Weekend Reading: Embracing Simplicity Edition

Do-it-yourself investors face a number of behavioral hurdles when it comes to building an investment portfolio.

We look to past performance to guide our future investment decisions, Ignoring evidence that yesterday’s winners often become tomorrow’s losers. As we Disregard decades of research that shows how low-cost investing through passive index funds beats active stock-picking strategies over the long term.

We build needlessly complicated portfolios when simple, automatically rebalancing solutions exist.

We tend to panic when markets go down or sideways for a period of time, instead of accepting that volatility is the price of admission.

Put up your hand if you added a technology tilt to your portfolio after the NASDAQ returned more than 48% in 2020. The same goes for cryptocurrency or the latest meme stock.

Who increased their equity allocation after markets roared back to life last spring?

Which part of your portfolio did you tinker with to help hedge against higher inflation?

We can’t help ourselves.

I’m here to remind you to embrace the simplicity that comes from holding a single asset allocation ETF (or a Robo advisor portfolio for those who don’t want to self-direct).

You’ll own 13,000 global stocks and 17,000 bonds inside of just one product. For that incredible simplicity and diversification, investors pay as little as 0.20% MER.

Asset allocation ETFs help deal with a number of behavioral limitations. One, because they roll up 4-7 underlying ETFs into one product, investors are less inclined to fuss over an asset class or region that is underperforming at the moment. Two, they automatically rebalance daily with new fund flows to maintain their target asset mix. That saves DIY investors from trying to exercise their own judgment and decision-making.

Some investors have a hard time embracing the simplicity of a single fund solution. I’ve seen portfolios that hold multiple asset allocation ETFs from different fund providers, which defeats the purpose of a single-ticket solution.

Maybe they’re trying to avoid putting all their eggs in one basket, but it’s helpful to remember that these products actually contain 4-7 underlying ETFs that represent thousands of stocks and bonds from around the world. It’s a big basket!

I get it. Investing doesn’t seem like it should be this easy. But it can be. Open a brokerage account, open the appropriate account types, fund the account(s), and purchase a single, risk-appropriate asset allocation ETF. Then do nothing.

Your future self will thank you for generating the most reliable investment outcome. Heck, your current self will thank you for saving time and stress over managing your portfolio. Win-win.