Keep Investing Simple

Its the start of the new year, and most of you have been thinking about some grandiose plan for self-improvement. Quit smoking, lose weight, clean out the basement, exercise, spend more time with family and friends, floss.

May I suggest taking control of your portfolio as a worthwhile goal this year?

I have been thinking about this for awhile now. Last year (heh), I read a quote I really liked from Tadas Viskanta of Abnormal Returns. He was discussing the disadvantages of complexity when creating an investment plan:

“A simple, albeit less than optimal, investment strategy that is easily followed trumps one that will abandoned at the first sign of under-performance.”

I am always mindful that brilliant, complex strategies more often than not fail. Why? A simple inability of the Humans running them to stay with them whenever there are rising fear levels (typically manifested as higher volatility and occasional drawdowns).

Let me state this more simply: Any strategy that fails to recognize the psychological foibles and quirks of its users has a much higher probability of failure than one that anticipates and adjusts for that psychology.

Toward that end, as you make your financial plans for the new year, I would suggest that you keep in mind these simple ideas for your portfolio:

BR’s Guide to Simple Investing

1. Use ETFs to get equity exposure more often than picking individual stocks.

2. Valuation when making purchases matters more than anything else I can think of to your long term investing success.

3. Low Cost passive investing, dollar cost averaging into 5 broad indices (Big cap, tech, emerging markets, fixed income, etc.) is ideal for do it yourself investors.

4.  Rebalance across various asset classes regularly. Do so at least annually, preferably quarterly. (Online tools for doing this should drive your broker selection).

5. Keep your Costs and Expenses low. This may be the only free lunch in all of investing.

6. Reduce your Turnover level; keep it low (this helps with #5, plus most of these)

7. Avoid the Noise: Reduce your consumption of useless chatter, be it in print or on TV. Classic investing books are vastly superior to ephemeral market gossip.

8.  Review your portfolio regularly. Check your allocations monthly. To see how your holdings are doing, use weekly, not daily charts.

9. Venture Capital and Private Equity ain’t easy — if you lack the skills, capital and risk tolerance, avoid them.
9B. Most IPOS are a sucker game.

10. Avoid new financial products at all costs.

I am curious as to your comments or thoughts on this. If there is interest, I may expand it into a full column.