Written by Erich M. Imphong, CFP®
Not many are familiar with the Franciscan philosopher, William of Ockham, however, some may have heard of his problem solving principle, Ockham’s Razor. The principle states that among competing hypotheses that predict equally well, the one with the fewest assumptions should be selected. In other words keep it simple. And to apply this to investing, invest in broadly diversified simple investments.
Ockham’s Razor & Investing
An example of applying Ockham’s Razor to investing is selecting a simple U.S. S&P 500 Index Fund. This thinking would suggest you’re better off investing in a broad diversified base of the best 500 companies in the world than trying to hit a homerun by concentrating your resources into one stock or one venture. Yes, concentrating your assets to one venture or company may be lucrative, but you should understand the risk and reward ahead of investing that way.
Warren Buffet & LeBron James
In a March 2, 2015 CNBC article Warren Buffet’s advice to LeBron James, LeBron James posted a question to Warren Buffet inquiring what should he be investing in now. Buffet responded, “Through the rest of his [LeBron’s] career and beyond making monthly investments in a low cost index fund makes a lot of sense.” Buffet followed this with “Everybody’s got an idea for him, and, usually the simplest is the best.”
LeBron’s first season in the NBA was the 2003-2004 season and during that season his gross salary from the Cleveland Cavaliers was $4,018,920. If at the youthful age of 19 had LeBron taken Warren Buffet’s advice and invested $1,000,000 in a simple index fund starting in 2004, that investment would have grown to $2,081,183.96 today (LeBron’s gross reported salary earnings through this season are $129M). Having your investment double over 10 years is not too shabby, but on a historical basis this is actually consistent with what an investment in the S&P 500 does growing at an annualized rate around 7% (today the average is closer to 10%)! That said, though we won’t all make over $100M during the course of our career, you can greatly amplify your earnings and bolster your savings by taking the simple approach and steadily invest your money in simple diversified investments.
Simply Start Investing
Not every investor will have the same investment success or luck Warren Buffet has had through the course of his career, but what every investor can achieve is the return of the market. This is of course not a bad foundation to invest towards your long-term goals. If this makes sense for you, the next step from here is to make a plan and simply start investing your earnings steadily into the market. With it being tax time, perhaps if you are fortunate enough to be receiving a refund you may want to kick-start your monthly investing by putting your refund to work in a simple diversified portfolio. Just remember to shave the complexity off investing and to keep it simple.
Below highlights an example of keeping it simple in investing. For the 30 year old considering getting the ball rolling in retirement, below is an illustration of contributing $500 monthly in a simple diversified portfolio of equities and bonds until the ripe age of 65 (In theory just as Buffet suggested to LeBron in the aforesaid lines). Here at Geier Asset Management, it is our goal to keep the process simple for you while at the same time helping you achieve your long term goals.
(Image from Betterment, LLC.)
Investments: Not FDIC Insured • No Bank Guarantee • May Lose Value. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature.
© Geier Asset Management, Inc. March 2015. Erich Imphong is a Client Manager and Assistant Portfolio Manager for Geier Asset Management, Inc., a Registered Investment Advisor. The above blog reflects the opinions of Mr. Imphong and not necessarily the firm. Any advice given is general in nature and investors must consider their own individual circumstances. Past performance is no indicator of future performance. The firm makes no warranties or representations of any kind relating to the accuracy or timeliness of the information provided.