Simple Portfolios Are Best

Have you heard of the Couch Potato portfolio? It was created by Scott Burns (a columnist) and is a portfolio comprised of 50% in a diversified stock market index and 50% bond market index. This portfolio is easy to setup, easy to maintain, and performed well historically. And this allocation includes only 2 mutual funds allowing for a minimal investment to setup. Scott wrote a follow-article on additional building blocks here, if you’re interested in extending your diversification beyond the two main asset classes.

I like the idea of keeping a portfolio simple, and to that end I prefer to minimize (where possible) the number of separate investments as well as the complexity of the percentage allocation. What I haven’t yet figured out is where all of these complicated allocations come from when dealing with financial planners.

I recently reviewed Ric Eldelman’s book “The Lies About Money”, and in it he uses a survey to select an asset allocation out of 50 or so alternatives. The book was well written and the asset allocations seem reasonable, but when you’re putting 17.8% in one type of bond fund and 4.7% in another type of bond fund, I start to lose focus. I think it’s more important to be consistent and execute well on the big things.

I can only assume that recommended asset allocations requiring 20 or more separate investments (especially mutual funds) and complicated percentage breakouts were developed by back-testing these allocations through monte-carlo simulations. This seems reasonable, but in the real world most of us have a hard time remembering to rebalance our portfolios at all! And if you have actively managed funds, figuring out your asset allocation can be a time consuming nightmare. Most actively managed funds have a wide range of assets under management, and your “large cap value fund” very well may have 10-20% small cap growth funds buried somewhere in them. Likewise your balanced funds may shift from a 70/30 stock/bond split to a 60/40 split. Better take that into account. And how much cash is your fund holding on to?

We need to consider asset location as well. Am I investing in the most tax-efficient place for each of my investments? How do I manage to keep my asset location correct when I’m juggling 2 401k’s, 2 Traditional IRA’s, 2 Roth IRA’s, and one or more taxable accounts? If you ask me asset allocations that don’t round to the nearest 5% are more trouble than they are worth.

I don’t dispute the fact that an investment portfolio should consider more asset classes than simply “stocks” and “bonds”. I’m not quite to the point where I need a dozen or more mutual funds to be fully diversified.

These are the big things to focus on in my opinion:

• determine your asset allocation, and keep the percentages simple (round to the nearest 5%)
• remember to rebalance regularly, either on a reoccurring schedule or when individual asset classes break a preset threshold
• don’t forget about asset LOCATION. make sure your tax-inefficient investments are in tax-sheltered accounts
• focus on low expenses when selecting investments
• spend the rest of your time working on your career, or finding ways to save more.

If you’re looking for a great review of some recommended asset allocations, check out My Money Blogs series on Retirement Portfolios. It’s absolutely fantastic.

If You Liked This Post Then Please Check These Out...

• Asset LOCATION Is Key To Building Wealth, Part 1
• For The Love Of Dividends
• I Don’t View Commodities As Investments
• Some CD Rates Are Lower Than Savings Accounts!
• Four Ways To Rebalance Your Portfolio

If you liked this post please click here to subscribe to the RSS feed!