The Permanent Portfolio, Investing, Finance and Random Thoughts.
The Five Minute Rule
Vanguard CEO Bill McNabb gave a speech recently about the financial markets and the need for trust. With the past few years shaking the confidence of investors, the industry has certainly been lacking in the trust department.
In this speech CEO McNabb gives out three important points about investing that are critical:
1) Simplicity – Investments should be simple to understand.
2) Transparency – Investment vehicles should be transparent so all moving parts are understood.
3) Candor – Investors and advisors should be honest with each other about the risks in an investment.
His point on simplicity matches up very closely to one of the 16 Golden Rules of Investing. That is, never invest in something you don’t understand completely:
A great rule in investing is the five-minute rule: If you don’t understand an investment in five minutes or less, take a pass. This should apply to sophisticated investors, novices opening their first accounts, and everyone in between. – Bill McNabb, Vanguard CEO on Restoring Investor’s Trust
Very wise counsel! A complicated investment can conceal many dangers. All investments have risks, but as investors we must be certain we understand each risk as best as possible. Having unknown risks buried in a complicated and opaque investment scheme is bound to cause problems eventually.
Remember this: There is no shame passing on an investment you don’t understand. I have done it myself many times in the past and have never regretted it.
Simplicity is critical to investing success and this can’t be stated often enough. The Five Minute Rule is a great way to weed out bad investments and keep things simple.
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