Investing Solved!

A few years back, entrepreneurial guru Tim Ferriss, had the author and documentary maker Sebastian Junger on his podcast. Junger, who has taken plenty of risks in his career, including spending substantial amounts of time embedded with US soldiers in Afghanistan, was asked by Ferris what advice a 70-year-old Junger would offer to his current self.

Junger offered the following:

“I think I would say to myself that the world is this continually unfolding set of possibilities and opportunities. And the tricky thing about life is, on the one hand, having the courage to enter into things that are unfamiliar. But to also have the wisdom to stop exploring when you found something that’s worth sticking around for.”

The courage to enter/wisdom to stop dilemma is one we’ll all face as it applies to many areas of life. All our critical decisions. Opportunities, either taken, or not taken. Will this new thing prove fruitful and rewarding, or is it wise to remain with what you know and has proven satisfying? It’s particularly relevant when it comes to careers, business, or money.

As advisers we see the impact that financial changes and optimisation have on peoples’ lives. It does take courage to walk in the door of a financial adviser and be prepared to delegate your affairs. It’s unfamiliar, but so are most financial decisions. Courage is required to take any new financial decision because the unknown means some won’t work out for the best. It’s hard to be wise when you really don’t know.

One of our Canadian peers, Ben Felix has often stated he believes “investing has been solved”. And he’s right. As Felix further adds, “it’s solved because capturing market returns using low-cost funds is a close approximation of optimal.” The one caveat? He says, “it’s not easy because people are not wired for long-term thinking.”

Not wired for long-term thinking simply means behaviour problems. It could be the extra cash an investor left accruing in their account because they thought a correction was due, meanwhile the market’s gone up 15%. It could be an investor feeling the temptation of a hot stock, market sector or new fad. It could also be not accepting the reality that investing has been solved, simply because someone believes “times have changed”. Behavioural problems impede wisdom.

The worst outcome from accepting investing is solved? Very simply, an investor achieves a market return, relative to the risk taken according to the asset allocation of their portfolio. Nothing more or less. Historically, and over the long term, it’s proven a reliable way to build and preserve wealth. It just required that wisdom to stop exploring and settle on that consistent set of beliefs.

The worst outcome from not accepting this reality? It’s a haphazard approach to investing. There might be astronomical rewards, but they will be accompanied by an ever-present spectre of ruinous consequences. Many alternatives are speculative without any track record. Investing this way might feel more courageous because everything is unfamiliar, but wise is another matter.

Without consistent beliefs, these investors are subject to influence. There are many investment, political, and societal commentators who grab attention by casting doubt over what’s solved. They cast doubt over data. Over reliable strategies. Over tax advantaged savings systems. Over long established investment product providers.
It all adds up and creates an environment of distrust. This often favours speculation, unproven alternatives and even frauds. We regularly see news reports highlighting millions, tens of millions, hundreds of millions or billions being lost by investors for various reasons. The numbers are so astronomical they often appear ridiculous. They also don’t register because they’re aggregate figures without faces accompanying the losses.

And the investors getting cooked like ducks aren’t the ones who believe investing is solved.

As part of the sentencing of Sam Bankman-Fried of FTX infamy, US Federal prosecutors released a collection of direct messages to Bankman-Fried’s X account (formerly twitter). These were sent from desperate investors who had money with FTX. Victim impact statements to the judge have also recently been released.

The messages to Bankman-Fried are immediate and panicked. Some are pleading, but others are more resigned to their fate. They all understand the gravity of their money vanishing. The victim impact statements detail what that money was and what it would have become. There’s no panic. They’ve lived with this for some time. Several of them were in life circumstances that shouldn’t have been associated with financial extremes. Disabilities, health challenges, caring roles. All their plans had been derailed. Due to the appreciation of the crypto market in recent times, investors may recover 100% of the capital they had at the time FTX collapsed, but there’s been a substantial opportunity cost.

It may seem ludicrous that someone can assume and even claim they had certainty in this situation. In some cases, it wasn’t just play money, whole life savings were sitting on an offshore platform that didn’t have US financial reporting requirements and they were invested in various cryptocurrencies and tokens that are extremely volatile. But set aside how much they’ve discounted risk and just consider the impact.

Financial and investment loss, or exposure to fraud, is always more than just a dollar figure or trust erased. It’s holidays not taken, cars that aren’t upgraded, housing renovations not done, educations that are downgraded, relationships that are stressed, medical care that’s delayed, lifestyles that go backwards. Opportunities that are lost and may never be seen again.

Such things need serious consideration if someone decides investing hasn’t been solved. If they’re being more courageous than wise. What did that money take to acquire? What’s the likelihood it could be acquired again if it was wiped out? How desperate would they feel? How do plans and assumptions change without that money?
The solved option, a low cost, globally diversified, market-based portfolio doesn’t come without the prospect of loss. In the short-term fluctuations should be expected, but if capitalism continues to work as it has over the past century, such a portfolio should be able to right itself and prove rewarding over the long term.

Something that’s worth sticking around for. We just need to accept it.