The Rube Goldberg Machine

Written by David Rath

Growing up, I used to love the game “Mouse Trap.” Truthfully, I didn’t actually play the game as it was intended to be played—I was simply fascinated with the Rube Goldberg nature of the setup and I found quite a bit of joy watching each item do its part in accomplishing the end goal. For those unaware, a Rube Goldberg machine is something needlessly complex that accomplishes a simple task, from catching a mouse to opening a doorknob. In the Rube Goldberg world, the more complex, the better. Conversely, an investment process should look nothing like these devices. Let’s examine some common pitfalls (or traps, if you will) that can derail an investor.

One of the most common mistakes investors make is tinkering too much with their investments.  Blaise Pascal, a 17^th century French mathematician, put it best when he said, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” This extends to numerous areas of life, but it is especially applicable to our investments. How often do we look at our retirement portfolios? More importantly, how often do we feel the urge to change? Perhaps we turned on the news to see that the recent manufacturing report came in lower than expected which prompted us to wonder about reducing our exposure to stocks. “Maybe just until things clear up,” we tell ourselves. As I mentioned in my last blog, the desire to participate in the latest investment fad also can lead investors astray. We listen to stories from our friends and families about the killing they’ve made in this biotech stock and we want in on the action. What doesn’t get mentioned is the other ten stocks that they bought which went nowhere or lost money.

Then there is the issue of performance chasing. We always want our money in the best stock, mutual fund, ETF, etc. So, we look over the performance numbers and Morningstar ratings, which are so helpfully provided by the companies looking for our dollars, of prospective investments and we pick the best. Performance chasing is a corollary to the tinkering problem. We simply can’t sit still watching one of our investments underperform so we need to act. The result, unfortunately, is a portfolio whose investments are highly correlated because we switched to whatever was working best at the time. The disclaimer at the end of every fund commercial and promotional material says, “PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS,” yet it tends to fall on deaf ears.

The benefit of a diversified portfolio is like a bar of soap. The more you mess with it, the quicker it (the diversification benefit) disappears. Returning to the imagery of the Mouse Trap game, catching the mouse is whatever goal you have in mind for your investments. For a lot of people, that goal is retirement. What are the essential elements? Putting away 10-20% of your salary into a low-cost, diversified portfolio and letting the incredible power of compounding work its magic is akin to setting the cheese or peanut butter on the trap. Each change made introduces an unnecessary element of complexity, like the metal ball dropping onto the end of a lever which springboards the plastic man into the waiting line of dominoes. Can it work? Sure! But I’ll leave the element of chance to the board games.