The Wall Street Journal had an article this weekend singing the praises of hedge funds. As a whole, they earned +11% last year (although the article pointed out some did far better, and some, which the article didn’t point out, did far worse).
I’m not impressed. Last year the MSCI World Index did over +16% and a short-term bond index did almost +4%. It seems like +11% was just as easily achievable via some simple combination of stocks and bonds. Emphasis on the word simple.
When I’m talking to a prospective client in the $10+M range, it’s almost always been the case that if they’ve talked to another “advisor” (brokerage firm, bank, or big conglomerate RIA firm), they will have been pitched hedge funds, along with other “alternative” assets like private equity, private credit (bonds), “real” assets (real estate, farm land, etc.). If that sounds complicated, it’s because it is.
When I ask them why they think they need these things, they’re not sure. I usually get some kind of answer like “I thought this is just what people like us invest in.” Uh-oh.
There’s no denying that the economy, politics, and investment markets are complex and complicated. But the answer to a complex problem is rarely a complex solution. As in other areas of life, instead opting for a simple (not simplistic), transparent, focused solution will work better and be easier to understand.
You don’t need to overcomplicate your investments, no matter your goals or net worth. Just look at the long-term returns on stocks and bonds—very reasonable returns for their level of risk. And probably more than sufficient to achieve your goals. (Side note, I’m always amused when I first show a potential client the portfolio I’m proposing for them—it has five or six core stock and/or stock and bond asset classes; they look at it and immediately turn the page over as if there’s more on the back. Every time. There’s nothing on the back—a good portfolio should always fit on one page).
In the rare times I’ve come across people who weren’t going to be able to meet their goals simply earning the long-term rates of return on some combination of stocks and bonds, I’ve found it wasn’t a problem with mainstream stock and bond investments, it was a problem with those folks’ wholly unreasonable goals.
We’re all just regular people, with reasonable long-term financial goals, no matter how many zeros our brokerage accounts say. Don’t let Wall Street and big investment firms convince you that you need a complex investment portfolio. One of my favorite sayings is this: Complexity isn’t sophisticated, it’s just complicated.
People like us don’t need to invest that way.
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