30 December 2022

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In finance, simplicity wins

Luigi Campopiano

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Being able to simplify is very complicated, but it helps achieve objectives in many cases. If you try to subtract, you inevitably assign an increasing degree of priority to the priorities themselves, adding real value to what remains on the table. 

From the point of view of savings and investments, this means bringing added value through choices which, at first sight appear illogical in terms of achieving what is shared. But these choices prove successful tomorrow: choices in finance take on a meaning full of expectations and are almost devoid of risks, at least in the collective imagination. Volatility, for example, allows you to increase the volume of your investments over time and is perceived downwards: when the value of your position is lower than in the past, you think you have suffered a loss. 

We tend to think in frames when the investment is a dynamic path. The time factor will always be essential to manage emotions during phases of high market volatility through shared and shareable choices.

It's not simple because if it were, financial education and advice like behavioral advice probably would never have been the subject of many analyses, projects and interventions by institutions and other sectors. Simplifying concepts should be the guideline for industry insiders to propose new methods in interpreting and considering the investment approach. Listen to the doubts that regularly arrive, experimenting with new analogies as examples to be developed in the future.

Devise simple examples that can help us achieve the main objective of our business, which is to avoid those typical mistakes in financial choices. We could add value while subtracting errors by simply multiplying. 

As an example, the repayment of the value of an investment that lasted decades has two options:

1. Option A. The daily credit of $10,000 for 30 days.
2. Option B. The daily credit of $0.01 doubled every day for 30 days.

The choice is between simple or compound capitalization; these choices appear counter-intuitive and lead to diametrically and exponentially opposite results. The example intends to place maximum attention on how the result achieved over time (theoretically for an indefinite duration of investments) generates such a volume that the simple contribution of customer subscriptions will never be able to equal. 

Comparing a credit from $10,000 against one cent seems a paradox, but in the "how" we approach the choices, the "why" of the results we want to achieve are hidden. 

The attention always paid to "what to invest," "what to get," and "what to do" inevitably distracts: supporting the saver in the transition from "what" to "how" and "why" and opting for a method rather than for a product will always be a good alternative solution to procrastinate the duration of investments year after year.

Which option would you choose and why?