Episode Details

After almost 20 years of interacting with investors (and potential investors) on a daily basis, I’ve noticed some common themes that prevent investors from achieving their potential. If you can avoid all three, you are almost guaranteed to achieve financial security.

Whilst some of these matters seem relatively simple, you should not let their simplicity fool you into thinking that they are anything less than critical.

Why do we tend to overcomplicate matters?

I believe that investing is simple. If you adopt a rules and evidence-based approach towards making investment decisions, it is virtually impossible to make a mistake. Successful investing is rooted in sound logic and basic math. There is nothing overly complex about it that cannot be explained in simple terms. That is why I wrote Investopoly – to outline 8 time-tested rules that if followed, would guarantee investors avoid making costly mistakes. I apologise if that sounds like a sales spiel. And I appreciate it sounds like a big promise. But I stand by it.

If investing is simple, why do people over-complicate it? Of course, the reason depends on the individual. However, I think there are probably two reasons.

Firstly, there is a lot at stake i.e. my family’s financial security, our dreams and goals. Given what’s at stake, people can have the tendency to over-think it due to fear of making a mistake.

Secondly, to many people, investing seems complex. Humans tend to think that complex problems require complex solutions. The truth is, simple solutions tend to be very effective, exhibit lower risk, lower cost, easy to implement and easy to understand.

Most mistakes are made by over-complicating financial decisions than over-simplifying them.

Investment mistake # 1: try to work it all out themselves

As a rule, I don’t perform my own dental work. I go to a dentist. When buying a property, I don’t do the conveyancing myself. I engage a professional and experienced lawyer. I don’t service my car… you get the point.

I rely on various professionals when (1) the consequences of making a mistake are unacceptable and (2) I don’t have enough knowledge and experience to give me a high level of confidence that I will not make any mistakes.

It has always puzzled me why someone would invest more than $1 million of borrowed money (e.g. buy an investment property) without getting any professional advice. Firstly, $1 million is a lot of money and the relative performance (e.g. 1% p.a. more) of the asset over 10+ years can make a huge difference in dollar terms (which I previously demonstrated here).

Secondly, you are investing money that’s not yours i.e. borrowed money. It’s not yours to lose. And it comes at a cost (interest rate) – and that cost is guaranteed – you must pay it regardless. Therefore, if you are on the hook for the cost of debt, you should take all possible steps to minimise the risk of under-performance. If you are not prepared to do that, then perhaps you shouldn’t be borrowing to invest.

Investment mistake # 2: to reduce risk, aim for a quick profit

For almost 20 years I have written ad nauseam that ‘playing the long game’ gives you the greatest chance of successfully building wealth. That is, make investment/financial decisions that are focused solely on maximising outcomes in 10+ years’ time. This allows you to drown out all the (media) noise and focus on sound fundamentals. Fundamentals, not noise (rhetoric), drive investment returns in the long run.

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