Do Complex Investment Portfolios Add Additional Value?

When we meet with potential new clients, one of the very first things we do is review their existing investment portfolio. Over the years, one of the most common themes we’ve noticed is that most portfolios we come across are very complex.

These complex portfolios are chock full, with lots of different funds, fund managers, asset classes, currencies, charges, and tax treatment. Our long-held view is that in almost all cases, simplicity beats complexity in the long term.

What’s the best investment strategy?

We like to say, “the best investment strategy we can give you is the one you are most likely to stick with”.

Take me as an example. I’m trying to be healthier at the moment – working towards losing weight, eating healthier, having more energy, and so on. Now, the best fitness regime I could find is probably something an Olympic athlete is following. But will it be effective for me? Of course not! I need something simple that I can follow easily and that focuses on sound, basic principles.

As it turns out the same applies to your investment strategy.

Simplicity beats complexity

A recent study from Morningstar (read here) found that the average investor underperforms the funds they are invested in by about 1.7% per annum.

Whilst that doesn’t sound like a staggering figure in isolation, when you run the figures against the amount you have invested in your myriad of funds, that stacks up over the long term to what can be a life changing amount of money.

The study found a number of reasons for this, which I will summarise below but the common theme was that the more complex an investor’s portfolio was, the more likely they were to make bad investment decisions. Those who invested in a simpler portfolio or “one fund solutions”, didn’t see as big an underperformance for three simple reasons:

1. Less opportunity for behavioural biases
2. Smoother returns helped keep investors “in their seats”
3. Good beats perfect

Why does it do that?

This study observed that investors who opt for one fund solutions tend to secure a larger portion of the total returns generated by these funds. This phenomenon can be attributed to the fact that allocation funds are intentionally crafted as comprehensive investment vehicles, encompassing a variety of asset classes and regularly adjusting their holdings. This approach relieves investors from the need for extensive portfolio management.

Furthermore, allocation funds serve as a safeguard against common mental accounting errors that investors often make, such as increasing investments in a high-performing standalone strategy while selling an underperforming one, when the opposite action may be more prudent. By combining these strategies, allocation funds effectively mitigate performance disparities that might otherwise trigger impulsive investor reactions.

Possibly the most notable observation from this study is that investors seem to encounter difficulties in effectively utilising funds with narrow focus or high volatility. Whether these funds belonged to nontraditional equity categories or were characterised by extreme volatility within their respective groups, they exhibited some of the most significant performance disparities we assessed.

For most investors, a more prudent approach would involve embracing simplicity, with an emphasis on broad diversification and cost-efficiency. The data indicates that investors achieved more favourable outcomes when they leaned towards straightforward options such as allocation funds.

So, what should I do?

What can we learn from all this? Well, here are the key principles:

• Most families can achieve investment success with one fund that is heavily invested in the great companies of the world.
 
• Your investment is like a bar of soap; the more you touch it, the less there is. A good financial advisor should focus more on your investment behaviour than finding the best investment every few years.

Things that add value:

• Low fees
• Tax Efficiency
• Global Diversification
• A financial plan
• Behavioural Investment coaching

Things that don’t add value:

• Timing the market
• Trying to outthink the market.
• Complex investment portfolios with lots of different holdings
• Financial Advisors with a shiny new investment opportunity

What next?

If you’d like to sit down with us to review your portfolio together, we’d be more than happy to oblige. Give us a call on 01 908 1500 or email us at info@metisireland.ie to get started.

Cian Callaghan
Private Client Manager