At Simple Money, we invest like LADS. LADS is an acronym for:
- Low-cost
- Automatic
- Diversified
- Simple
There are over 137,000 mutual funds globally. That is an astonishing number! How are you meant to sort through all those funds and select the best ones?
The good news is, you don’t have to. We can discard 99.999% of the fund options and focus on just a few low-cost funds that give us broad diversification across the entire share market.
Low-cost
Want to know a dirty little secret of the financial advise industry? High fees don’t mean high performance. In fact, the best predictor of better fund performance is a low fee fund.
Take a look at the 1 year and 20 year column in this table below for the second line. This table is from the SPIVA U.S. Scorecard, a division of Standard and Poor Global.
Let’s take the second line, the S&P 500 index. What this table shows is that in a 1 year period in 2023, 75% of U.S. equity funds investing in the 500 largest companies in America underperformed the S&P 500 index. 75%!
That means if you picked any actively managed mutual fund at random, you only had a 25% of beating the market over a year. You would have been better off just buying an S&P 500 index Exchange Traded Fund (ETF) like Vanguard’s VOO or the SPY ETF.
But it gets even worse over the long run. If you look at the 20 year column, 93% of fund managers could not outperform the index over a 20 year period. If you just picked a random fund at the start of the 20 years, you would only have a 7% chance of outperforming the S&P 500 index.
Those are terrible odds! How the heck are you meant to pick the 7% of fund managers that outperform the S&P 500?
The answer is you don’t have to. You can just pick the index. Now, over a 20 year time period, you’ll beat 93% of the active fund managers. And you’ll pay lower fees too.
Automatic
Investing early, often, and regularly in the easiest way to build wealth. Rather than making large one off purchases every few months, years, or decades, you’re far better off making regular contributions from your pay check into your Kiwisaver and other investing accounts.
Diversified
Diversification isn’t about owning a lot of mutual funds or ETFs. You can be extremely diversified in a single ETF. For example, the InvestNow Foundation Series Total World Fund has a 0.07% expense ratio and contains the shares of 9,911 companies. One fund = almost 10,000 global companies!
This is an extremely diversified share fund that invests in Vanguard ETF VT. It has global exposure to all the big names such as Apple, Microsoft, Meta, Google, Novo Nordisk, Toyota, Blackrock, and more.
Simple
Being able to understand what you are invested in, how fees are charged, and where your risks are is extremely important in being a confident investor.
Financial Advisors have been trained to asses your risk profile and your investing style. But if you have no prior or limited investing experience, how are you supposed to know your risk profile or style?
Answering a few questions in a risk profile assessment is not a good measure of your actual risk tolerance. It’s one thing to say you’re willing to risk losing money for higher expected long term returns. It’s quite another thing to lose 30% of your investment in 30 days during the COVID-19 crash of March 2020.
By keeping things simple and not over complicating your investment strategy, you can be in control and have a better understanding of how your journey to financial independence or retirement is going.
What is the LADS investing principle?
LADS investing means keeping your investments Low-cost, Automatic, Diversified, and Simple. If an investment does not meet those 4 criteria, it is not considered suitable for clients of Simple Money.
- Low-cost – fees are rampant in the financial advice and investing industry. It’s hard enough making a return on investment. Don’t then give your hard earned returns to your adviser.
- Automatic – We want to create money and wealth building systems that require minimal human input, so that our money is working for us, and not the other way around.
- Diversified – We don’t put all of our eggs in one basket. By diversifying, we reduce our risk of failure and increase our chance of successfully achieving our financial and other goals.
- Simple – We want to create a simple system that is easy to understand, maintain, and implement. Complexity adds stress and does not perform as well as simple sytems.