Keeping Investing Simple: Q&A with Rick Ferri

By Andy Hayes

Have you ever heard the old adage, Keep It Simple Stupid Sister (KISS)? It’s basically a loose interpretation of a much older philosophy, Occam’s Razor, which states that usually the simplest solution is correct.

That’s the basis for our conversation with today’s guest, Rick Ferri, CFA. He’s the author of six investment books, the founder of Portfolio Solutions, an investment management company, and a true expert on low-cost index fund investing.    We recommend The Power of Passive Investing and Serious Money, Serious Talk About Investing for Retirement as good reads from Rick’s lineup.

Now, enjoy today’s Q&A with Rick.

Your investing philosophy is that – in a nutshell – you don’t need a financial advisor to beat the market, when you can do very well just matching the market. When should someone talk with a financial planner or expert, if ever?

Hiring a financial adviser isn’t about trying to beat the market. It’s whether you’re going to achieve the desired results by doing it yourself or having someone else do it for you. If you’re more comfortable having someone else do your investing for you, then find and adviser you like and who has the some investment philosophy. There’s a big chunk of the population who doesn’t want to manage their own investments, just like there’s a big chunk who don’t want to do their own tax returns. If you want an adviser help with the investing chores and keep you on track, then hire one. It’s that simple.

Another important part of your investing philosophy is all about watching costs – what are some costs investors should be looking at that can add up?

There are three costs to investing. First, structural costs. These are the commissions and fees associated with the products you buy and the person or firm you may hire to invest for you. Second is tax cost. This is what the IRS and other governments takes from your interest, dividends and capital gains. Third is behavioral cost. This is the amount of money you lose relative to a market return for doing bad things in your portfolio, such as market timing and trying to pick the next hot style or stock.

Your recent book focuses on ‘passive investing.’ For a young investor just getting their feet wet, can you explain what this is and what they need to know about it?

Fortunately, information dissemination through the internet has made investor education much easier than it was in my generation. The benefits of low-cost index investing through funds and ETFs is widely available now. It being promoted on dozens of blog sites, social media, and even by so-call robo advisors like Wealthfront and Betterment who cater to young investors. The bottom line is, you don’t have to beat the market to reach your financial goals. Just have a sensible asset allocation to stocks and bonds based on your long-term needs, invest in those asset classes using low-cost index funds or ETFs, and maintain the portfolio with discipline.

You’re at a dinner party, and the host mentions to the group that you’re an author/authority in the finance space. Another guest (that you don’t know) asks you what’s the best piece of advice you’ve learned since writing so many books. What do you tell them?

Simplicity is better than complexity. The more complex you make investing, the worse you’re less you’re going to earn. This isn’t rocket science. Keep it simple.

Thanks for the great tips, Rick! To connect with Rick, give him a shout out Twitter or Facebook.

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