Think Different was a successful advertising campaign launched by Apple in 1997, the same year they introduced us to the iPhone, a revolutionary product. The iPhone allowed us to think and act different by changing the way we communicate and access data. Companies like Uber have prospered because of it.
The iPhone is simple to use and has clean lines with nominal clutter. A touch of an app can connect me to almost anything. I don’t have to program it or learn a complicated algorithm to operate my phone. If I want to check my flight, buy a book, take a picture, listen to music, or find a restaurant I touch the appropriate app and voila.
The iPhone, however, is anything but simple. It’s loaded with powerful, complex components under the touch screen glass; components like a lithium ion battery, bionic application processer, wi-fi chips, XMM 7480 modem, wireless charging chip, super retina HD display, loudspeaker, charging coil and Taptic engine. I don’t understand how these sophisticated apparatuses work, but they’ve simplified my life.
Cell phones operate from wireless networks using radio frequency connected to telecommunication networks around the world and satellites in space. These systems are difficult to create and far from simple. And, the only way for a satellite to get to space is to be shuttled by a rocket. Rocket scientists, engineers, and PhDs use mathematical formulas few people can comprehend to design and build these systems.
Mutual funds, especially index funds, appear simple but under the wrapper there are high levels of sophistication. For example, the Dimensional Fund Advisors (DFA) model was built with financial science. DFA is armed with PhDs, engineers, and other smart people working to remove complexity from the investment process.
Dimensional Funds was founded by David Booth and Rex Sinquefield in 1981 and utilized the work of Dr. Eugene Fama. Dr. Fama was awarded the Nobel Prize in Economic Science in 2003 for his work on the efficient market hypothesis. He, along with Professor Kenneth French of Dartmouth, developed the three-factor model for stock investing, known as the Fama-French three-factor model. The three factors are: stocks outperform bonds, small companies outperform large companies, and value outperforms growth. These three themes appear simple but the research to arrive at these conclusions is anything but.
In addition, Dimensional worked with several Nobel Laureates, before they were awarded their prizes including Merton Miller, Myron Scholes and Robert C. Merton. Merton Miller said, “I like that Dimensional invited all these Nobel laureates on their board before they got their Nobel Prizes. It’s easy to invite them afterward.”
One of the arguments against mutual funds is that they’re too simple for sophisticated investors, a major misconception. Investors are also concerned about missing out on high flying stocks like Amazon, Apple or Nvidia. Well, these three companies, and many more, are currently held inside a few of the funds managed by Dimensional. In addition to those popular companies, they also own Ablynx NV, ASE Industrial Holdings, Axon Enterprises, Enova International, PT Indah Kiat Pulp & Paper, Seacor Holdings, Suzano Papel E Cellulose SA, Tenent Healthcare, and Yageo Corporation – all up more than 100% so far in 2018. Furthermore, a diversified portfolio of mutual funds will give you global exposure across multiple sectors.
As you construct your portfolio think differently. Don’t worry about picking a few hot stocks, rather focus on your financial goals and dreams. A financial plan will help quantify your goals and establish the proper asset allocation. Once your plan is complete, invest in a portfolio of mutual funds diversified around the globe – simple!
Simplicity is the ultimate sophistication. ~ Leonardo da Vinci
May 10, 2018
Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX. Our mission is to remove confusion, complexity, and worry from the financial planning and investment management process. For more information please visit www.parrottwealth.com.
Note: Past performance is not a guarantee of future returns. Your returns may differ than those posted in this blog and investments aren’t guaranteed.
 https://www.bloomberg.com/features/apple-iphone-guts/, published 10/12/17, updated 12/6/2017.