Simplicity and clarity of investment strategies are key parts of my investment philosophy and more and more data is starting to back up a low cost, broadly diversified investment plan. For instance, the New York Times just ran a story about Houghton College, a small college in western New York, and how their endowment outperformed Harvard, and the rest of the ivy league for that matter, during their last fiscal year. Houghton ditched their allocations to hedge funds, and instead invested in a broadly diversified set of low cost index and mutual funds. Their allocation was 76% equities (38% US, 38% International) and 24% bonds; A fairly aggressive positioning seeing as they had no hedging. During the fiscal year ending June 30, 2016 they were able to put together a return of 11.85%, as apposed to a negative ~2% at Harvard.
Similarly, Ben Carlson has compared complex college endowments to a simple three fund portfolio and found out-performance by the simple, cheap portfolio allocation. There are many reasons why institutional investors and high net worth investors often over-complicate their investment plans, and none seems more likely than the fact that simple advice isn’t sexy.
This belief that complexity correlates to quality is misguided at best and harmful to returns at worst. As it says on the front of the Greyfox website “Excess complexity is often a way to give the appearance of sophistication and frequently increases fees without increasing returns”.
There will certainly be times where complex strategies produce superior returns but I believe, and the data supports, that simple strategies will tend to outperform over the long term.