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Why Simplicity Wins In Investing

I’ve always believed that simplicity wins in investing.

In a great recent post on his blog A Wealth of Common Sense, investment manager Ben Carlson compared the returns of college endowment funds in the US and a simple portfolio he called the Bogle Model (named after the index fund legend John Bogle).

US college endowment funds, as described by Carlson, invest in an incredibly complex manner:

“These funds are invested in venture capital, private equity, infrastructure, private real estate, timber, the best hedge funds money can buy; they have access to the best stock and bond fund managers; they use leverage; they invest in complicated derivatives; they use the biggest and most connected consultants…”

Meanwhile, the Bogle Model consists of three, simple, low-cost Vanguard funds. They are the Total U.S. Stock Market Index Fund (a fund that tracks the US stock market), the Total International Stock Market Index Fund (a fund that tracks stocks outside of the US), and the Total Bond Market Index Fund (a fund that tracks bonds).

The Bogle Model held these funds in weightings of 40%, 20%, and 40%, respectively.

What Carlson found was that over the five years ended 30 June 2016, the Bogle Model had generated an annual return of 6.5%. For the same period, the college endowment funds that belonged to the top decile in terms of returns had delivered annual returns of 6.6%.

For all the complex investing strategies the best-performing endowment funds employ, their returns over a five-year window were barely any better than a simple portfolio built with three low-cost funds that are easily accessible by just about any investor.

It gets better. For the 10 years ended 30 June 2016, the Bogle Model turned in an annual return of 6.0%. The top-decile US college endowment funds? 5.4%. The simple Bogle Model had beaten a group of the best-performing fancy-pants endowment funds.

There are simply no extra points awarded for difficulty in investing. Here’s another great example. In 1981, the investment manager with the best decade-long track record in the US was an unknown person named Edgerton Welch. When a small US newspaper interviewed him on his methods a year earlier in 1980, this is what they found:

  • He’d buy a share only if it’s rated as “1” by Value Line and is also highly recommended by two other brokerages. (Value Line is an investing newsletter that rates stocks on their cheapness; stocks with a rating of 1 are considered to be the cheapest.)
  • He sold when any of them changed their ratings.

It was as simple as that. Nothing fancy. No computers were needed and no star-gazing at charts were required. In investing, less complexity really is more.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.