There’s a certain kind of person who revels in adding complexity to everything they do. If want to buy a car, they worry about whether the fourth gear ratio is too close to fifth gear. If they are on a diet, they worry about whether protein should be 20 per cent of their food intake or 25 per cent. If they are watching a cricket match, they must study the diagram that shows what percentage of a bowler’s good-length deliveries to right-handed batsmen were dot balls. And so on. These are all actual examples I have come across in the last few weeks.
However, as far as I’m concerned, the real trouble starts when someone of this sort starts investing in mutual funds and gets hold of my email address. And it gets really bad when they bring down their attention on Systematic Investment Plans (SIPs). For someone who enjoys complexity for its own sake, SIPs are like a red rag to a bull. The problem is that although an SIP is basically a way of simplifying investing, you appreciate the idea only when you understand the arithmetic of cost averaging and how it tends to boost returns. And there’s no shortage of apparent ways of finetuning SIPs that appear to be great improvements.
A typical such email I got recently is from someone who says that SIPs are good when the market is going to fall, and lump sum investments are good when its going to rise, therefore its best to invest half in each. Unfortunately, there’s no end to this. How do you know the split should be half and half? Wouldn’t that depend on the relative rate of the rising or falling? In any case, the starting assumptions are wrong. However, beyond that, the main problem is that it takes a simple, hands-off way of painless investing and tries to over-optimise it. It doesn’t work. Optimising something simple is a contradiction, and takes away its most valuable characteristic.
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