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A Wealth of Common Sense

Why Simplicity Trumps Complexity in Any Investment Plan

By Ben Carlson
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  • Contains 7 key ideas
A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan by Ben Carlson
Synopsis

A Wealth of Common Sense (2015) reveals how sound decisions can lead you to long-term success as an investor. These blinks provide the tips that every investor should know from the outset and explain how you can create a diverse, consistent strategy that will stand the test of time.

Key idea 1 of 7

Investors aren’t all equal.

Ever toy with the idea of adopting the same investment strategy as a filthy-rich company? Even if it was risky and complicated, it worked for them. Why shouldn’t it work for you, too? Well, for a number of reasons! Institutional investors face very different conditions to individual investors like you.

First of all, trading is less expensive for institutional investors. Why? Their size gives them the leverage they need to negotiate lower fees when dealing with investment platforms. Secondly, institutions employ several professionals, even full-time staff members, to manage their portfolios on a day-to-day basis. This is something that most individual investors simply can’t afford.

Not all institutional investors are created equal, either. The amount of funds available differs widely, and so too do the deals they get into as a result. Take Yale University. Yale’s endowment fund enjoys hundreds of millions of dollars in grants and donations annually. All of this is managed by chief investment officer David Swensen. So far, Swensen has done a great job. With 14 percent gains every year since the mid-1990s, Swensen’s portfolio management style is widely admired, and even earned its own name: the “Yale Model.”

Most institutions can’t invest on the same massive scale as Yale. And only large-scale investors, like Yale, can afford the high minimum investments required to get into the funds that are so attractive because of their low management fees.

Yale is not only a large-scale investor, but also a nonprofit. Nonprofits benefit from additional advantages that other investors can’t access. As a university, Yale has a perpetual time horizon. This means that there is no time limit on when an investment pays out. This is particularly handy because it means Yale is not obliged to restrict its strategy to short-term investments. Non-profits may also be exempt from paying taxes whereas a portfolio conducted on the same level by a private investor would face significant tax burdens.

In short, the investment strategies of institutional giants won’t help you out much. To succeed as an individual investor, you’ll need to find your own path. Before you set out on your journey, let’s investigate a few common mistakes that you’d be wise to avoid.

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