My friend Carl Richards (of Behavior Gap fame) went to town on the idea that rich people should have super-complicated investing strategies this week at the New York Times.
There’s something about people that drives them in search of the magic beans no matter what facts, science and statistics you at their feet. Sometimes they just need to be jerked around a bit more by the hotshots and rocket scientists before they’re ready to discuss wealth management minus the hobbyist aspect.
Why, despite this body of evidence and our experience to the contrary, do people think that once you have a bunch of money you’ve somehow outgrown the simple, low-cost investment tools that most academics think you should use, like broadly diversified index funds and basic, safe fixed-income instruments?
I can think of a few possible reasons.
First, that’s just what rich, smart people do, right? It’s just another piece of (bogus) investing folklore: Once you have a big pile of money to invest, the solution must be complicated. And the more complicated and secretive and exclusive it is, the better.
Second, people want to believe there’s a better way of investing that’s only available to a select few. This idea of using plain old mutual funds is for the common folk. People think, “I’ve got to get access to the best minds in the industry, and they’re in the heads of people who go manage hedge funds, right?”
Finally, there’s a perverse belief that if something is more expensive, it simply has to be better.
If I told you how often I come across this mentality each week you wouldn’t believe me.