In one sense, you need to know almost nothing to be a good investor. However, in another sense, you need to learn quite a lot.
The recipe for investing better than almost all other investors over the long run can be dead simple. Buy three low-cost index ETFs and rebalance mechanically based on some fixed rules. Within reason, these fixed rules don’t matter much as long as they remain fixed. We could teach this to a 12-year old.
Where you need deep knowledge is to avoid screwing up the simple investing recipe. Imagine yourself balancing on a wobble board following this simple investing recipe and trying not to fall over. Unfortunately, most of the financial industry is trying to knock you off.
First we have the never-ending media reports about an impending market crash. These are designed to turn you into a market timer. All the evidence says you are most likely to get out of the market at the wrong time, but the articles calling for a crash are very scary and convincing. More money is lost being out of the market than has been saved avoiding crashes, but that brings little comfort as you feel yourself falling off your wobble board.
Next there’s the lure of expensive mutual funds with the promise of star managers getting you higher returns and steering you clear of big losses. Of course, they can’t do these things, but the appeals to greed and fear are often enough to knock you off balance. Over the years you give away one-third or more of your savings waiting for the out-sized returns that never come.
Then there’s the lure of choosing your own stocks. When the world tells you you’re smart enough to beat other investors, your ego can’t resist. Steady media stories about “5 hot stocks” keep you off balance. Trading against the best in the world rarely works out well, but you remember your winners. Somehow, though, your portfolio never grows the way you hoped it would.
Banks, insurance companies, fund companies, and brokerages can’t make money unless they take it from you. So, they do their best to keep you off balance. Their messages can be extremely persuasive. It takes a lot of investing knowledge to tune out all this noise, stick to the simple plan, and stay balanced.