Keep It Simple

Keep It Simple

On one of the first days of medical school an orthopedic surgeon was giving an introductory lesson on reading X-rays. When going through his technique of reading a film he said that he followed the KISS method. Keep it simple, stupid. As the years passed, I marveled at how bad this advice was. There is nothing simple about being a doctor. Nothing simple about reading X-rays. The world was far more complex than he was willing to let on at the time.

I sometimes wonder if we use the same technique while teaching about personal finance and financial independence. We like to come up with catchy phrases and straight forward game plans.

But is there really an Easy button. Are we being dishonest?

Safe Withdrawal Rate

There is no more obvious example of keeping it simple than the safe withdrawal rate. We love the 4% rule of thumb. We exalt in the idea that one simple equation can answer an almost ephemeral question. How much is enough?

Simple. Multiply your current assets by 4% and that’s what you can spend. Unless there is an unfortunate sequence of returns over the next ten years. Unless your spending balloons due to a white swan event such as divorce or a medical emergency.

And we haven’t even mentioned changes in the cost of living. Does anyone know what healthcare will cost in a decade? I sure don’t.

How about overall market volatility? A poor bond showing? Cataclysmic change? changes in tax law?

While it feels good to wrap it all up in one easy to understand equation, I wonder if we are selling an oversimplified bag of goods.

Real Estate

No problem. Real estate always goes up. Just buy a few properties, rent them out, and your off to the races. We have other catchy equations like the 1% rule and we educate on the Cap Rate.

Again, simple equations and simple concepts. Anyone can do it. Except that they can’t. Ask any handful of new real estate investors, and more than not will have one horror story or another.

In some neighborhoods property prices go down. In others, finding a renter can be challenging. And just about every property eventually has some type of structural or maintenance issue. Many of which occur in the middle of the night.

Believe it or not, losing your shirt in real estate is not unheard of. Even for experienced investors.

Keeping it simple may be harder than originally expected.

The Stock Market

Set it forget it. Keep it simple. Invest in broad based passive income indexes and let it ride. How many times have we heard this advice. It is exactly what most of us novice investors want to hear.

Questions about asset allocation? Just go all in equity!

But, of course, there is nuance. Depending on time horizon, index investing may do horribly. You may have a liquidity crisis or find yourself drawing down in retirement at exactly the worst time.

Even with simplicity comes complexity. There is always rebalancing to consider. And if you want to do it right, there should be some consideration of tax loss harvesting. Don’t forget to avoid the wash sale.

Final Thoughts

It’s not that we try to be misleading. It’s not that we try to keep it simple. The truth is that nuance is not sexy. Complexity sometimes makes our head spin. We grasp for order and pattern, and hold on for dear life.

This gives us a large breath of knowledge with very little depth. We understand the shallows quite well, but are not ready for the possibility that as the waters get deeper, we might just drown.

What’s the solution? Get help? Read more? Think more on risk mitigation? Chance it?

Maybe all of the above?