My wife writes a food blog.* For years, she used a simple “point & shoot” digital camera for all the photos. But as she learned more about photography, she realized that she would have to upgrade her camera in order to reach the level of photo quality to which she aspired.
While we were researching the purchase, I visited the Digital-Photography-School forums to ask the experts for their input. Before I knew it, I was looking at a $2,400 camera, a $380 lens, and a few hundred dollars of accompanying gear.
I had a similar experience shopping for a new laptop early last year. Any new computer would have beaten the pants off our 2004 vintage MacBook, but after reading several articles and reviews, I found myself leaning toward a rather high-end machine.
In both cases, I found that it was helpful to take a step back and think about our needs. After all, a feature that someone else considers an absolute necessity might end up going entirely unnoticed in our hands.
What This Has to Do with Investing
When researching a purchase–especially in a field in which you’re not an expert–it’s easy to get overwhelmed or talked into something you don’t really need.
The same thing goes for building a portfolio. While researching the decision, you’re going to get a whole list of varying suggestions, even from those of us who agree that a low-cost, passively managed portfolio is the way to go. For example:
- Some people will say it’s important to rebalance annually. Others will say every 2 years. Others will say to do it every time your asset allocation is out of whack by a specific percentage.
- Some people will insist that you’re better off if you overweight small-cap stocks and/or value stocks.
- Some people will insist that you need to have a certain portion of your portfolio in emerging markets, REITs, gold, commodities, or any of 100 other things.
- Some people will insist that you need to include corporate bonds in your portfolio. Others will argue that it’s better to stick to Treasuries.
The result I see over and over is that an investor will end up with a portfolio that has so many moving parts he/she isn’t entirely sure how to operate it. That is, a portfolio that made perfect sense in the hands of the person recommending it (an investing aficionado) ends up being a poor fit for the person who’s new to the field or who simply takes less interest in managing his/her portfolio.
Simplifying Your Portfolio
My advice is to simplify your portfolio until it reaches the point where you understand all your holdings, why they’re in your portfolio, and how/when you’re supposed to move money between them. If that means using ten funds, super. If it means using just two or three funds (or even just one), that’s perfectly fine too.
*Shameless plug: She writes at Wheat Free Meat Free, where she shares gluten-free vegetarian recipes.