5 Reasons Your Portfolio Is Too Complicated
“The electronic age makes everything simple and fast.” That was the message from several commenters on Morningstar recently. Yeah right! I’m firmly of the opinion that simplicity generally yields superior results to more complex strategies in most aspects of life, but particularly when it comes to investing.
I’m not saying you have to go so far as to dump your current portfolio and invest in a single balanced fund as the Oblivious Investor recently did, although that wouldn’t be the worst thing you could do. That said, I do believe most of us could simplify our portfolios to some extent. I admit I haven’t yet embraced the one-fund solution for myself, but I have made some changes to my IRA allocation in the last year to simplify things a bit which I plan to write about later this week.
But Why Do We Over-Complicate Things?
Understanding why we tend to over-complicate investing is the first step to redemption. Wouldn’t you rather own just three or four funds and still sleep well at night instead of owning 20 or 30? To paraphrase the great Jack Bogle, “nobody needs to own 20 funds.”
- You pay too much attention to the financial media - The financial media has a vested interest in convincing people investing is complicated. After all, there are only so many ways you can tell people to invest in a total stock market mutual fund, a total international stock market mutual fund, and a total bond market index fund. Not very exciting, is it? In order for them to keep selling ad space to advertisers, they have to keep writing content that people actually read, and what better way to do that than to convince people they’ll eat dog food in retirement if they don’t follow their complex investing strategies? Don’t buy into the hype: effective investing is not complicated and anybody can do it. Not convinced? Then just buy a target retirement fund (I’ve compared the three best candidates here) designed by experts and move on with your life.
- You don’t understand diversification - A lot of people think “well, if owning two funds is more diversified than owning just one, owning 20 must be more diversified than owning 10.” Unfortunately, it doesn’t work that way. Owning three different funds that all invest in large-cap growth stocks doesn’t increase diversification, it just increases complexity. Diversification results from owning different funds that all invest in different asset classes, not from owning seven different generic US stock funds.
- You haven’t consolidated investment accounts - Most people will end up with more than one investment account out of necessity. You might have a Roth IRA, a 401k at work, and maybe even a taxable account. That’s fine. What you absolutely should not do is maintain multiple superfluous accounts in different places. Recently quit your job? Roll over your 401k immediately! Similarly, don’t keep 3 different IRA’s at three different fund companies. Consolidate them. Having too many investment accounts spread out over too many places makes it difficult to rebalance and increases the chances you’ll lose track of your finances. Keep it simple.
- You were given bad advice - There are a lot of financial charlatans out there whose sole goal is to separate you from your money. Sadly, some financial advisors fit that description. It’s not unheard of for disreputable advisors to put their clients in dozens of funds in an attempt to justify their fees. Remember how I said the financial media has a vested interest in convincing you investing is complicated? It goes double for financial advisors. Of course, most financial advisors are honest people and truly want to do what’s best for you and your finances, but you still have to look out for the bad ones. If your advisor has you invested in dozens of mutual funds while charging a hefty annual fee, get out now.
- You’re paranoid - I can’t really argue against this one. Some people are just more prone to worrying about money than others, and there’s nothing wrong with that. Is Vanguard or Fidelity or one of the other large fund companies likely to collapse in a way that would put your nest egg at risk? No. In fact, I’d put the odds of that happening at less than 0.0000000001%, but I can’t say for certain it’s completely impossible. If you’re really that worried about it, sure, go ahead and keep accounts at a few different companies. Just don’t overdo it.