https://www.facebook.com/HomeDigestmag Pin it Stumble google-plus

Portfolio's - Why Less Is More

Overview

Published: 09/18/2013

by Warren MacKenzie

 Life can be complicated, but investing doesn’t have to be.

 

In the past 10 years, of the hundreds of investment portfolios I’ve reviewed, one of the best was the simplest – a
self-managed portfolio of $2 million. The retired doctor who owned it could have listed every holding (mostly ETFs – exchange-traded funds) on the back of an envelope. The doctor’s list of holdings was so brief that he knew his exposure to different mandates to the second decimal point and therefore he knew exactly when rebalancing was required.

 

Simple portfolios offer many advantages over more complex structures. Here are 11 reasons why this is the case.

 

1            It is easier to see the ‘big picture’ and understand the asset mix for the portfolio as a whole.

 

2            Minimal time is spent thinking or worrying about your investments (one hour per quarter).

 

3            Performance measurement and benchmarking are more straight-forward.

 

4            Diversification is almost effortless (assuming you use index funds or ETFs).

 

5            Quick rebalancing is a snap (based on your written rebalancing plan).

 

6            Fewer, more-diversified holdings usually lead to greater tax efficiency.

 

7            Simple ETF portfolios typically sport lower and more transparent fees, which keeps returns in line with benchmark performance.

 

8            Upon death, heirs will much more easily sort out your simple portfolio. Complex structures can be over-whelming when grieving.

 

9            Less time spent tinkering with your portfolio equals more time enjoying the lifestyle your wealth affords you.

 

10          Simpler structures also help shift your focus toward the most important investment issues – e.g., “Am I on track to achieve my goals?”

 

11          Clear-cut portfolios avoid overlap of securities or mandates.

 

Simple portfolios require care too. Otherwise, you may have risks or higher fees than you want. For example,
balanced funds, wrap programs and structured products may simplify your investing life, but most of these products come with sky-high fees.

Many stock portfolios are highly concentrated in just a few stocks, resulting in heavy exposure to a few companies or sectors. Also, too many portfolios are far too exposed to Canada, which pushes up volatility and excludes high-quality global investments.

If simpler is better, why are portfolios usually complicated? There are seven main reasons for this.

 

a             Most portfolios are constructed with a focus on products rather than on the investment process. A sound process will more likely lead you down a path toward quality investment products.

 

b            Most investors use two more three advisors to hedge their bets. But finding an advisor you trust with your whole portfolio just might save a bundle in fees and will more likely give you a total portfolio more in line with your goals.

 

c             Investors procrastinate and fail to consolidate orphan accounts.

 

d            Portfolios become more complicated (but less diversified) when advisors or individuals think they can pick the stocks that will outperform. Reluctance to admit failure leads to a longer list of stocks held, cluttering the portfolio.

 

e             Complicated investment structures can be used to justify high fees.

 

f              In complicated portfolios, it is harder to see the role of each holding and its ultimate impact on total portfolio risk and return.

 

g             When investing seems very complicated, investors are more inclined to think that an advisor is necessary. (I know many smart and honest financial advisors and investment counsellors. Rather than going it alone, the vast majority of
investors can benefit from an advisor who recommends a disciplined investment process, who drafts written investment policy statements, and who has transparent fees and clear performance reporting.)

 

Life is complicated, but investing doesn’t have to be. And the best part is that you will probably earn a higher return
while taking less risk when you have a well-designed, simple portfolio, and follow a disciplined rebalancing process.  

 

Warren MacKenzie, CA, CFP, CHFS, is founder
of Weigh House Investor Services in Toronto. If you feel your portfolio is too
complicated, he is offering Home Digest readers an analysis. He can be reached
at warren.mackenzie@weighhouse.com or at 416-640-0550.

Browse by Category