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  • Writer's pictureMatthew Kelley

A Radical Investment Idea: Simplify Your Strategy

It may seem odd for a financial advisory firm to say this, but financial advisors often overcomplicate investments. While managing an investment portfolio does require knowledge, care, and attention, it isn't rocket science.

In our view, financial advisors often over-emphasize the amount of time and effort needed to select the right mix of good funds and monitor them. It is always possible to make that process more complicated, but as we discuss in this article, that is usually unnecessary and may not even be beneficial.

We do admit that the investment process is inherently complicated in at least one respect: there are an infinite number of ways to build and manage a portfolio. Consider that there are close to 8,000 mutual funds available in the U.S. alone. More than 4,600 invest in stocks, with a wide range of strategies that focus on various segments and slivers of the market. There are also roughly 2,200 bond funds, taxable and tax-exempt, also segmented in numerous ways. It can be overwhelming if you allow it to be.

Simplify Your Investing

We believe that when making decisions about investing, it is crucial to appreciate the benefits of simplicity. We propose that simplicity should be a key pillar of one's overall investment philosophy, along with things like "invest for the long-term," and "diversify," and "investment risk should be consistent with financial goals."

Studies show that the most critical factor, by far, in determining an investor's long-term returns is the asset allocation decision. In other words, what is the most appropriate percentage mix of stocks versus bonds and cash? When you keep that in mind, it becomes easier to understand that the difference in return you will earn by choosing Fund A over Fund B in a given category is not very meaningful. Yes, the difference is not zero, and it is vital to recognize that a fund's characteristics can affect your portfolio's volatility and taxes. However, contrary to widespread knowledge, maximizing investment performance is not where you should be focusing your energy. It simply doesn't have the dramatic impact that you likely think it does.

We are pulling back the curtain here, disclosing a truth that many financial advisors prefer not to discuss because they worry it will make their services seem less valuable to their clients. The reality is, if you own a handful of funds, each one designed to deliver the return and risk characteristics of a key segment of the market, you can do just as well, likely better, than an investor who selected specialized funds that seek to "outperform" (deliver a higher return than the market), by picking individual stocks or sectors the fund managers think will be "winners," or by pursuing sophisticated quantitative strategies. Instead, simply pick quality, low-cost investments that deliver what the global markets have to offer; demanding more will likely cost you in the long run.

The Benefits Of Simplicity

As with many things in life, there are numerous benefits to simplifying the ongoing process of investing. When you simplify, you:

  • are less likely to tinker with how your money is allocated among funds;

  • are less likely to frequently review your funds to see how they have performed over the last month or quarter, then obsess about whether you should sell the low performers and add another fund;

  • incur fewer transactions costs because you will trade less frequently;

  • will pay lower fees and will probably have lower capital gains to report on your taxes;

  • reduce tax headaches when it comes to figuring out the cost basis that determines gains and losses from buying and selling fund shares.

While some make an argument in favor of actively managed mutual funds for investing in certain types of securities or niche segments of the market or regions of the world, instead of sticking with mutual funds or ETFs that passively track a market index, that argument is not necessarily persuasive to individuals whose financial goals (and temperament) do not require "beating the market." The truth is, by using a limited number of funds, investors can achieve returns over time that are extraordinarily similar to, or better than, returns that are generated by more complicated strategies.

We believe that a qualified financial advisor who truly serves a client's best interests will be able to provide expert guidance to clients who prefer a more dynamic approach to invest - we will delve into that in Part II of this article – but we want to be completely transparent about the benefits of simplicity.

It may also be counterintuitive to learn that even "Robo-advisors" often over-complicate the investment process. Several brokerage firms and independent providers offer these technology platforms, use proprietary algorithms to select funds automatically, allocate your money across them, and rebalance those positions (to maintain targeted weightings across funds) without human intervention. That may seem like a good idea, but these platforms often create portfolios containing ten or more funds and shift money around fairly often. In other words, in this case, automation doesn't necessarily simplify your life. Many investors simply don't need a small-cap fund, a mid-cap fund, a large-cap fund, a small-cap value fund, a large-cap growth fund, and so on when overtime, a Total Stock Market index fund will deliver much the same result (if not better). And you don't need Robo-advisor charging fees that are multiples of index ETFs to buy all of those funds for you.

Do you need a financial advisor to invest for you?

Lastly, here is another statement that might sound surprising coming from a financial advisory firm: if you think you need a financial advisor to manage your investments for you, you may not need a financial advisor.

When it comes to investing, a good financial advisor can provide value in many other, more impactful ways. Yes, we help you stick with your investment program even when the market gets volatile and you are tempted to bail out. That's valuable and often overlooked. Yes, we also advise the most tax-efficient way to allocate investments between retirement accounts (in a 401(k)-type plan, traditional IRA, or Roth IRA) and a taxable account. But the real value of an excellent financial advisor involves way more than investment advice and portfolio management.

At Gold Medal Waters, we believe our clients derive the most value from our consultative approach to identifying the real purpose of their money and determining the best way to help each one of them to achieve their desired outcomes through sound financial planning, ongoing guidance, and execution. Our ultimate purpose is to help you to stay on track financially throughout the twists and turns of your life so that you can view money as a way to achieve the things that you value. Reach out to us for more information.


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