Thoughts on Complex Investment Products and Keeping It Simple

| About: iShares MSCI (EWA)

Friday I ran across a thought provoking post on Seeking Alpha by Charles Hugh Smith. In general it was about the extent to which retail investors have sat out the big rally, how corrupted Wall Street et al is and now investors realize the extent to which it is an attempt to take money from individuals. Smith cites the recent data going around about $26 billion having been recently taken out of equity mutual funds and the $300+ billion that has gone into bond funds.

There were only three comments on the post and all three were skeptical about retail investors having collectively wised up.

I tend to discount the notion of a rigged game where firms collude to steal from mom and pops or the idea that the little guy can't beat the house. I would replace collude to steal with "create ill conceived products that frequently go bad with not enough regard for the end user; be they individual investors or institutional investors." I can recall big derivatives blow ups for Procter & Gamble (NYSE:PG), Gibson Greetings and Orange County in the early to mid 1990s. There is incentive to push product to get paid, but far more often than not the products although wildly mediocre don't hurt investors.

Don't get me wrong, to the extent the above paragraph is correct it is a hideous business model that lacks proper due regard but it is not perpetual collusion to steal. I would concede that there have been instances where collude to steal has been close to right like maybe what Henry Blodget apparently did during the tech bubble.

Even if you disagree with me completely, think about the tech bubble and the financial crisis. Each event gave plenty of warning--the same warnings actually. The "bad sector" grew to exceed 20% of the S&P 500, the yield curve inverted, the market rolled over for a period of a few months before going below its 200 DMA. This blog did not exist during the tech wreck but I wrote about these things so frequently as they were happening during the earlier stages of the financial crisis that there were complaints about repetitive posts not to mention the comments which said I was wrong for whatever reason.

Whether you manage for clients or you are your own client, every end-user is participating because they need money for something in the future--probably retirement. That starts with saving money and then investing the money in such a way as to offer a chance for growth combined with being able to sleep.

Assuming you are not saving $10,000 per month while living off of $5000 per month then some portion of your savings is going to be allocated to risk assets. You can keep it simple with things (stocks and funds) that can be sold easily to heed the warnings mentioned above or you can buy a bunch of "sophisticated" products only offered to the wealthy.

To repeat a point made recently, the typical person does not need to beat anything or compete with anybody; they need enough money when they need it, that's all. I have been a big fan of Australia, among several countries, as an investment destination. If picking Australia turns out to be correct over the next ten years then I would expect it will go up most of the time and have at least a couple of downturns.

Anyone agreeing could buy the iShares Australia ETF (NYSEARCA:EWA), which I own, and if worried about the occasional downturn they could do something like only own it when it is above its 200 DMA. That strategy could turn out to be successful over the next ten years but who would you have beaten? Who would you have been competing against? Even if you could somehow answer those questions what would it matter?

As a money manager I believe my task is to give clients the best chance possible of having enough when they need it and making that ride as smooth as possible to minimize the chance of their panicking at some inopportune moment. I think the best way to get there is with simple products that allow for the occasional tactical decision.

This can exist even if you agree completely with Smith's article and think I am completely wrong about collude to steal.