Simple vs Complex Investing

Professional chefs may experience kitchen mishaps more frequently than the average home cook, be that kitchen accidents or throwing away a burnt attempt and starting again. While this may seem contrary to expectations, this is because expert chefs more frequently engage in complex and risky culinary techniques at high speeds, whereas home cooks typically cook less, take their time, and follow safer, simpler methods. You might be thinking ‘so what?’, but this statement holds an important lesson about money and investing.
 
Investors often believe that they need to engage in complex investment strategies to achieve high returns. However, investing in an actively managed portfolio which uses index funds, diversified across thousands of companies worldwide can outperform more complex strategies. Linking this to the chefs analogy: as investors gain more knowledge about investing (become professional chefs), they will tend to spend more time in the kitchen (time spent changing their investments) and venture into more intricate cooking styles (complex strategies). This increased confidence can lead them to frequently trade their portfolios, take on more risk through difficult-to-understand strategies, and potentially end up worse off (suffering a kitchen mishap) than those who stick to more basic cooking methods (simple strategies).
 
The lesson here is that simplicity and caution can lead to better outcomes in both investing and cooking alike. While it is possible to make short-term gains from adopting a complex investment strategy, maintaining these high returns over the long term can be difficult for all but the best in the game. In fact, over the long term, those who invest simply have done better than most of those who adopted a complex investment strategy, i.e. they were less likely to experience a kitchen mishap and still achieve the desired end result. Only 18% of investment funds that adopted a complex strategy outperformed the simple strategy over a 10-year period (source: Investor’s Business Daily). The table below highlights the key differences between a simple and complex investment strategy.

The takeaway here is for investors to avoid overconfidence and unnecessary overcomplication, which can lead them to be worse off than if they had stuck to a simple strategy. Overconfidence bias is a cognitive bias that negatively impacts investment returns by causing investors to overestimate their skill and knowledge, engage in strategies that aren’t fully understood, trade too frequently, incur higher costs, or ignore relevant information. Because of this bias, investors can end up making poor financial decisions. Investing wisely means recognising the risks, staying cautious, and avoiding overconfidence and overcomplication to ensure you reach your financial goals safely. A simpler investment strategy may be better for most individual investors, particularly those who are less experienced or have a lower risk tolerance. However, for sophisticated investors with a deep understanding of financial markets and a higher risk tolerance, more complex strategies can be beneficial. Importantly, for those who are wondering if they should invest at all, if we think of investing as ‘cooking’ and keeping your assets in cash as ‘going to the nearest fast-food joint’, to become wealthy (and healthy!), an investor must make their own meals i.e. they must invest. In short, it’s incredibly difficult to be self-sufficient financially without investing. Whichever strategy investors choose, it is important to align it with one's financial goals, knowledge, and risk appetite. 

The Noise

• The US economy grew faster than expected in the second quarter of 2024, amid solid gains in consumer spending and business investment. Q2 GBP increased at a 2.8% annualised rate, up from 1.4% in Q1 and meaningfully above estimates of 2%. Consumer spending rose faster than expected led by a rebound in goods consumption, with growth also receiving a boost from inventory building as well as increased government spending. The housing market recovery, however, regressed and was a small drag on the economy, with the trade deficit widening further and subtracting from GDP growth. The latest data calmed concerns that economic growth was in danger of ending abruptly, having been fuelled by a lacklustre performance in the first quarter and in April. With inflation pressures subsiding alongside resilient growth, hopes remain for a September interest rate cut from the Federal Reserve.

• British business activity rebounded in July after a lull in the run-up to the July 4th election, driven by the fastest manufacturing growth in two years and the strongest inflow of new orders since April 2023. Companies have noted an improvement in market confidence, with those operating across manufacturing and services having gained optimism about the future. The figures will come as good news for new PM Keir Starmer, as his government targets faster growth to allow for higher public spending. Although growth in 2024 has exceeded most forecasters’ expectations, Britain’s economy has performed relatively poorly since the COVID-19 pandemic. Among the Group of Seven rich economies, only Germany has done worse, having been more impacted by the surge in European natural gas prices following Russia’s full-scale invasion of Ukraine in 2022.

• ​The Japanese Yen is headed for its strongest week in nearly three months, as traders unwound long-held bets against the currency. Having hit a 38-year low against the US dollar earlier this month, it has since surged in value, as expectations that the Bank of Japan will raise rates next week grew. A sell-off in global stocks also drove investors into safe havens, including the Yen. Accelerating core inflation in Tokyo has supported the view that the Bank of Japan should raise rates next week, though the Central Bank have pointed to weakness in consumer spending complicating their decision.

The Numbers

The Nuance

Can the 2024 Paris Olympics be the greenest games yet? With medals crafted from iron salvaged during Eiffel Tower refurbishments and stadium seating made of recycled plastic, the organisers certainly hope so! The case to leave no stone unturned is clear, global warming linked to man-made carbon emissions is not just a growing risk to the environment, but will also impact an Olympian’s ability to perform at the highest level.

Paris 2024 has pledged to reduce its carbon emissions by half compared to the average emitted during the London and Rio Summer games. The biggest source of emissions during mega-events are traditionally the transport of participants and the construction of buildings and infrastructure. Rather than looking to build new facilities, 95% of the 26 competition venues either already exist or will be temporary sites. Any new building has been designed to emit less CO2 than the average edifice. They will also use renewable energy provided via the grid, rather than diesel-powered generators often used at sporting venues.

The athlete’s village, which will be repurposed afterwards as social housing, has caused controversy by having no built-in air conditioning. Instead, it was designed to rely on natural breezes and a geo-thermal cooling system. Many teams planned to bring portable aircon units to ensure athletes can sleep well during summer nights, forcing organisers to change course and install 2,500 portable units. Athletes and spectators will also notice over 60% of meal options will be vegetarian, helping to lower the carbon footprint.

Lingering concerns remain however, as almost 50% of the emissions from the Paris games will come from the travel and accommodation of athletes, officials and millions of spectators. Organisers will use carbon offsets in a number of countries to compensate for these emissions. Relying on offsets however is not as sustainable as reducing emissions in the first place.  Various credit-generating projects have also faced scrutiny over false claims about the benefits they deliver.

The River Seine, which has been the focus of years of effort to make it safe for the open-swimming and triathlon events. With E-Coli and other undesirable bacteria being detected as recently as the beginning of July, there were concerns that the triathlon may have to be converted to a duathlon to avoid the harmful river water. Since then, drier conditions have improved things and the water is expected to stay clean for the games.