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Investing: Prevention is better than cure

Few things you learn as an adult are more important than the simple advice you learn as a kid.

Take medicine.

Advancements in treating lung cancer are astounding, and so important. But not smoking is far more important — smoking is responsible for about 90% of lung cancers in men, according to the Australian Institute of Health and Welfare. Breakthrough drugs are amazing and becoming more effective. But it’s unlikely that anything will ever be as effective at fighting lung cancer as the simple and free advice of “don’t smoke.”

The scientists who develop these treatments are some of the world’s most valuable people. But those who can help others quit smoking, or never begin smoking, will probably save far more lives. Alas, the quit-smoking counsellors, social workers, nurses, and primary-care practitioners tasked with this job aren’t nearly as prestigious as the medical researcher who pioneers a breakthrough drug.

Same for heart disease. Few complicated and expensive treatments will ever be as effective at tackling heart disease as “eat right and exercise.” But who is viewed as more important to medicine: the nutritionist, or the cardiac surgeon?

Here’s the problem: Advice that sounds basic but is important isn’t as valued as complicated advice that is necessary only if you ignored the basic advice to being with.

Complex or effective? Your choice

It’s the same in finance. Advice that sounds complicated — chart patterns, trends, Greek symbols, market timing — is often more valued than basic advice that is far more important, like saving your money, investing for the long term, and reducing costs.

And just like medical advice, the only reason you need complicated advice is often that you ignored the basic advice to begin with. Do you need derivatives to hedge your portfolio? Maybe only if you don’t have a long-term attitude to begin with. Do you need to know when the next recession will come? Maybe only if you don’t have a good emergency fund to begin with.

It’s natural to assume that if something sounds complicated, it must be more important than the basics. But in many fields, it’s the other way around. What’s dangerous is that smart people can think the basics are beneath them and focus all of their attention on complicated manoeuvres. But since the basics can determine the majority of success, they end up with performance that’s far below average.

A US Vanguard index fund that invests 60% in stocks and 40% in bonds outperformed most US hedge funds with less volatility over the past decade. But I guarantee you that if you tried to sell this strategy to managed- and superannuation funds, they’d shake their heads. It sounds too simple. They want complicated hedge funds managed by rocket scientists.

Foolish takeaway

In my view, those who get people to save more money, teach people about the value of a long-term mind-set, lower costs, and reduce bad investing behaviour will always be more valuable than anyone engaging in complicated investing forecasts and techniques. But we'll always be more attracted to those with fancy charts, flashy formulas, and complicated jargon.

The choice is yours - choose wisely.

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Morgan Housel is a Motley Fool columnist. You can follow The Motley Fool on Twitter @TheMotleyFoolAu. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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