{"id":113,"date":"2018-07-31T20:56:24","date_gmt":"2018-07-31T20:56:24","guid":{"rendered":"http:\/\/insiderwealthalert.com\/?p=113"},"modified":"2018-07-31T21:14:56","modified_gmt":"2018-07-31T21:14:56","slug":"4-reasons-we-overcomplicate-investing","status":"publish","type":"post","link":"https:\/\/www.insiderwealthalert.com\/4-reasons-we-overcomplicate-investing\/","title":{"rendered":"4 Reasons We Overcomplicate Investing"},"content":{"rendered":"
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Though investing\u00a0<\/span>should<\/i>\u00a0be simple, simplicity can be quite difficult.\u00a0There are powerful forces in play that compel us to overcomplicate. I\u2019ll review a brilliantly simple portfolio and discuss forces you will need to overcome to reach such simplicity.<\/span><\/div>\n<\/header>\n<\/div>\n<\/div>\n<\/div>\n
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A new book,\u00a0The Bogleheads\u2019 Guide to the Three-Fund Portfolio by\u00a0Taylor Larimore,<\/i>\u00a0makes a persuasive case that all one needs to successfully invest are three index funds. For me, this approach is preaching to the choir. I\u2019ve written before and often that investing should be simple.<\/p>\n

With a Vanguard Total Stock Market Index Fund (VTSMX) and a Vanguard Total International Stock Index Fund (VGTSX), you own more than 9,700 companies across the planet. And with a Vanguard Total Bond Market Index Fund (VBMFX), you own more than 8,000 of the highest-quality investment-grade U.S. bonds. Together, they maximize diversification and minimize expenses and taxes.\u00a0There are, of course, similar low-cost funds offered by other companies, such as the Fidelity Total Market Index Fund (FSTMX), the Fidelity Global ex U.S. Index Fund (FSGDX) and the Fidelity U.S. Bond Index Fund (FBIDX).\u00a0Schwab\u2019s versions are the Schwab Total Stock Market Index Fund (SWTSX), the Schwab International Index Fund (SWISX) and the Schwab U.S. Aggregate Bond Index Fund (SWAGX).<\/p>\n

I will often benchmark clients\u2019 portfolios against the\u00a0three-fund portfolio\u00a0and typically see the client portfolios badly lagging the performance of these three funds, costing them thousands of dollars a year. That\u2019s the price tag for overcomplicating one\u2019s portfolio. Over the years I\u2019ve learned that these are the forces that cause us to do it.<\/p>\n

4 forces preventing simplicity<\/b><\/h3>\n

The belief we know the future.\u00a0<\/b>We think we know, or that there\u2019s a way to know, what will happen to the stock market or what changes will occur in longer-term interest rates. If we don\u2019t think we know, we think the experts do and that they know even more, such as what the hot companies or sectors will be over the next couple of years. So instead of diversifying, we concentrate on parts of the market we think will outperform. Yet research indicates this is a loser\u2019s game.<\/p>\n

We chase income.\u00a0<\/b>In my experience, most people seem to want income more than total return (income plus the change in value of the security). Focusing on income plays out like novels with consistently bad endings\u00a0\u2014\u00a0<\/b>buying General Electric for dividends when the stock lost more than half its value since 2016, or buying master limited partnerships (such as companies operating oil pipelines) providing so-called safe income until the sector lost nearly 35 percent in 2015 while U.S. stocks turned in a small gain. In fact, I tell people that income is their biggest risk in retirement, as high income comes with high risk.<\/p>\n

The financial services industry.\u00a0<\/b>Quite frankly, my industry is not only a powerful force because it is for-profit; it is the most powerful force because it controls the narrative. Advisers probably couldn\u2019t charge you a whole lot for this simplicity since you could likely do it yourself. So we build complex portfolios using complex jargon like smart beta, correlations, standard deviations, alpha and the like. This complexity is intimidating enough to make you dependent upon us so we can keep charging you more, year after year.<\/p>\n

Taxes.<\/b>\u00a0I admit that my own portfolio is far more complex than these three funds. That\u2019s because these funds didn\u2019t exist when I started investing and I\u2019d have to pay very high capital gains taxes to reach simplicity. It is for this reason that taxes can be a complicating force for many investors. I do a cost-benefit analysis in deciding what to sell, weighing the future benefits of lower costs and higher diversification against the taxes that would need to be paid if I sell. Taxes create a complexity in reaching simplicity.<\/p>\n

My advice<\/b><\/p>\n

It\u2019s lonely to accept that we don\u2019t know the future. It\u2019s natural to want income, especially after retirement, and we want to believe that our income is safe. So much of what we hear about investing is mind-numbingly complex, which makes us afraid to go it alone. And of course, we all hate paying taxes and sometimes forget the real goal is to make more money after taxes.<\/p>\n

Remember that investing is simple, not easy.\u00a0Do not underestimate the powerful hindrance of these four forces.\u00a0Though they are not easy to overcome, it can be done.\u00a0Removing these roadblocks is likely to dramatically increase your return and leave you with more money in retirement.\u00a0As I tell people, if you can\u2019t explain your\u00a0investing strategy\u00a0to an 8-year old, you\u2019re doing something wrong.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n

https:\/\/www.aarp.org\/money\/investing\/info…\/roth-overcomplicated-investing.html<\/p>\n

<\/div>","protected":false},"excerpt":{"rendered":"

Though investing should be simple, simplicity can be quite difficult. There are powerful forces in play that compel us to overcomplicate …<\/p>\n

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