Introduction:
Why Simplicity Is the New Sophistication

In 1776, Thomas Paine, a political activist, philosopher, and poet published a simple pamphlet that likely altered history as we know it. The title of his publication was plain and simple-Common Sense. This tiny pamphlet, which numbered less than 90 pages, inspired the original 13 colonies to seek their independence from Great Britain and form the United States of America. It's been said that virtually every rebel read, or at least listened to, the words written by Paine. This was Paine's introduction to Common Sense:

In the following pages I offer nothing more than simple facts, plain arguments, and common sense; and have no other preliminaries to settle with the reader, than that he will divest himself of prejudice and prepossession, and suffer his reason and his feelings to determine for themselves; that he will put ON, or rather that he will not put OFF, the true character of a man, and generously enlarge his views beyond the present day.1

Paine's simple words ignited the people of that day to fight for their independence. As John Quincy Adams, the second president of the United States, once said, "Without the pen of the author of Common Sense, the sword of Washington would have been raised in vain." Paine's plain, common sense arguments provided the motivation that was so desperately needed to unite people from all walks of life to stand together in their cause. So why did Paine's words resonate with so many people? In a word-simplicity. Many writers of that day and age used dense philosophy and Latin to get their point across. Paine made his case for the benefits of independence by using clear, concise language that everyone could understand. Common Sense worked well with the crowds in the taverns, but was sophisticated enough to be given credibility by the Colonial dignitaries.2 His words lived up to the title, as common sense works on a number of levels.

Improving long-term investment results by bridging the gap between sophistication and simplicity is the point of this book. Much of the financial advice out there these days might as well be written in Latin because it comes across as another language to most investors. The financial crisis from 2007 to 2009 left some lasting scars on investors' psyches. Many don't know how to proceed or whom to trust. My goal with this book is to provide a resource that helps all investors make more informed decisions using simplicity and common sense, two things that are severely lacking in the financial industry, as a guiding framework to help alleviate some of the lasting damage from the market crash. There is an assumption that complex systems such as financial markets must require complex investment strategies and organizations to succeed. This is a false premise that far too many both inside and outside of the industry have come to believe. Most of the advice out there these days works against investors and their goals because those giving it don't have an understanding of the needs and desires of their audience.

I've spent my entire career working in portfolio management. This experience has taught me that less is always more when making investment decisions. Simplicity trumps complexity. Conventional gives you much better odds than exotic. A long-term process is more important than short-term outcomes. And perspective goes much further than tactics. Tactics are useless to investors in a matter of days-sometimes in a matter of hours. But perspective is something that stays with the investor for a lifetime. It allows you to adapt to the changing market and economic landscape. While keeping it simple won't make it any easier to predict the future-no one has a crystal ball-it can give you the necessary capacity to make rational decisions, no matter what happens next.

There are two working definitions of perspective and both apply to making better financial decisions:

1. Context: A sense of the larger picture of the world, not just what is immediately in front of us.
2. Framing: An individual's unique way of looking at the world, a way that interprets its events.3

Perspective is so important because, without it, even the most intelligent of investors can be ruined from a lack of self-awareness in their own abilities. Investors that fail to put the news or market moves into the proper context in regards to their own personal circumstances are fighting an uphill battle. And how you frame the world around you determines how certain events will affect your reactions to outside factors that can impact your financial decisions. Combining a lack of context with a misinformed view of the way the world works is a sure path to failure with a portfolio of investments in the financial markets. A proper perspective can give the investor the right frame of mind to be able to ignore news headlines and avoid acting on the damaging emotions that can hurt the decision-making process.

I'm not here to sell you a pot of gold at the end of a rainbow. I can't offer you a secret get-rich-quick formula for making millions of dollars overnight. The real secret is that there is no secret to be able to make millions of dollars overnight. It only happens over a period of time. Building wealth takes patience. You can't be in a hurry. Fred Schwed, a financial writer who worked on Wall Street during the Great Depression, once said, "Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little."

The financial markets are like any other marketplace that brings together buyers and sellers looking to find and create value. If you understand how the markets work, and more importantly how the human brain works, the results over time can be impressive. The process does not have to be based on degree of difficulty. The goal is to gain financial independence, pay for your child's college education, go on more vacations, have more time to do what you love, or whatever your needs and desires may be. Remember, the markets are not just about building wealth and making money. They're a tool for your desires about creating freedom, time, memories, and peace of mind. These things are all attainable, as long as you have a plan in place and are able to get out of your own way.

Complexity tends to be the default option that gets used to persuade investors to buy unnecessary investment products while the vast majority of people really just need to understand more conventional options to succeed. Working with the most sophisticated portfolio strategies over the past decade has given me the ability to interpret the issues that investors should actually pay attention to as opposed to those that are used as an illusion of intelligence and control.

Noise

The information available to everyone on the planet is growing at an exponential rate. Anyone with a smartphone today has better mobile phone capabilities than the president of the United States did 25 years ago. We have better access to information than the president had 15 years ago.4 We now have an unprecedented amount of information at our fingertips anytime we want it. There's up-to-the-minute, 24-hour news coverage. We can communicate with anyone we want no matter where they live through e-mail or social media at the click of a button. Every financial market from around the globe can be followed on a tick-by-tick basis. We can now trade stocks on our smartphones. There's no way to escape the deluge of news and financial information that the media throws at you.

Nobel Prize-winning psychologist Daniel Kahneman showed in his research that because of a bias called the affect heuristic, the human brain is very quick to make judgments and decisions based on intuitive feelings that require little thought or deliberation. The sheer amount of information available today makes it easier than ever to use these quick hunches to tell us how to act. There are times when this type of response can work in your favor, but investing is not one of them. Kahneman also found that there is another part of the brain that is much more effective in using a logical and deliberate process to think things through. This is the part of the brain that should be used for thoughtful, deliberate financial decisions. Kahneman says, "If there is time to reflect, slowing down is likely to be a good idea."5

Information flow will only continue to speed up in the future, so we have ourselves a conundrum. It will become more and more important to separate the meaningful from the meaningless as most people will be continuously trying to drink from the fire hose of information instead of focusing on the truly important areas that they can control. This illusion of control is more likely when many choices are available, there is a large amount of information available, and you have a personal stake in the outcome of the choice.6 This is basically a description of the portfolio management process. We all like to think that more choices must be better, but as the number of choices grows, so, too, do the number of decisions and the likelihood of making a mistake.

For example, there are now over 77,000 mutual funds to choose from worldwide.7 As the number of investment options available to investors...