I’m a bit zealous in my preference for lazy portfolios and simple investing plans. So it’s no surprise that I sometimes get emails asking whether I really believe that it’s worth “dumbing down” a portfolio just to save a few minutes every month.
My answer: It’s not being lazy or saving time.
Beyond the time saved from not having to monitor your investments everyday, there are multiple tangible benefits to using a simple portfolio and investment plan.
Protecting Against Mistakes
The simpler your portfolio and investment plan are, the easier it is to have a true understanding of them. And the better you understand them, the less likely you are to make mistakes.
A deep understanding of every piece of your investment plan helps prevent technical mistakes like rebalancing improperly. And (perhaps more importantly) it helps prevent emotional mistakes — giving up on your plan to chase performance somewhere else, for instance.
Protecting Your Spouse
If your spouse inherited complete control and responsibility for your portfolio tomorrow, would he or she know what to do with it?
- Would (s)he know the purpose of each of the investments in the portfolio?
- Would (s)he know the desired allocation for each of those investments?
- Would (s)he know how you intended that allocation to change over time?
And, even if your spouse would know what to do with the portfolio, would she have any interest in actually doing it? What you see as “rebalancing” and “regular maintenance,” your partner may see as “hassle” and “endless tinkering.”
The simpler your investment plan is, the better your spouse/partner’s position if he or she ever has to take over maintenance of the portfolio.
Protecting Against Cognitive Decline
It doesn’t happen to everyone. And hopefully it won’t happen to you. But cognitive decline does happen to a lot of people. And, by its very nature, it’s darned hard to self-diagnose. So you have to prepare for it ahead of time.
If you have a simple portfolio — especially one in which each of the parts performs an obvious function — it will be much easier for your loved ones to handle things for you, should that need arise. (Important note: You’ll also have to provide them with the legal authority to do so.)
Ways to Simplify Your Investing
Stick with one brokerage firm: Choose one low-cost brokerage firm, and stick with them. Having everything in one place makes it easier to see how your portfolio is allocated. It makes it easier to track performance. And it makes it easier to rebalance when necessary.
Hold fewer investments: If you can put together a diversified portfolio using just 3-5 index funds or ETFs, I say go for it.
Consider annuitizing: If you’re retired, consider devoting a portion of your portfolio to a single premium immediate annuity. With such annuities, there’s no ongoing maintenance to be done. All you have to do is make sure you’re spending less than the income you’re taking in — something you’ve been doing for years.