A simple indexed portfolio of 60 percent stocks, 40 percent bonds has blown away most professional investors over the last decade.
Go out to a baseball field and watch the outfielders catch fly balls. Or, better yet, swing by the park and watch the dogs chase and catch Frisbees in flight. These are everyday occurrences we hardly give thought to. But perhaps we should.
Being able to catch moving objects flying through the air is very cool. But how do we do it?
Well, if you were a math geek, you might be able to calculate the trajectory of these thrown objects and know exactly where you’d have to run in order to catch them in mid-flight. Let’s see, all you’d need to know is 1) the ball’s initial forward velocity, 2) rotational spin velocity, 3) angle of ascent, 4) wind and air parameters, 5) a bit about Newton’s laws on gravity and then voila! You should then be able to simply calculate exactly where the ball will land. So just run right over and catch it. Easy Peasy.
Or, if your math skills are a bit rusty, maybe you could just do this: Run at a speed so that your angle of gaze to the ball remains roughly constant. Then, when it gets close enough, catch it.
There. Less really is more. We investors should strive to apply this sort of thinking to our own affairs — especially in this day and age, where everything seems so complicated and we are competing against professionals who seem to have so many advantages.
Funny thing, when it comes to standing out, most pros have done so in a most unexpected way. It turns out that try as they may, most active professional investors simply do not beat or match the returns offered by the markets they invest in.
Because they are all essentially welltrained and smart graduates from the best (and often same) business schools and compete against one another, it has progressively gotten more and more difficult to move to the head of the class. Michael Mauboussin calls this phenomena the Paradox of Skill, which states that as the average skill level of the players in the game has increased, the more difficult for even the smartest to win, thereby, by necessity, introducing simple luck as a requirement to win.
Question — How do you beat Tiger Woods?
Answer — Play him at anything except golf.
Don’t waste your time trying to beat the pros by playing their game. Investing does not need to be — nor should it be — complicated. As Warren Buffet has stated, “Investing is not like Olympic diving. There are no style points awarded for degrees of difficulty.”
The fact of the matter is a simple indexed portfolio of 60 percent stocks and 40 percent bonds has blown away most professional investors over the last decade. And that includes a wide variety of investment styles, including growth, value, small cap, large cap, allcap, international, emerging markets and alternative assets, and it especially includes hedge funds, which of course are not really investments but rather compensation schemes for their sponsors.
So, forget the bells and whistles that complicate your investment life. Put down your smart phone. Log off that trading site. Just align your portfolio with a simple solution, and get there. An indexed approach of 60 percent stocks and 40 percent bonds is a really good start.
It has been said that, paradoxically, dumb money can become quite smart once it recognizes its limitations. How true that statement is. As Leonardo DaVinci noted 500 years ago: simplicity is the ultimate sophistication. Remember this the next time you go out to toss a ball or throw a Frisbee to your dog.
Bo Billeaud has served as president and chief investment officer of Lafayette-based Billeaud Capital Management for almost three decades.