How Much Time Should You Spend On Your Portfolio?

To most people, investing is hard.  It’s time-consuming, confusing, and making sense of all the different competing investments out there can make things downright incomprehensible, the theory goes.  Both you and I know that isn’t true, of course.  With the proliferation of target retirement funds and to a lesser extent balanced funds, investing has never been simpler.

That said, investing can be as complicated as you choose to make it.  You could go the easy route and buy a target date fund or go the more complicated route and own a dozen different asset classes (which is closer to my approach).  Both approaches are valid, and both will probably get you where you need to go.  But which will end up with the highest ending balance?  The answer, of course, is “it depends…”

How Much Time Should You Spend On Your Portfolio?

As I see it, you have three primary options:  the single target retirement fund approach, the three- or four-fund total market portfolio, or the slice-n’-dice-many-asset-classes approach.

The Target Retirement Fund Approach

This one is easy.  Pick a target retirement fund and stick with it for the next several decades.  Choosing between the different target retirement fund options requires some upfront effort, of course, but once you’ve made your choice, you’ll probably spend no more than a few minutes per year managing you portfolio.  Couldn’t be simpler.

The beauty of this approach is that, in my view, it also works with taxable accounts.  Will you lose a chunk of return to taxes?  Yes, but probably less than if you spent all your time chasing the hot investment du jour as most investors are wont to do.  Don’t let the tax-efficiency tail wag the investment dog.

The Total Market Approach

The approach favored by many Bogleheads, the Total Market Approach is only marginally more complex than the target date approach.  There are only three essential funds:  a Total Stock Market fund, a Total International Stock Market fund, and a Total Bond Market Fund.  That’s it.  Your allocation to each of these funds will vary according to your age, goals, and risk tolerance, of course, but for the most part there is little reason to expand beyond these three funds.  Will you end up with the optimal portfolio going this route?  Maybe not, but you’ll be 95% of the way there and will never need to spend more than 20 minutes or so per year rebalancing your simple total market portfolio.  On a side note, some experts not recommend Treasury Inflation Protected Securities (TIPS) as an additional required core asset class.  I tend to agree.

The Slice N’ Dice Approach

This is the approach I follow and many modern portfolio theory advocates tend to suggest.  And firms like Dimensional Fund Advisors have led wide-spread credibility to the slice n’ dice methodology.  It’s common sense that more diversification is better than less, so it follows that owning REITs, commodities, small cap stocks, foreign bonds, and emerging market stocks in addition to the asset classes mentioned above might be expected to marginally outperform a simpler, less diversified portfolio.  It is important to note, however, that out-performance is by no means guaranteed nor even likely.

And even if your slice n’ dice portfolio does manage to beat a total market portfolio, you must accept the fact that you’re spending all those extra hours rebalancing, tax-loss harvesting, and researching investment options for at most a small incremental return.  In other words, you’re spending 95% of your effort chasing that extra 5% in performance.  There’s nothing wrong with that if it’s something you enjoy, but it’s not what I would recommend for the average investors.