Less Is More When It Comes to Your Investment Portfolio

All too often, clients come to me with investment ideas they like.

Some are good and some are not so good, but many of them are complex.

As humans, we are often seduced by complexity, as though the more glamorous or intricate an investment instrument is, the better it must be.

Now a dose of reality.

This type of behavior is part of the reason that “the average investor” underperforms the market over time.

Please allow me, in an effort to save you from yourself, to make an impassioned argument for the cheap, simple, and boring.

High Fees

Complexity often comes with a cost in the form of higher fees.

A money manager who actively trades your account is likely to charge a higher fee than a money manager who updates investments once a quarter or semi-annually.

Incurring higher fees than necessary puts you in what I like to call a “fee hole.”

That’s the hole you need to dig yourself out of before you can start earning a positive return.

The bigger the hole, the more you need to outperform to dig out (more on outperforming later).

Would you rather dig yourself out of a 3% hole or a 1.5% hole?

High Risk

If it’s complex, exotic, or hot, it’s also likely to be high-risk.

As an example, I often have clients ask me about buying into companies that have an upcoming Initial Public Offering (IPO).

Being curious about IPOs is natural enough — the stock is in the news, investors seem excited, and the return potential looks so attractive.

Why not get in on it?

IPOs can be very risky.

There isn’t as much public information about the company (compared to companies that have been trading publicly for a long time), and there may be news that hasn’t yet broken that could affect the company’s stock price a great deal.

If and when things go wrong and the value of the investment drops more than expected, the natural reaction will often be to sell to stop the pain.

Once an investment is sold, those losses are locked in — you will have damaged your returns in a very meaningful way.

Action Over Inaction

Our brains value action over inaction.

We want to think our money managers are hard at work each day squeezing every ounce of return out of the market.

In reality, markets are efficient, and there are very few angles to exploit.

Everything the public knows is already included in the price of a given asset.

Doing the (Nearly) Impossible

The dirty little secret that many money managers don’t want to fess up to is that “beating the market” consistently is nearly impossible.

A manager might beat the market for one year, two years, or even three years.

But that same manager will then tend to underperform in future years.

That’s not to say that active management has no place.

There are situations and circumstances where active management is appropriate and necessary.

But those situations are often limited, and for most investors a core portfolio of passively investments is appropriate.

What Does Work?

Cheap, simple, boring.

·???????Limits the depth of the fee hole.

·???????Less likely to get nasty surprises.

·???????Novelty can mean taking too much risk.

Why does anyone need a Financial Advisor if cheap, simple, and boring is the way to go?

Not every investor needs a Financial Advisor. However, those who do typically share these traits:

·???????They lack investing confidence

·???????They lack time to run their portfolios

·???????They want a steady hand during rough markets

·???????They value the Financial Planning process

Does any of this sound like you?

Book a Free One-hour Consultation with me to see if hiring a Financial Advisor might be the right move.

If you are interested in learning more about risk tolerance, check out my post here.