Rock Science
The old sign sits at the edge of the grass airfield in Katama on Martha’s Vineyard – a simple weather-divining device involving only a stone and some pithy instructions. It is a little worn but the message has endured.
Not just because it’s funny, but because it serves as a commonsense reminder to pilots before executing a flight plan:
Take a step back and don’t rely solely on complex models and fancy planning tools.
If the stone is wet, it’s raining, if the stone is white on top, it’s snowing, if the stone is gone… hurricane.
Some years ago, I was spending an evening at a house, which is across the street from the airfield. As can happen over Cape Cod and the Massachusetts islands, a thick fog had crept in from the Atlantic. Just as the sun was going down, we heard an aircraft flying in circles over our house, lower and lower, and finally disturbingly close to the roof, as it attempted to find the Katama airfield in the fog. Our uneasy anticipation of a plane crash went on for what seemed like an hour. We eventually stopped hearing the noise and prayed that the pilot had veered off for the lighted runways of the main Martha’s Vineyard airport or across Vineyard Sound to Hyannis. In the morning, we checked in with the airfield. Thankfully, no accident had been reported, but everyone had heard the same disturbing sounds. We all agreed that bold pilots can get themselves in trouble by relying too much on belief in their skill or fancy equipment.
As the saying goes, “There are many old pilots and many bold pilots, but very few old, bold pilots.”
What does this have to do with investing?
Plenty.
The investment world produces many forecasts and strategies designed on complex models and calculations. Product offices are staffed by PhD’s in math, statistics and physics. Actual rocket scientists are developing solutions that promise to add alpha and provide protection to help investors weather market conditions.
At Fiduciary Wealth Partners, we keep abreast of the latest ideas and explore new solutions that might help our clients. As we wrote in our Don’t Be A Sheep blog, however, we try hard to resist the pull of fancy new approaches and try not to run with the herd.
Why?
Because, consistently, the evidence shows that well-worn, simple approaches not only keep up but often outperform.
Many behavioral finance studies also show that investors are more likely to stick to solutions that are easily understood and that, by sticking to plans, they are more likely to reach their investment goals.
A well done piece comparing the simple to the complex was published by in 2014. The paper is based on independent academic research and compares data from Morningstar on all balanced funds to U.S. endowment portfolios, which frequently hold a complex array of traditional and alternative investments.
At the end, the researchers came to the following conclusion:
“The majority of endowments would have been better off had they simply invested in low-cost, diversified, transparent public mutual funds.”
By posting this, we are not suggesting that endowments are investing inappropriately based upon their goals (like individuals, every one is unique).
All we are pointing out is that keep-it-simple portfolios can keep up, and in many cases, outperform complex strategies.
At the end of the day, there will always be fancy new products and strategies in the investment marketplace. There are a lot of cool new gauges and instruments, too – analyses by really smart economists and market historians.
Take them all in, to whatever the limit of your tolerance for studying the markets. But don’t forget the following:
- If a strategy is so complicated that it can’t be explained in simple terms that you understand, consider passing on it in favor of something you can understand thoroughly enough to sleep at night.
- Fancy and complex can sound great, but increased complexity can also mean increased opportunity for mistakes or course corrections at the wrong time.
Even though a forecast looks promising, remember that models based on complex theories sometimes break down, especially when fog or unpredictable market storms develop.
Before starting a journey or making a major change in your financial flight plan, take a good look around at what the evidence in front of you is saying. Take a step back and consider that the best ideas, those that keep us out of trouble and on plan, may come from keep-it-simple “rock science”, not rocket science.
Related Reading:
Transparency, Simplicity, Peace of Mind®
Are Selectors Good at Selecting?
The Road Less Traveled – Simple Alternatives 
Are Most Investment Managers One Hit Wonders? 
The Certain Drag on Performance – Taxes