My friend asked me questions the other day along the lines of, “What investments should I be choosing? How do I find the funds everybody is talking about that do well? Should I buy different types of funds?”
I could have gone many ways with these questions, but I remembered what my tennis coach in high school always said, “KISS – keep it simple, stupid.” I come back to this principle often in life. What gets better as you make it more complex? Not much.
I’ll say it to you: keep it simple, stupid.
I find most people make investing unnecessarily complicated. They will own 40 funds and 20 stocks, and think they are diversified, but many of those funds may invest in similar companies, and the stock research may take more of their time than the reward.
I find it’s best to keep it simple. Let’s talk about how you can simplify your investing. Please keep in mind none that of this is investment advice. I am providing this information for educational and informational purposes. You always need to decide what’s best for you.
Know Your Timeframe
Before you can simplify your investing, you need to know your timeframe for the funds. I asked my friend, “When do you plan to use the money you want to invest?”
“Most of it is for the long-term. I have no plans to spend it for many decades. Some might be used in the next few years”, she responded.
Investing is like food. You can’t buy a fresh, warm loaf of bread from a local baker and expect to use it in a month. It’s intended for the same day or possibly the next day.
However, you can buy matzo, use it in a month, and it will taste the same as eating it today.
The ingredients you buy need to match when you want to use them.
For money you need to use in the next year or two, it usually does not make sense to invest the money. The easiest example is buying a home and wondering the age-old question: “How should I invest my down payment?”
Simply, you should not.
I kept my home down payment in cash in a high-yielding online savings account for a couple of years until I was ready. I did not want to put the money at risk in the stock market. If the stock market had declined 20%, I would not have had enough money to buy a house.
For money in the next year or two, cash is generally best. There are exceptions, but they are rare.
On the other side, money for retirement in 30+ years can be invested aggressively – that is if you can stomach the ups and downs of the market. Just because you can take risk does not mean you should take risk.
For example, the speed limit may be 60 mph on the highway, but you may not feel comfortable driving 60 mph at night in sideways rain and fog and a large deer population. If that’s uncomfortable, you slow down. The same can be said for your investing experience.
The easiest way to reduce the uneasiness of the stock market is to own less of it. Instead, you can own certificates of deposits, bonds, or cash. Those reduce risk.
So, on one hand, you can have 100% stocks and a lot of risk. On the other hand, you can have 100% cash and have less market risk, but face more inflation risk (where your purchasing power decreases over time because inflation eats away at your cash).
Or, you can pick something in between, such as 50% stocks and 50% bonds.
There is no perfect answer about how to allocate your funds. Each person is different. For instance, I’m 100% stocks for my long-term investing, but keep a fair amount in cash for living expenses and starting a business. Other people have an entirely different approach. You need to determine what works best.
The important thing is to know your timeframe for any money you are investing.
Automate When Possible
Once you know your timeframe, automate your investing as much as possible. Although many people will criticize 401(k) accounts, and I do my fair share when the fees are high, they are wonderful automation vehicles.
You tell your human resources department how much you want to contribute, select which funds you want to choose, how often to rebalance, and it does everything automatically.
When set up properly, it works beautifully.
If you don’t have access to a 401(k) or you are trying to contribute money to a Roth IRA or brokerage account, you have fewer automation options. There are a few tools out there that let you automate purchases, but they are usually from a startup or have other limitations if through a bigger brokerage company, such as Vanguard, Schwab, or Fidelity.
Instead, I suggest setting up automatic transfers on the same day you are paid and making a calendar reminder for yourself to buy whatever it is you want to buy. You can do this each paycheck, but I find monthly is a good frequency. You only have to take action 12 times a year.
For example, you could automatically transfer $50 from each paycheck and invest it once a month into an investment.
Automating is a crucial step in simplifying your investing. It requires little effort on your part and can run without a big-time commitment. Remember, you want to make it as easy as possible for yourself. Your future self will thank you.
Choose Fewer Funds
Once you know your timeframe and automate the process of buying, choose fewer funds.
If I had to pick one mistake I see people make as they get comfortable with investments, it’s choosing more funds and making it unnecessarily complicated.
More does not equal better.
Have you ever had a good Italian meal?
It’s usually made with very few ingredients. The chef will select high-quality, delicious ingredients and transform them into a bright, fulfilling meal.
Extra virgin olive oil and balsamic with bread.
Spaghetti and meatballs.
Pasta with butter, lemon, and parmesan.
None of these dishes have more than a handful of ingredients, but they are extremely satisfying.
Your investments can be the same way.
In fact, one account I have intended for a family member is nothing more than the Vanguard Total World Stock ETF (Ticker: VT). As of this writing, it has 9,299 stocks from around the world and has an expense ratio of 0.08%.
It’s diversified and cheap. Simple.
I find it incredible that if you invested $100,000 into the Vanguard Total World Stock ETF, you could own over 9,000 stocks from around the world for about $80 per year.
Instead, you could own 40 funds and 20 individual stocks. You could spend the time researching each one, staying up to date on new funds being released, and throwing away your precious, limited time on this planet trying to formulate a perfect portfolio that does not exist. Or, you could own the entire world stock market in one fund and go live your life.
I know what I would rather do if I was not a financial planner.
Now, you may be thinking, what about ESG (environmental, social, governance) investing, small company premiums, value stocks, angel investing, real estate, etc.?
You can explore it if you want. I own ESG funds. I own small company stocks. I own value stocks. I own real estate investment trusts (REITs).
But, I enjoy researching new investments. It’s part of my career.
Despite it, I still own the Vanguard Total World Stock ETF in one of my personal accounts intended for a family member.
I own it because it’s simple. Each month when I was making deposits, I had an automatic transfer into it and a calendar reminder to buy shares of VT with as much cash as I had available in the account.
I did not need to research, rebalance, or give it any other thought. I simply had to buy VT.
Because I knew the timeframe for using the funds was more than a decade away, I felt comfortable with 100% stock risk. Because I automated the transfer and the buying as much as possible, it happened each month like clockwork. Because I selected one investment, it took me about two minutes each month.
Two minutes. That was it.
You can complicate investing as much as you want, but I find choosing fewer funds and making it simple gives you a better probability of sticking with it and understanding how you are invested.
When you have 40 funds, there are good odds that some overlap and own the same asset class or stocks, giving you the illusion you are more diversified than you think. I’ve met people who owned five funds, who thought they were diversified, but they all tracked US Large Company stocks. Unless you look under the hood of each fund, you’ll never know. The name alone is not enough to tell you how it is invested.
Unless you enjoy researching funds and know what you are doing, consider choosing fewer funds. Remember – KISS – keep it simple, stupid.
Keep Expenses Low
No investment article would be complete without a section on keeping expenses low.
I’m not one of those people on a crusade to say everything has to be the lowest cost. I don’t think that’s an effective way to go about life. Sometimes you do get what you pay for.
With investments, it usually makes sense to be diversified. You can buy the cheapest fund available and call it a day. In fact, you can find free funds from Fidelity, but that may not be best for you.
Does the free fund include non-US companies? Can you transfer the fund to another custodian if you want without selling and recognizing tax consequences? Are there hidden costs to the fund?
I am posing these questions because sometimes people read free or low cost and jump on the bandwagon when it should require more thought and due diligence.
I could try to eat rice and beans for the rest of my life because they are cheap, but there will likely be unintended consequences. I should pay for fruits, vegetables, and other proteins for a healthier diet.
With that said, you should generally keep expenses low. For each asset class, that will mean a different level. For example, US Large Company stock ETFs are very cheap. You can easily find many funds under 0.10%.
The same can’t be said if you want to own Emerging Market Small Company stock ETFs. They cost more to run and the expenses will likely be higher than 0.10%. It doesn’t mean it’s bad. It just has a different cost, similar to how a piece of fruit will cost more than a serving of rice.
Most people should be able to build a globally diversified portfolio for under 0.30%. This is if you want to customize your exposure to different asset classes. As I mentioned earlier, you can buy the Vanguard Total World Stock ETF for 0.08% and call it a day.
The other aspect of keeping expenses low that is often underappreciated is that it forces you to simplify your investing. More complicated investments tend to have higher costs. If you limit how much you are willing to pay for your investments, you will naturally exclude the more complicated investments.
I’m not saying private equity, venture capital, real estate, and other more complicated investments don’t have their place in a portfolio for some people, but you certainly don’t need them to have a good investing experience.
The last thing I’ll mention is that it is okay to pay for financial advice and investment help. I’m a big fan of outsourcing when it makes sense. Just because something has a cost does not mean it’s bad. I’ve paid attorneys thousands of dollars. I’ve paid for house cleaning. I’ve paid restaurants for meals. Each of them enriched my life in different ways.
If you don’t have the time and interest, or the opportunity cost is huge if you make a mistake, it’s okay to pay for advice even if it raises your expenses. I’ve seen people pay far more in mistakes than it would have ever cost them to hire someone to help.
Summary – Final Thoughts
Investing doesn’t have to be complicated. Remember what my high school tennis coach always used to tell me – keep it simple, stupid.
To simplify, follow these easy steps:
- Know your timeframe
- Automate when possible
- Choose fewer funds
- Keep expenses low
Good luck in your investing journey!