By Clayton Daniel 

Do you know what investing is? Confusing.

To circumvent that issue, you can do what most people do – learn.

Ahh yes. Learning about investing. Such a fantastic topic isn’t it. Perhaps, the more you learn, the better returns you’ll get? Maybe outperform the market? Maybe find the NBT (Next Big Thing)?

I know. I started on this journey over a decade ago. Read a bunch of books. Went to a few classes at uni. Even got a degree! Worked in tax, super, investments, cash flow. Opened up my own shop. Clients came in. I researched portfolios. We discussed those portfolios. These portfolios had ‘Foreign Exposure’ with ‘Counter-Cyclical Hedges’, ‘Active Managers’ that would use ‘Dynamic Asset Allocation’ to ensure ‘Market Trends’ were taken advantage of.

Oh God. It hurts even just to write it all down.

Here’s the thing. The world of investing has taken something that is honestly quite rudimentary and fluffed it up to be something it isn’t. Or to put simply, we spend 80% of our time, effort and resources aiming for that last 20%.

What do I mean?

I mean, it’s not a surprise to anyone in the greater investment industry to spout off this fact ‘the majority of active managers underperform the benchmark’. Now what that financy-pants language means is that the majority of professional investment teams do worse than if they had just done nothing.

That’s right.

For all the posturing, all the research, all the education, all the fanfare, all the talk, all the mumbo-jumbo………………. Most of the time it’s not only for naught, but detrimental.

That’s a pretty condemning statistic. Could you imagine if the medical industry had these kind of results? Could you imagine if ‘go home and rest’ had a higher chance of survival for cancer patients than having treatment? We would be up in arms.

But the investment community has a different opinion. And that is because everyone is convinced they can pick that top 20%. And so that is what everyone is aiming for. To ‘beat the market’ by being smart enough to get in the top 20%. It makes sense. Everyone has an ego. And everyone has hubris – especially when it’s other people’s money…

But here’s the thing. What if you said ‘no more’. What would happen? What if you stepped out of the hustle and bustle of trying to get that last 20% and were happy with the 80%. What kind of world would that look like? What kind of research, education, monitoring and ongoing effort would that require from you?

Or put simply, how much of your attention would you have to give your investments if you were happy with 80% of the possible returns?

I’m sure you’re probably anticipating the answer to be 20% of the effort. I mean, that’s how it normally goes doesn’t it. Well not quite. It’s less than that.

How about one percent?

One percent effort is all you need. And even that is pushing it. If you’re happy to just go along with the ups and downs of the market, you don’t have to do anything. At all. Once the purchase has been made, there is zero upkeep for you.

Let me explain how this works.

Like everything else in finance, the solution comes in the form of an acronym.

ETF – Exchange Traded Funds. Really simply, ETF’s are an algorithm that trades stocks. Sounds complex, but it isn’t. Most ETF’s have a VERY simple trading strategy. The algorithms aren’t looking for undervalued hidden gems, or for promising speculative mining stocks. They aren’t looking what pays a good dividend, or any other investment strategy.

All they do is blindly buy what they are programmed to buy. And while these algorithms are starting to get more complex, the majority of money invested in ETFs are in the S&P 500 (http://etfdb.com/compare/market-cap/).

And what is the S&P 500? It’s the top 500 publicly traded companies in the States. That’s it. The algorithm simply buys the biggest 500 companies. If company 500 drops down to 505 it’s sold. If company 550 goes up to 400, it’s purchased. Simple. Indiscriminate investing. The Aussie version is called the ASX200. So instead of the top 500, it’s the top 200.

Now, this is why I like ETF investing.

It takes 1% knowledge and effort to get in, and the algorithm ensures you’re only ever invested in the top companies. Even in 20 years from now, say if 50% of the companies that are currently in the S&P500 or the ASX200 were to go bankrupt and fall off the face of the world – you don’t have to know about any of it, and you don’t have to take any action.

The ETF trading formula does it all for you.

In addition, as this is the simplest, easiest to monitor trading strategy that takes so little money to run, it is by far the cheapest way to invest.

So the easiest way to invest, is also the cheapest way to invest. Winning.

But not only that, this whole easy/cheap way of investing is backed up with a Nobel prize. If you want to look into it more, it’s called Modern Portfolio Theory (https://en.wikipedia.org/wiki/Modern_portfolio_theory)

Like all theories, it absolutely has it’s detractors, and the detractors have a point. But I’m not suggesting this passive ETF investment strategy because I think you’ll get the best returns. Absolutely not. This article is all about 80/20, and while you’ll never get in the top 20% of investment returns with this long term investment strategy, do you really want to spend 80% of your time, money, resources etc. going after that last 20%.

Nope. Not me.

I have exited my ego stage left when it comes to investing. I used to think I could out-perform the market, and at times I absolutely have, but to do it consistently is nigh on impossible.

And here is why you shouldn’t be looking for that last 20% either - because it’s just not a good use of your time or your headspace. I’ve written extensively on decision fatigue (http://www.fundyourideallifestyle.com.au/decision-fatigue/), and I’m a big proponent on the less you try to think about money, the better you do in every other area of your professional and personal life.

So how do you get your hands on these ETF’s? Well you can go out and open a brokerage account, go online and find a risk profiling tool to see what mix of ETFs you should have. Then decide which ETF you should buy, save up at least $500 for each ETF, go back to your broker, pay the brokerage fee, and have a portfolio you can log on to once every six months to look at.

Or you can download the Raiz app, go about your day, spend your money, and have the roundups get invested for you.

You decide.

By Clayton Daniel

Financial commentator and author of upcoming book Fund Your Ideal Lifestyle.