Ben Carlson at A Wealth of Common Sense has a great piece discussing why simple solutions are preferable to complex ones when it comes to investing. Carlson writes:
Simple does not mean easy or thoughtless. Simple actually requires more thought up front because it forces you to filter out the endless noise in the markets ahead of time. Simplifying helps you make better decisions by breaking down complex problems into component parts to better understand it.
We shouldn’t forget that even simple solutions are too much for most people to handle. It seems that modern life is full of paperwork (or online forms) of one kind or another. Ryan Cooper at The Week writes:
One of the signature features of modern life is stressing out over paperwork. Some of it probably can’t be avoided (buying a car, for instance) but a lot — especially anything connected with government programs — unquestionably could.
Retirement investing, is another feature of modern life that is already too complex. Cooper continues:
We load tons of responsibility on individuals, who are supposed to use tax-advantaged accounts like the 401(k) to save and invest in one of a slew of complicated mutual fund plans. Unsurprisingly, it does not work for most people. Instead it mainly fuels a cottage industry of swindlers who trick people into high-fee plans. How about instead we expand Social Security, paid for with taxes?
The irony is that Federal government workers already have access to simple and (very) cheap retirement investment options through the Thrift Savings Plan that would be the envy of most workers. Another challenge is that we as a society we often focus on the accumulation of assets but not the decumulation of assets in retirement.
A paper, “Reducing Sequence Risk Using Trend Following and the CAPE Ratio” forthcoming in the Financial Analysts Journal by Clare et al. demonstrates that challenge facing retirees. From the abstract:
The risk of experiencing bad investment outcomes at the wrong time, or sequence risk, is a poorly understood, but crucial aspect of the risk faced by investors, in particular those in the decumulation phase of their savings journey, typically over the period of retirement financed by a defined contributions pension scheme. Using US equity return data from 1872-2014 we show how this risk can be significantly reduced by applying trend-following investment strategies. We also demonstrate that knowledge of a valuation ratio such as the CAPE ratio at the beginning of a decumulation period is useful for enhancing sustainable investment income.
CAPE, trend following, decumulation. Good luck trying to explain that to the average investor. This dilemma reminds me of a post I wrote a long time ago talking about why the vast majority of investors DON’T want to trade. All they want is a fair shot at making a reasonable return on their hard earned savings. I wrote:
There is nothing wrong with trading. Just recognize that most people are playing, out of necessity, a very different game. They are trying to keep their jobs, their health insurance and their 401(k) plans. They aren’t traders. They are just trying to earn a modest return on their hard earned savings.
Is the solution similar to that in Australia? Not sure, but I am sure that the current system asks too much of investors when they are accumulating asset and decumulating savings in retirement. In an ideal world, some combination of the government and forward-thinking fintech startups would solve this problem. Fingers crossed.