Order and simplification

"Order and simplification are the first steps toward the mastery of a subject."

- Thomas Mann, Nobel Prize winning novelist

Mastering investments is about keeping order in your methodology and being simple in execution. Too often we tend to overcomplicate our investments in the hope of achieving superior results (depending on your goals). The hardest part of any investment program is to maintain order. In fact, many investment programs we review for new clients end up as a jumble of investment ideas (based on what was hot at the time of purchase) without any real philosophy or discipline.

Keep it simple

The reality of the investment world is that smart people get paid a great deal of money to complicate things-on purpose. They do this to make it appear that they are doing more (and therefore earning their money), or they feel that more complexity is needed to have something better than a simple plan. Yet when we look at how simple investments have fared historically against complex ones, we may come to a different conclusion-that simplicity and order will generally win over complexity and disorder.

If you look at the current state of the world, many of the problems originate with complex products that were sold to clients who really did not understand what they were getting themselves into or how they would help them to achieve their goals. Investments such as ABCPs, CDOs, SIV's, derivatives, and hedge funds, all seemed like good investments at the time, but for various reasons they failed, and many clients never knew their risks when they bought them.

We are constantly bombarded by new and more complex products that offer great features and promises, but when it comes time for these promises to be fulfilled, the products are lacking. To make sure that we never repeat history, here is a bit of advice:

Order- we recommend that your investment program be a process not a product. Your investment process will help you to understand why you make an investment, why you would sell it, how often and why you should rebalance and if it is meeting your objectives on a regular basis.

Simplification- the goal here is to make your portfolio uncomplicated. Too many times we want to either over or under diversify or continue to tinker with it, adding this and that investment depending on short-term trends. What this can lead to is sometimes called DI-WORSE-IFICATION. As an example, having too many Canadian Equity mutual funds all doing the same thing or holding similar investments is not diversification and in fact can lead to worse results in the long run. In our opinion, simplification means having few investments, knowing what they are, understanding their downside, and holding them for an appropriate length of time for them to work through your defined process. You don't have to follow the latest trends or fads. You don't have to keep adding to your portfolio. You just have to make sure the investments continue to have the same objectives that you originally bought them to accomplish.

So our advice to most people is: don't try anything fancy, stick to a SIMPLE diversified portfolio and rebalance and maintain ORDER periodically to keep your investment allocations in line with your long-term goals.

This financial crisis may turn out to be a good opportunity for us to take a hard look at our portfolios and return to the tried and true methods of investment management and financial planning.