Simplify Your Investment Life

On 12/04/2009, in Investment Strategies, by Jordan Wilson

Christine Benz wrote a good article, “Seven Ways to Simplify Your Investment Life.” It is well worth a read. I have added a few thoughts below to flesh out some points she makes in the article.

Stick with the Basics

Ms. Benz writes that investing based on market “noise” can be “expensive and exceptionally volatile” and may have “little to no bearing on the actual value of their holdings.”

Why? Unless you have inside information, you are learning about news, say the next US federal government stimulus package, at the same time as a billion other investors. Some are buying, some are selling stocks and the bottom line is lots of volatility.

For a traditional investor, volatility is not what one wants. Basically, volatility is the risk that the stock price may fluctuate. The greater the volatility, the greater the potential for movement, both up and down. Investors like certainty. That is, a certain expected return for a given investment. Not something that is all over the map.

But if the stimulus will help the US economy, why is not everyone buying shares? Good question. In January, 2009, while the USD 787 billion stimulus was being debated, the unemployment rate in the US was 7.2%. The Obama economic advisors stated that without the stimulus, unemployment would rise to 9% in 2010. But with the stimulus, unemployment would stay under 8% and 3.5 million jobs would be created or “saved” (no, I have no idea how one calculates a saved job).

However, if we look at the actual results, the reality is a little different than forecast. With the stimulus adopted, unemployment actually went to over 10% and more than 2.7 million real jobs were lost.

Those who were selling did not share the government’s optimistic economic assessment.

Forecasting is not an easy task and experts are not always right. A good rule to remember.

Investigate One-Stop Funds

Some more good points regarding target-date funds. As your personal situation changes, your appetite for risk also changes. When you are 20 and single, you have maybe 40 years to accumulate wealth. You can afford to take more risk due to the long investment time frame and the fact that you have no big financial worries when you are young (no mortgage, no two kids to care for, save for their college, etc.). As you age and add these responsibilities, you naturally want to take on less risk and ensure your assets are more secure. Then when you retire, your paramount concern is income and asset safety. Makes sense? If not, do not worry, we will address risk in a subsequent post.


For most investors, I would recommend an index strategy. At a later date we will explore this in some detail. In short, over the long run, investment managers who actively manage their portfolios rarely outperform related indices. So why should you pay good money to a manager that likely will not earn you any extra return?

An index also makes sense over individual stocks. Unless you are an investment expert, you are at an extreme disadvantage against the professionals. Would you go head to head in court against a seasoned trial lawyer, or on the golf course against Tiger Woods? Probably not. Trying to beat professional investors who have the technical skills, the tools and access to information, and the investing experience is not easy. So why try?

As someone who might be considered an investment expert, even I do not pick individual stocks very often. Without that immediate access to information that analysts have, I am at a disadvantage.

Finally, as we saw with the stimulus package, there is a good chance that the experts will get it wrong anyway.

Save the headaches. Keep it simple and stick with indexing.

Consolidate Your Investments with a Single Firm or Supermarket

Your investment goal is to maximize return on your portfolio (given your risk parameters). Money paid to others for expenses, transaction costs, management fees, record keeping, tax work, etc. is a reduction in your return.

Individuals too often only consider the stated portfolio return. They do not look as closely at the net return, after fees etal are deducted. In actively managed funds, these can be significant. Unless you are convinced that a fee brings value, do not incur it.

If you follow an index strategy, find a one stop shop that is inexpensive. Companies like Vanguard and Fidelity provide a huge range of investment options, low expense ratios, often allow you to switch investments without transaction fees, and consolidate your record-keeping requirements. This saves you money.

Remember, every dollar saved in costs is another that can be invested.

Put Your Investments on Autopilot

Discipline and consistency are important for proper long-term investing success.

By making automatic deductions for investing, you do not have to worry about saving each month. Like the utilities’ bill, the money is gone. You adjust the remainder of your cash for discretionary expenditures.

As for dollar cost averaging, this indirectly relates to market timing. When the market is low, you are able to purchase more units for the same amount invested, as compared to when the market is higher.

As Ms. Benz states, be careful about transaction costs. Look for funds that allow for low dollar subsequent investments on a no load basis. Or, if buying index funds, accumulate the money monthly in a savings vehicle, such as a no load Money Market Fund (MMF). When you reach a sufficient amount to justify the transaction fee, say every six months, then buy the units.

Some brokerage houses “sweep” your cash balances nightly into higher yield investments to provide a MMF type return while your money is accumulating in your account. This is useful if saving monthly but only purchasing units periodically.

Enjoy the article and I hope my thoughts increase its usefulness.

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