Conventional wisdom is a byproduct of groupthink that presents solutions good enough for the average person while simultaneously not being right for any individual. You follow it at your peril. The more different you are from the person that defined a rule the less you should follow the rule. Each Monday I will challenge the investing norms that just may be holding you back from living the life you want.

A simple way to better returns 

“Our life is frittered away by detail. Simplify, simplify.”

     - Henry David Thoreau

The Bowerbird lives in Papua New Guinea and the north of Australia. To attract a mate the male Bowerbird builds an elaborate nest filled with brightly coloured objects.

To choose a mate the female bird returns multiple times to different nests. During the visit the male Bowerbird puts on a bit of a dance routine. The pressure is on the male Bowerbirds. This is a winner take all exercise. Multiple females will mate with one male. That leaves the males with subpar nests and dance moves without a mate.   

Seems simple enough. The female bird wants a nice place to raise her offspring so she picks a male with a nice house. Plus some good dance moves never hurt anyone trying to mate. A little shallow for my taste but you can’t argue with the logic. Except the female Bowerbird is not a gold digger. The nest the male builds is just for show. After mating the male is out of the picture. The female builds another nest to lay eggs and raise the young.

Is more better?

The Bowerbirds who manically add more and more to their nests aren’t the only organism that thinks adding is key to improvement. We humans have the same tendency. Conventional wisdom is that more is better. Professor Leidy Klotz explored this concept in his book Subtract.

Klotz performed a series of experiments and found that when asked to make something better most people came up with the same solution – add more. To create a better Lego structure people added more Legos. When asked to adjust an already jam-packed holiday itinerary people added more activities. Klotz’s work demonstrates our bias as humans is to associate more with better. Just like the Bowerbird.

Don’t confuse competence with complexity

In Professor Klotz’s experiments most people never even considered subtraction as a solution. Subtraction is not always the best solution but to not even consider it is limiting. A study by the US firm Broadridge found that between 2018 and 2022 the average US investor increased the number of positions in their portfolios by 42%. For 60-year-old investors the average portfolio contained 5.1 managed funds, 4.2 ETFs and 8.5 individual share holdings.

Investors are clearly comfortable with the adage that more is better. The fact that this meaningful increase in portfolio holdings occurred in conjunction with a proliferation of new investment products is unsurprising. The investment industry is incentivised to portray successful investing as complex. That encourages investors to pay for help managing their portfolios. It encourages more holdings and more trading which is good for the industry. It is likely bad for investors.   

There are benefits to simplicity when it comes to investing. This notion was explored by portfolio manager Ben Carson in his book A Wealth of Common Sense. He advocated for investors to create a buffer between their portfolios and their emotions. He cited a study that showed people ate three times less chocolate if the sweets were a short walk away instead of just in front of them.

If your portfolio is simple you are likely to check it less often. Constantly checking your portfolio is the equivalent of having the chocolate right in front of you. You will be frequently tempted to make changes. Given investor predilections for chasing performance and overtrading at inopportune times more changes will likely result in lower returns. Decision fatigue may also set in which refers to the deteriorating quality of decision making when constantly confronted with making choices.  

Diversification is important. But once you’ve achieved a certain level of diversification more holdings can be counterproductive. Holding broadly diversified ETFs means you can build a portfolio with only a few holdings. You don’t have to own every niche asset class.  

How to simplify your investment approach  

The male Bowerbirds are competing to show competence. Even though that competence has no real-world value it ends up impressing other birds. We do this a lot as humans. We put on a show to impress people. Like the Bowerbirds the show has little relation to our actual competence.

If you are reading this article it is likely that you are the one responsible for investing for your family. Perhaps investing is also linked to your standing with your extended family and friends. You may be known as the one that is ‘good with money’. Whether intentional or not investing may have become part of your self-identity.

Perhaps your portfolio and investment strategy has become a bit like a Bowerbird nest. You may have holdings that are brightly coloured ornaments that serve no practical purpose other than as a false symbol of competence. The more complex your portfolio the more competent you appear to your peers. You might sound smarter describing your sophisticated portfolio at a cocktail party. You might also be hurting your long-term returns.  

There are two ways to simplify your portfolio. The obvious way is to have less holdings. This likely means taking a passive approach. For many people that is sensible. Remember that it takes no skill and little effort to get the average return. It takes more skill and more effort to try and beat the market – and most people fail. Average has a bad connotation in day-to-day life. But when it comes to investing average is likely all you need to hit your goals.

The other way to simplify is to have a more straightforward investment strategy. Simple does not mean simplistic. For example, Shani takes an approach where she controls what she can control. That includes her savings levels, the fees she pays and her behaviour which impacts her tax outcomes. She lets her investments take care of themselves.

I also pursue a simple investment strategy. I’m an income investor and focus on dividends with a goal of growing my passive income faster than inflation. It isn’t that I don’t care about capital appreciation. It just isn’t my primary focus. I certainly don’t care if my portfolio underperforms over multi-year periods. I just buy and hold great companies and ETFs and let the dividends roll in.  

We can contrast the approach that Shani and I take with an investor that is constantly trying to ‘beat’ the market each year. That is complex. An investor with that goal needs to worry about the macroeconomic environment, interest rates, geo-political risks and the catalysts for different types of investments. To do this means constantly monitoring your portfolio, forecasting short-term earnings, rotating your portfolio and continually reevaluating each position. This is the way successful investing gets portrayed in the media. It is also almost impossible to do.

Final thoughts

When you are trying to solve your next investing problem – whatever it may be – consider if simplicity is the best approach. Ben Carson wrote that “complexity tends to be the default option that gets used to persuade investors to buy unnecessary investment products, while the vast majority of people really just need to understand more conventional options to succeed.” I couldn’t agree more.

Please share any thoughts or topic suggestions with me at [email protected]  

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What I've been eating

There are lots of reasons I keep going back to Chiang Mai. Khao soi gai is high on the list. The dish is rumoured to have been introduced by Chinese Muslim traders working the spice route. It has a bit of everything. Chicken and rice noodles in a spicy milk curry topped with crispy noodles. I recently had a delicious version in the Mae Rim district outside of Chiang Mai in early January.

Khao Soi Gai