I like this quote, attributed to Chris Sacca: Simplicity is hard to build, easy to use, and hard to charge for. Complexity is easy to build, hard to use, and easy to charge for.
It’s particularly true in investing. Complexity sells. Offering simple solutions makes it difficult to charge high fees. Yet, most people would be well-served by following these very simple rules in their financial planning and investing.
Simple rule #1: Insure before you invest
If others depend on your income for their quality of life (spouse, children, partner and parents), it’s irresponsible not to have adequate amounts of life and disability insurance in force.
Insurance can be complex. You can make it simple by limiting your choice of insurance providers to the highest rated companies. For most people, low-cost term life insurance is the best choice. The majority of term life insurance policies are “renewable.” This is an important feature because it permits you to extend coverage for a designated period without proof of insurability.
Simple rule #2: Keep your investments simple
The fewer mutual funds and accounts you have, the easier it will be to manage your investments.
For many people, low management fee target date funds from Vanguard and others may be the only investment they’ll ever need in both their retirement accounts, 401(k) plans (if they’re available) and after-tax accounts. Vanguard’s LifeStrategy Funds may be another excellent option.
Think about how great it would be to have all your investments in a single fund.
Financial advisors will tell you there are more tax efficient ways to manage your money and more sophisticated investments with higher expected returns. While this may be true, the trade-off is more fees and complexity. Is it worth it to you?
Simple rule #3: Focus on “doing nothing”
The most significant obstacle to successful investing is your behavior. Here’s what I recommend as your guiding principle: If you select one of the funds noted above, contribute to them regularly, and then do nothing. Target date funds rebalance automatically and require no maintenance. Every 5 years or so, check your LifeStrategy fund and determine whether you should switch to another LifeStrategy fund with more or less risk.
Don’t watch the financial news. Don’t listen to pundits who claim the ability to make predictions about the direction of the market. Don’t buy individual stocks.
When the market tanks, continue to make regular investments to your fund. In bull markets, do the same.
If you are spending more than an hour or two a year on your investments, you are doing something.
Simple rule #4: Getting help
Investors with more significant assets ($500,000 or more) would be well advised to use the services of a reputable financial planner or advisor.
Here are my simple rules for getting help:
If you need just financial planning, you can find a list of reputable, qualified financial planners on the website of the Garrett Planning Network. Pick one who just does financial planning and doesn’t offer investment products.
If you need help with portfolio management and comprehensive wealth management, I recommend searching for an advisor authorized to place clients in funds managed by Dimensional. As a group, they are highly qualified advisors, who use sound academic evidence when recommending investments.
I told you it was simple!
Resource of the Week
This blog post, by Ben Carlson, explains why simple beats complex.
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