Satisfying Returns

I'm a Harvard MBA, so you would think that I know how to invest money. However, over the years, my education has outsmarted me. I've invested in all kinds of instruments and funds, including stocks, bonds, options, real estate, venture capital, private equity, commodities, REITS and partnerships. I've paid significant fees for financial advisors, money managers, accountants, general partners, commissions and lawyers. I've made money and lost money, crowing about wins and then lamenting (and trying to forget) losses. And, as I look back, I realize that I could have made much more money and had a much easier life if I had just invested simply.

In an excellent article in the Wall Street Journal entitled A Simple Recipe for Investors: Less Can Often Lead to More (1), Jonathan Burton describes how a simple portfolio of a U.S. stock fund, an international stock fund and a bond fund in a 35%/15%/50% ratio has delivered a very satisfying 9.1% annual return over the last 25 years. Using low cost mutual funds from Vanguard or Fidelity, anyone can set up this simple investment plan for both their savings and retirement accounts. You can make monthly savings contributions and automatically split the contribution to go into each fund in the correct percentage. Once a year, you "rebalance" the account to maintain the same 35%/15%/50% ratio by selling funds that are over the ratio and buying the funds that are below it.

A major benefit of this simple technique is that you are not subject to market emotion or the "investment product of the week." You won't get swept up in dot.com mania, mortgage backed bonds, hot stock tips, gold, oil, hedge funds or whatever your broker is pushing that month. Even in a severe downturn, this portfolio will lose much less than more aggressive approaches, and you will not cash out at a low point based on fear. The rebalancing discipline ensures you sell at higher points and buy at lower prices for each asset class.

This portfolio is tax- and fee-efficient. By only trading once a year, you minimize your taxable gains and commissions. With low cost funds, more of your money goes into investing rather than fees. Because it is so simple, you can do it yourself, saving the cost (and pressure) of a financial advisor, and, without any complicated investments, you won't need an accountant to help you do your taxes.

Some people may still have a burning desire to "play the market." If you fit that description, then put 90% of your money into the simple portfolio and use the other 10% to invest in whatever you desire. This lets you play, while still protecting the bulk of your savings. You also can objectively compare your performance to the passive portfolio. My bet is that you will find the simple portfolio provides the better return over time.

Action Points
• Simplify your portfolio with a 35% U.S. stock fund, 15% international stock fund and 50% bond fund.
• Rebalance annually.

Payoff
A worry-free, tax- and fee-efficient investment program with solid returns.

(1) A Simple Recipe for Investors: Less Can Often Lead to More, Jonathan Burton, Wall Street Journal, September 2, 2010

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