{"id":3073,"date":"2016-10-30T22:39:42","date_gmt":"2016-10-30T22:39:42","guid":{"rendered":"https:\/\/raizinvest.com.au\/investors\/the-8020-principle-of-investing\/"},"modified":"2024-04-04T19:00:40","modified_gmt":"2024-04-04T19:00:40","slug":"the-8020-principle-of-investing","status":"publish","type":"post","link":"https:\/\/raizinvest.com.au\/investors\/blog\/the-8020-principle-of-investing\/","title":{"rendered":"The 80\/20 Principle of Investing"},"content":{"rendered":"
\"image\"<\/figure>\n

By Clayton Daniel<\/a><\/p>\n

Do
\nyou know what investing is? Confusing.<\/span><\/p>\n

To
\ncircumvent that issue, you can do what most people do \u2013 learn.<\/p>\n

Ahh
\nyes. Learning about investing. Such a fantastic topic isn\u2019t it. Perhaps, the
\nmore you learn, the better returns you\u2019ll get? Maybe outperform the market?
\nMaybe find the NBT (Next Big Thing)?<\/p>\n

I
\nknow. I started on this journey over a decade ago. Read a bunch of books. Went
\nto a few classes at uni. Even got a degree! Worked in tax, super, investments,
\ncash flow. Opened up my own shop. Clients came in. I researched portfolios. We
\ndiscussed those portfolios. These portfolios had \u2018Foreign Exposure\u2019 with
\n\u2018Counter-Cyclical Hedges\u2019, \u2018Active Managers\u2019 that would use \u2018Dynamic Asset
\nAllocation\u2019 to ensure \u2018Market Trends\u2019 were taken advantage of.<\/p>\n

Oh
\nGod. It hurts even just to write it all down.<\/p>\n

Here\u2019s
\nthe thing. The world of investing has taken something that is honestly quite
\nrudimentary and fluffed it up to be something it isn\u2019t. Or to put simply, we
\nspend 80% of our time, effort and resources aiming for that last 20%.<\/p>\n

What
\ndo I mean?<\/p>\n

I
\nmean, it\u2019s not a surprise to anyone in the greater investment industry to spout
\noff this fact \u2018the majority of active managers underperform the benchmark\u2019. Now
\nwhat that financy-pants language means is that the\u00a0majority<\/i>\u00a0of
\nprofessional investment teams do\u00a0worse<\/i>\u00a0than if they had just
\ndone nothing.<\/p>\n

That\u2019s
\nright.<\/p>\n

For
\nall the posturing, all the research, all the education, all the fanfare, all
\nthe talk, all the mumbo-jumbo\u2026\u2026\u2026\u2026\u2026\u2026. Most of the time it\u2019s not only for naught,
\nbut detrimental.<\/p>\n

That\u2019s
\na pretty condemning statistic. Could you imagine if the medical industry had
\nthese kind of results? Could you imagine if \u2018go home and rest\u2019 had a higher
\nchance of survival for cancer patients than having treatment? We would be up in
\narms.<\/p>\n

But
\nthe investment community has a different opinion. And that is because everyone
\nis convinced they can pick that top 20%. And so that is what everyone is aiming
\nfor. To \u2018beat the market\u2019 by being smart enough to get in the top 20%. It makes
\nsense. Everyone has an ego. And everyone has hubris \u2013 especially when it\u2019s
\nother people\u2019s money\u2026<\/p>\n

But
\nhere\u2019s the thing. What if you said \u2018no more\u2019. What would happen? What if you
\nstepped out of the hustle and bustle of trying to get that last 20% and were
\nhappy with the 80%. What kind of world would that look like? What kind of
\nresearch, education, monitoring and ongoing effort would that require from you?<\/p>\n

Or
\nput simply, how much of your attention would you have to give your investments
\nif you were happy with 80% of the possible returns?<\/p>\n

I\u2019m
\nsure you\u2019re probably anticipating the answer to be 20% of the effort. I mean,
\nthat\u2019s how it normally goes doesn\u2019t it. Well not quite. It\u2019s less than that.<\/p>\n

How
\nabout one percent?<\/p>\n

One
\npercent effort is all you need. And even that is pushing it. If you\u2019re happy to
\njust go along with the ups and downs of the market, you don\u2019t have to do
\nanything. At all. Once the purchase has been made, there is zero upkeep for
\nyou.<\/p>\n

Let
\nme explain how this works.<\/p>\n

Like
\neverything else in finance, the solution comes in the form of an acronym.<\/p>\n

ETF
\n\u2013 Exchange Traded Funds. Really simply, ETF\u2019s are an algorithm that trades
\nstocks. Sounds complex, but it isn\u2019t. Most ETF\u2019s have a VERY simple trading
\nstrategy. The algorithms aren\u2019t looking for undervalued hidden gems, or for
\npromising speculative mining stocks. They aren\u2019t looking what pays a good
\ndividend, or any other investment strategy.<\/p>\n

All
\nthey do is blindly buy what they are programmed to buy. And while these
\nalgorithms are starting to get more complex, the majority of money invested in
\nETFs are in the S&P 500 (http:\/\/etfdb.com\/compare\/market-cap\/<\/a>).<\/p>\n

And
\nwhat is the S&P 500? It\u2019s the top 500 publicly traded companies in the
\nStates. That\u2019s it. The algorithm simply buys the biggest 500 companies. If
\ncompany 500 drops down to 505 it\u2019s sold. If company 550 goes up to 400, it\u2019s
\npurchased. Simple. Indiscriminate investing. The Aussie version is called the
\nASX200. So instead of the top 500, it\u2019s the top 200.<\/p>\n

Now,
\nthis is why I like ETF investing.<\/p>\n

It
\ntakes 1% knowledge and effort to get in, and the algorithm ensures you\u2019re only
\never invested in the top companies. Even in 20 years from now, say if 50% of
\nthe companies that are currently in the S&P500 or the ASX200 were to go
\nbankrupt and fall off the face of the world \u2013 you don\u2019t have to know about any
\nof it, and you don\u2019t have to take any action.<\/p>\n

The
\nETF trading formula does it all for you.<\/p>\n

In
\naddition, as this is the simplest, easiest to monitor trading strategy that
\ntakes so little money to run, it is by far the cheapest way to invest.<\/p>\n

So
\nthe easiest way to invest, is also the cheapest way to invest. Winning.<\/p>\n

But
\nnot only that, this whole easy\/cheap way of investing is backed up with a Nobel
\nprize. If you want to look into it more, it\u2019s called Modern Portfolio Theory (https:\/\/en.wikipedia.org\/wiki\/Modern_portfolio_theory<\/a>)<\/p>\n

Like
\nall theories, it absolutely has it\u2019s detractors, and the detractors have a
\npoint. But I\u2019m not suggesting this passive ETF investment strategy because I
\nthink you\u2019ll get the best returns. Absolutely not. This article is all about
\n80\/20, and while you\u2019ll never get in the top 20% of investment returns with
\nthis long term investment strategy, do you\u00a0really<\/i>\u00a0want to
\nspend 80% of your time, money, resources etc. going after that last 20%.<\/p>\n

Nope.
\nNot me.<\/p>\n

I
\nhave exited my ego stage left when it comes to investing. I used to think I
\ncould out-perform the market, and at times I absolutely have, but to do it
\nconsistently is nigh on impossible.<\/p>\n

And
\nhere is why you shouldn\u2019t be looking for that last 20% either – because it\u2019s
\njust not a good use of your time or your headspace. I\u2019ve written extensively on
\ndecision fatigue (http:\/\/www.fundyourideallifestyle.com.au\/decision-fatigue\/<\/a>),
\nand I\u2019m a big proponent on the less you try to think about money, the better
\nyou do in every other area of your professional and personal life.<\/p>\n

So
\nhow do you get your hands on these ETF\u2019s? Well you can go out and open a
\nbrokerage account, go online and find a risk profiling tool to see what mix of
\nETFs you should have. Then decide which ETF you should buy, save up at least
\n$500 for each ETF, go back to your broker, pay the brokerage fee, and have a
\nportfolio you can log on to once every six months to look at.<\/p>\n

Or
\nyou can download the Raiz app, go about your day, spend your money, and have
\nthe roundups get invested for you. For more information on Raiz fees, click here<\/span>.<\/a><\/p>\n

You
\ndecide.<\/p>\n

By
\nClayton Daniel<\/p>\n

Financial
\ncommentator and author of upcoming book\u00a0Fund Your Ideal Lifestyle<\/a>.<\/p>\n

 <\/p>\n

\n

 <\/p>\n

Don\u2019t have the Raiz App?<\/h3>\n

Download it for free in the App store or the Webapp below:<\/p>\n

\n
\"download-raiz-app\"<\/a>
Click to download the Raiz app<\/a><\/figcaption><\/figure>\n

 <\/figure>\n

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The information on this website is general advice only. This means it does not take into account any person\u2019s particular investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the product.<\/em><\/p>\n

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The information may be based on assumptions or market conditions which change without notice. This could impact the accuracy of the information.<\/em><\/p>\n

Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz Invest or Raiz Invest Super.<\/em><\/p>\n

Past return performance of the Raiz products should not be relied on for making a decision to invest in a Raiz product and is not a good predictor of future performance.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

By Clayton Daniel Do you know what investing is? Confusing. To circumvent that issue, you can do what most people do \u2013 learn. Ahh yes. Learning about investing. Such a fantastic topic isn\u2019t it. Perhaps, the more you learn, the better returns you\u2019ll get? Maybe outperform the market? Maybe find the NBT (Next Big Thing)? […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false},"categories":[1],"tags":[],"yst_prominent_words":[]}