The late Charlie Munger liked to talk about the advantage of “trying to be consistently not stupid.” The way he phrased it was funny, but he was also serious about it. How can you apply this idea in your own financial life?
One way to help avoid errors in investing is to keep things simple, and in my view, simplicity should be a key pillar in building a portfolio. But it’s not easy. That’s because there are multiple, powerful forces that favor complexity over simplicity. I see at least five.
For starters, the investment industry prefers complexity for its own reasons. In addition to the thousands of individual stocks, there are nearly 8,000 mutual funds, each offered in an average of three share classes, resulting in a total of 24,000 different individual mutual fund options. Investment markets have been diced in every conceivable way, and yet fund companies continue to develop new products every year. Why? Because mutual fund companies are like any other kind of company; to stay competitive, they need to create new variations on their products each year.
The lesson: Recognize why these companies are creating new investment options. In my opinion, it’s to serve their needs, not yours.
