Occam’s Razor and Investing

This image depicts bright blue newly formed stars that are blowing a cavity in the centre of a fascinating star-forming region known as N90. The high energy radiation blazing out from the hot young stars in N90 is eroding the outer portions of the nebula from the inside, as the diffuse outer reaches of the nebula prevent the energetic outflows from streaming away from the cluster directly. Because N90 is located far from the central body of the Small Magellanic Cloud, numerous background galaxies in this picture can be seen, delivering a grand backdrop for the stellar newcomers. The dust in the region gives these distant galaxies a reddish-brown tint.

Establish Basic Principles of Investing

What does Occam’s Razor* principle have to do with investing? Furthermore, what is Occam’s Razor?  The principle states that “Entities should not be multiplied unnecessarily.” The principle is attributed to the 14th century Franciscan friar, William of Ockham.  Isaac Newton stated the Occam’s Razor another way with this rule. “We are to admit no more causes of natural things than such as are both true and sufficient to explain their appearances.”  Put another way, we make every attempt to shave away unnecessary information and this applies to investing. To quote Einstein, “Everything should be made as simple as possible, but not simpler.”  Of all the interpretations of Occam’s Razor, this is one of my favorites.  “When you have two competing theories that make exactly the same predictions, the simpler one is the better.”  

While it is a stretch to extrapolate Occam’s Razor to investing, it makes sense to keep investing as simple as possible.  The investment style of ITA Wealth Management attempts to do just that – make investing as simple as possible.

Here at ITA Wealth Management we have a few simple goals and principles.

• Save as much as you can as early as you can. The operative word is “early.”
• Pay attention to portfolio risk.
• Use available research when developing a portfolio plan.
• Use index vehicles as the foundation for portfolio development.
• Give asset allocation the importance it merits – and no more.
• Pay attention to momentum.
• Accept the mantel of humility if you think you can outperform the market by picking individual stocks.
• Avoid losing money by employing a risk reduction model such as ITARR and/or the SHY cutoff model.
• Seek a return that is above the return of an appropriate benchmark.
• Develop a customized benchmark for each portfolio.
• Strive for a high Sortino or high ITA Retirement ratio.
• Reduce fees and expenses.
• Rebalance the assets when appropriate.
• Learn how to monitor a portfolio accurately.

If one were to take the Occam’s Razor principle to its extreme, one might end up investing in two to four broad index funds.  That is keeping it very simple.  To go back to the Einstein quote, such a move would keep the portfolio “as simple as possible,” but one would be forgetting the final admonition – “but not simpler.”

The contention of ITA Wealth Management is that building a portfolio around fifteen to twenty-five ETFs that cover all the primary asset classes fulfills the Einstein quote and the Occam Razor principle. These principles are applied to the thirteen portfolios tracked here at ITA Wealth Management.  Platinum subscribers have access to all details of ten of the 13 portfolios.

* Information pulled off the Internet so as to give credit where it is due.