Complexity has a way of seeping into portfolios a little bit at a time. Simplicity has advantages beyond being easier to understand: it's also likely to keep you disciplined and adherent to your goals and long-term strategies.
As organisms evolve, they become more complex. You may find a similar phenomenon as an investor. But do you ever feel like your portfolio is becoming too complicated to understand and follow? Complexity has a way of seeping into portfolios a little bit at a time. Simplicity has advantages beyond being easier to understand: it’s also likely to keep you disciplined and adherent to your goals and long-term strategies.
Here are a few steps to a simpler strategy.
Sounds counter-intuitive, right? But it’s true. By owning a variety of asset classes, you remove the need to constantly tinker with your investment mix. In a diversified portfolio, some sectors will perform better when others struggle; the right mix will give you a better chance at steady, long-term growth than will constantly trying to time the market or shuffle your stock mix.
2. Focus on Price and Expenses.
I’m one of those people who always arrives on time. My always-late friends say that unexpected traffic popped up, or they had to run an errand, or [insert excuse here]. What I figured out early on is that the single biggest factor in achieving an on-time arrival is the time at which you depart. Similarly, the single biggest factor in how successful an investment will be is what you paid for it. When initial investments are cheap, your potential returns will be higher.
Commissions and expenses add up over time, as well. Always know the expense ratio of any investment you hold, and always be aware of what you’re being charged for individual transactions. What may seem like small fees now can really add up over the lifetime of your portfolio.
3. Zone Out.
Watching television analysts like Jim Cramer (among many others) can be entertaining—it can be both intentional and unintentional comedy—but it generally shouldn’t inform investment decisions. Consider this: if a strategy is being touted on one of the financial networks, the potential for significant return has probably already passed by. You may have some analysts you trust who have earned a return for you over time, and that’s fine. But for the most part, steering clear of the noise will be both mercifully quieter and better for your portfolio.
Also, while there can be value in working with an advisor, working with more than one can add unnecessary complexity, and it may add conflicting strategies that end up moving away from our core principles.
4. What’s Old is New Again.
Generally speaking, steer clear of trendy products or the latest new strategy. Tried and true investments work because…well…they’re tried and true. Hopping on board the latest trends may work just fine in fashion, but it’s rarely fashionable in finance.
5. Rebalance at Least Once a Year.
I covered this in more detail here, but while rebalancing may seem complex, it actually encourages simplification, and most online brokers and investment companies have tools to help you rebalance.
A simpler investment portfolio has many advantages, not least of which is giving you a better chance of focusing on improving investment performance. Sometimes, the simple answer is the better one.