe Maddon has transformed and led our team. Making a group of people believe that they can win it all after trying and failing (often miserably) for 107 years in a row is no small feat. Over the years, he has used a variety of innovative strategies to keep his team working together toward a winning season – from dress-up road trips, to penguins in the clubhouse, and especially his pithy sayings. In Chicago, we call them Maddonisms, and he has one for every occasion. My favorite Maddonism is “Do Simple Better.” And it seems to be one key to his success as he encourages the team to consistently do simple better through the huge up and down swings, long stable periods in the middle, and all the distracting noise that happens during the 162-game season. In many ways, I think the markets often behave in ways that are similar to the performance swings of a baseball team. One day you are up, the next you’re down, maybe you hit a hot streak, or maybe you’re stuck in a month-long slump. But whatever the score, you’re in it for the long haul. It turns out, “Do Simple Better” is a pretty good motto for baseball, but it is an even better motto for investors in today’s environment.
The problem with doing simple better in investing is that it is boring. Let’s face it, buying a call on a stock, watching it skyrocket, and closing out your position with a huge gain is a rush. For me, it beats playing a so-so hand into a winner at the poker table. It’s also fun to talk about. However, in the end, the rush isn’t really the goal. Successfully trading for a positive return on your investment over a sustained period takes a very rare combination of hard work, deep knowledge, talent, and patience. Like building a winning baseball team, it takes time and being willing to stick with your plan. The beauty of following a simple, passive investing strategy is that there is a large body of data and research that shows it works (and it’s actually not very hard). While not the best way to entertain a crowd at a bar with stories of that last best trade, it is a very effective way to build wealth. And if you are willing to take advantage of the research that is out there, it turns out that a little dose of boring in your investing can be a very exciting thing.
Standing on the Backs of Giants
I am a finance nerd. One of my favorite classes in graduate school was Arbitrage Portfolio Theory (my friends always tell me not to say things like this, but I can’t help it). Economists and financial theorists have the amazing ability to compound the problem of being painfully boring with a gift for making things so complex most people lose interest. One of the first contributors to this idea of doing simple better in investing was Harry Markowitz. He published groundbreaking research on Modern Portfolio Theory in 1952, outlining strategies that have proven to be key to successful investing.
Markowitz was followed by a string of economists and financial experts that have laid a clear foundation for very successful investing practices. These theorists were then followed by wave after wave of technical and market innovators that drove an evolution in the financial marketplace that Markowitz, Sharpe, and their peers would truly marvel at.
Early classes I took in financial theory espoused that buying 20 individual stocks and holding them was a good rule of thumb for building a diversified portfolio. Today, an investor who simply buys three Exchange Traded Funds (EFTs), can be invested in over 9,000 stocks and bonds that broadly cover the U.S. Equities Market, the U.S. Bond Market, and a non-U.S. broad-based set of securities – all with almost zero transaction cost. I believe Markowitz would be proud of what he helped start and simply amazed at the efficiency of these modern market tools and exchanges. Unfortunately, he would also be frustrated by how few people take advantage of these advancements to simplify their investing strategy.
Time In the Market
It is tempting to brush off investing advice by saying it all comes down to luck. In fact, you don’t need to be lucky to build wealth. But you do have to be willing to do simple better. Unless you have trouble sleeping, you don’t have to slog through the countless papers by economists that clearly demonstrate this one truism: a consistent accumulation of wealth over time is achievable if you regularly put money (even small amounts) in an investment portfolio. Even if you happen to pick the worst market period possible to start this routine, over time it really pays off. While we would all like to pick the homerun fund at exactly the right moment, there is a wealth of data that shows you are truly the exception if you can consistently outperform the broad market performance (in terms of either timing or making the right picks). A common phrase found in this research is that it is simply about time in the market, not timing the market.
The real way to get the best returns is to make the simple choices that you know will work – minimize your costs (fees and taxes) and start putting a few dollars away as often as possible. Do you love your morning coffee from your neighborhood coffee shop? It is costing way more than the price you pay at the register (including the tip for your favorite barista). If you made it yourself and invested that $5.50 every day in a fund that grows at an average market rate of 7%, then over a typical working career you would have over $500,000 to fund your retirement adventures.
While the discipline to save everyday sounds boring, several new companies have popped up that make all this easy. It’s easy to open an account, and with a few taps to connect that account to your bank account. A few more taps let you select a tool that will round the change up every time you use your debit card and put that spare change directly into your portfolio. Some of the most innovative solutions such as the Evati App have nifty charts and fun messages that replace the drudgery of thinking about finances with fun. The best part is that most of these tools have a set it and forget it feature; they apply modern portfolio theory (with the help of some finance PhDs) to pick the right ETFs, keep a continuous eye on them, and make changes if and when that’s necessary. In simple finance terms, these companies build well-diversified portfolios that are designed to minimize fees and taxes and make it very easy for you to contribute to your portfolio and to monitor progress.
This new wave of companies were built in the spirit of “Do Simple Better.” Best of all, some of them even let you load pictures and other amusing items so that it might not be so boring to show someone what you are doing in the next conversation where people are talking about their last best trade (and we don’t mean the one the Cubs did right at the MLB trading deadline).
To learn more about ways to simplify your investing habits and start on your path to financial fitness check out more posts at Inspire by Evati. (hyperlink Inspire by Evati to https://www.evati.com/inspire/)
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