Lars Kroijer has a free video series called Investment Demystified where he introduces the key concepts of his book with the same name. The video series consists of 5 videos lasting in total 30 minutes. It is a great way to quickly get exposed to the learnings of the book without having to spend hours reading it.
I have read the book and watched the video series. My recommendation is that you watch the series and then read the book. Both are amazing resources.
Below are the notes I took from the series. I advocate for an investment approach which is very similar to the one suggested by Kroijer therefore, I thought it would be of interest to share the notes I took from the video series here.
You can’t outperform the market by picking stocks.
You can’t pick an active investment fund which can outperform the market.
There is an investment portfolio which is simple, cheap and has great performance:
- Invests in single (cheap) fund which tracks a world index. This is all you need for your equities. This grows your capital.
- Invests in low risk assets like government bonds or cash. This preserves your capital.
- Has the allocation between risky and non-risky assets which is suitable to your risk profile. The more non-risky assets the lower returns you have.
The majority of investors won’t beat the market in the long run:
- Regular/Retail Investors are competing against professional investors which have better education, information, access, resources and insights into companies
Investors can’t pick an active investment fund which will outperform the market in the long run:
- Only 1 in 10 active investment funds actually outperforms the market in the long run.
- Active funds have high fees (e.g. on average around 1.5%-2%) which makes it harder for them to outperform the market.
- Studies show that investment managers that did well in the past don’t necessarily do well in the future.
The ability to outperform the market may exist but we have to accept that we can’t do it ourselves. That will save us a lot of money.
An index tracker is an index fund or ETF which blindly follows an index. It buys shares in companies according to the strategy of the index. They are cheap because nobody is trying to be smart about beating the market.
Comparison of an active fund and an index fund:
- $10,000 initial investment
- 30 years investment period
- 7% a year returns (including inflation)
- active fund with 2% annual costs ends up with $43,000 of portfolio value
- index fund with 0.5% annual costs ends up with $66,000 of portfolio value
- $23,000 difference! Costs matter a lot! The impact of a 1.5% cost disadvantage is massive. This can be the difference between a comfortable or a bad retirement.
Index funds are not only cheap but they are better. The fact that they are cheap makes them have great returns.
You only need a portfolio with two investments:
- Risky asset: cheap index fund which tracks a world index.
- Non-risky asset: High grade government bonds or similar alternatives (e.g. cash, savings accounts)
Risky assets grow your capital. A fund which tracks the whole world is the only equity investment you need:
- it tracks the whole world in the appropriate relative proportion of its capital market’s size
- if you were to overweight/underweight specific regions/countries it would be like claiming that you can beat the market.
- it provides the maximal diversification you can find (thousands of companies, sectors, countries and regions)
- it is cheap (~0.25% in annual costs)
- by not overweighting our own local economy we are ensure that our investments’ value does not move in tandem with our non-investment assets (e.g. house, job, pension)
- it is simple. You only have to buy one thing.
Non-risky assets allow you to preserve your capital. They should be high quality, liquid and in your own currency.
It is reasonable to expect an investment return of 4-5% above inflation for equities given what we observed in the past 200 years.
You should mix non-risky assets and risky assets according to your risk profile. The more non-risky assets the lower your potential investment returns and the lower the risk.
The equity markets don’t move in a straight line of growth. That 4-5% above inflation (real) return rate is only an average. Markets fluctuate abruptly all the time. In 2008 the markets lost ~50% of its value and in the 1930s they lost around 80% of its value. We need a mix of non-risky and risky assets to navigate that.
Just because something is called an index fund it does not mean it is a good choice. You need to look at the exposure of the index (which companies does it track) as well as costs. Than is more important than the brand name.
The specifics of implementing an investment strategy vary depending on your tax situation or country but the principles are the same. You may not find the perfect fund, but if you follow these learnings and the fund is cheap then you are doing great.
Usage of ETFs and index funds is growing a lot across the world. There are many providers including: iShares, Vanguard, DB xtrackers. Vanguard is a good default choice.
There is not much work to do once you settled on the 2 investments (world tracker + non-risky assets) and the asset allocation. This is a very simple investment portfolio. Ongoing work may involve:
- monitoring if there are cheaper/better funds for the simple portfolio
- adapt your asset allocation if your risk profile/characteristics have changed
- see if there are ways to improve your tax situation
- rebalance as you add contributions to the portfolio