Most investors think good investing is about finding more things to say yes to. More opportunities, more asset classes, more products in the mix.
In my experience, the opposite is true. The investors who build the most wealth over a lifetime are the ones with the discipline to say no, repeatedly, to almost everything that crosses their desk.
This shows up in small, easy-to-miss ways. I regularly see people investing into an ETF each month feel an urge to switch it up, to buy something different next time, simply because buying the same thing five times in a row feels unsophisticated. It is not. If that option was the highest quality and an attractive price last month, and nothing has changed, buying it again this month is the correct decision.
The temptation to diversify for its own sake, or to manufacture activity where none is needed, is one of the more common ways investors quietly erode their own results.
The wealth equation, revisited
In Wealth by Design, I set out wealth as the product of three factors: investment surplus multiplied by investment efficiency multiplied by time.
Time is largely outside your control. The only real risk here is procrastination, so the task is simply to start and to stay invested.
Surplus is a function of cash flow management, spending less than you earn and directing the difference into investments, which I have written about recently here.
Both matter. However, the factor that determines whether all that saved and invested capital actually compounds into wealth is efficiency, the average long-term return you keep after tax and cost drag have taken their share. Two investors can invest the same amount of capital for the same length of time and end up with materially different outcomes purely because of investment efficiency.
This is the one lever within an investor’s control that genuinely warrants obsession.
Quality, then price, then diversification, in that order
We optimise investment efficiency by working through three considerations, always in the same order of priority.
Quality always comes first. It refers to the underlying fundamentals of an asset that will drive its economic value over time.
Price comes second. How much are you paying for that quality. A wonderful asset bought at an inflated price can still deliver a mediocre outcome, because the price you pay determines the return you are entitled to from that point forward. Your return will be driven by two components: growth in the asset’s underlying economic value and any subsequent repricing. Repricing will enhance your return if you buy well or detract from it if you overpay.
Diversification comes third, and this is deliberate. Diversification is a risk management tool. It does not generate long term returns, it manages the variability of shorter-term returns, and it should only be introduced once quality and price have already been satisfied. I would rather hold one very high-quality asset, bought at a fair price, for thirty years, than dilute that position across a handful of mediocre or overpriced alternatives in the name of balance.
The order matters because reversing it produces a worse outcome. An investor who starts with diversification as the objective ends up buying things simply to fill a gap in the portfolio, rather than because those things meet the bar on their own merits.
Why saying yes feels like progress
Saying yes feels like progress. It feels like you are doing something, staying engaged, keeping pace with markets or with other investors. Saying no, particularly repeatedly, can feel like inaction. Most people find that uncomfortable, even when doing nothing is the correct decision. This is a behavioural bias we must acknowledge if we are to resist it.
FOMO compounds the problem. A new ETF, property investment strategy, or asset class with a compelling story can appear reasonable enough to warrant consideration. Crypto is a perfect example. Each opportunity, considered in isolation, can seem worthy of attention.
The discipline is in recognising that the correct response to the vast majority of these is simply no, and that this is not a sign of being closed-minded, it is a sign of having a filter that works.
Why a bad yes costs more than a bad no
It is worth being clear about why the bar for a yes should be so high. A bad no costs you nothing you can observe. You miss an opportunity that, in hindsight, might have performed well, and you move on.
However, a bad yes is far more expensive. It ties up capital in something that fails to compound, and because of the third factor in the wealth equation, time, that capital cannot simply be redirected without cost. You do not just lose the money, you lose the years that capital could otherwise have spent compounding somewhere better, which you can never get back.
“You only have to do a very few things right in your life so long as you don’t do too many things wrong.” Warren Buffet
This asymmetry is precisely why this filter should be very strict. The cost of an unnecessary no is small and recoverable. The cost of an unnecessary yes, compounds against you.
When diversification is merely cosmetic
Genuine diversification reduces a specific, identifiable risk. Cosmetic diversification simply adds line items to a portfolio without changing its actual risk profile.
Consider an investor whose entire share allocation is held in just three ETFs: VGS, VLUE and DGCE. On the surface, this may appear concentrated. In substance, the portfolio is highly diversified across thousands of companies, numerous industries and many countries, while also incorporating three different and complementary investment methodologies. Adding another three international share ETFs may not meaningfully improve diversification. It may simply introduce more complexity and overlap while creating the appearance of a more sophisticated portfolio.
Diversification should be assessed by what it actually does to underlying risk, not by how many products appear on a statement.
Doing nothing is a decision, not a failure
If nothing available meets the required standards of quality and price, holding cash is entirely appropriate. This is neither procrastination nor a failure to invest. It is evidence that the filter is working as intended.
The discomfort some investors feel about holding cash often stems from viewing investing as an activity that must be constantly performed, rather than a discipline applied only when conditions justify action.
In property, for example, this may mean delaying a purchase until a genuinely compelling opportunity emerges.
In share markets, however, we can usually identify at least some compelling opportunities, even when the broader market appears expensive. It is rare to find none at all, but it is possible. If that occurs, continuing to hold cash is the correct response.
Our current ‘do not invest’ list
The value of a strict filter is best demonstrated by what it excludes. Below is our current list of asset classes and products that do not clear the bar, and why, each one is failing on quality, price, or the genuine diversification test.
Cryptocurrency
We invest only in assets that generate productive value, whether that is a company producing goods and services, or property in a scarce and highly desirable location housing tenants. The overwhelming majority of cryptocurrency owners hold it for speculative or investment purposes only, with no underlying productive activity generating demand. This is the same reason we avoid investment properties in locations dominated by other investors rather than owner-occupiers or tenants driving genuine demand. Both fail the quality test.
Unlisted managed investments
This category includes agribusiness schemes, structured products, hedge funds, and absolute return funds. These products typically market themselves on the promise of higher returns, but that promise comes with materially higher risk, including complexity that is often difficult to properly assess, high fees, and reduced liquidity. Relative to a low cost, transparent, liquid global share index, which has delivered average long-term annual returns of around 10% over multi-decade periods, these products tend to fail on a risk-adjusted basis once fees, complexity, and liquidity risk are properly accounted for. Higher headline returns, where they exist at all, are rarely enough to compensate for the additional risk being taken on.
Listed investment companies
Listed investment companies generally rely on active fund management. Decades of evidence demonstrate that, after fees, most active managers underperform comparable index benchmarks over the long run. LICs also tend to charge higher fees, while many trade at persistent discounts to their net tangible assets. This introduces an additional structural pricing problem on top of the performance issue. Taken together, these shortcomings mean that most LICs fail the quality test.
Private equity and private credit
Private equity in its purest, most illiquid form carries high risk and a high failure rate. Where private equity is offered in a more liquid structure, such as listed private equity ETFs, performance tends to be average at best, while fees remain high, so the liquidity is effectively purchased at the cost of return. On private credit, our view is that growth assets remain preferable to high-yielding bond-style alternatives, given the risk-adjusted return trade-off involved. Both options fail on the quality test.
New build residential property
New residential property developments are frequently located in areas that are either impaired, such as busy main roads, or characterised by an abundant supply of vacant land nearby that limits future scarcity value. Most of the purchase price reflects the improvements rather than the underlying land, and land is the component that has historically driven long-term capital growth. There is also no long-term performance record to draw on for many of these developments, which fails the quality test on the evidence available.
IPOs
We do not invest in direct shares, which rules out IPOs on structural grounds alone. Beyond that, IPOs lack a genuine price discovery mechanism at the point of listing. The price is set by investment bankers and the issuing company, not by the market, and it is only once the shares begin trading that their true market value becomes apparent. This is a clear failure on the price test, before quality is even considered.
The filter behind every no
None of these exclusions are permanent judgements about the opportunities themselves so much as they are the output of a consistent process applied honestly. Every asset class above fails a specific, identifiable test: quality, price, or genuine risk-adjusted diversification, rather than being excluded on reputation or headline alone.
The next time you are tempted to add something new to your portfolio, or to swap out something you already own simply for the sake of variety, it is worth running it through the same three questions:
- Is it high quality?
- Are you paying a fair price?
- Does adding it reduce a risk you are genuinely exposed to?
If the honest answer to any of these is no, then no is the correct response, and it should not feel like a missed opportunity. It should feel like the discipline working exactly as intended.
