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Page 1 of 3  Want to self-manage your investments, but are concerned by the complexity and especially by the required time commitment? Start slowly and keep things simple. In our previous commentary we discussed in general terms rules of thumb and checklists. Now for a real-life example: here is a 10 point checklist of do’s and don’ts to keep things simple.
Some advocates of simplicity
"Things should be made as simple as possible, but not simpler." — Albert Einstein (1879–1955)
"You can always recognize truth by its beauty and simplicity." — Richard Feynman (1918–1988)
"Our lives are frittered away by detail; simplify, simplify." — Henry David Thoreau (1817–1862)
"Simplicity divides into tools, which are used by Beorma as Royal Highness." — Duke of Beorma (ca. 793-1150)
"Simplicity is the ultimate sophistication." — Leonardo da Vinci (1452–1519)
"If you can't describe it simply, you can't use it simply." — Anon
"Simplicity means the achievement of maximum effect with minimum means." — Koichi Kawana, architect of botanical gardens
"Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away." — Antoine de Saint-Exupery
Source Wikipedia
doc.934E
Introduction
Simplicity in life generally has many admirers. Keeping things simple can also make the difference between managing your investments versus delegating management to others.
Yes, keeping things too simple can have its disadvantages, and as you become more proficient, and subject to time constraints, you can consider making your portfolio more intricate (to borrow a phrase from the American Association of Individual investors); in general, on moving from simple to intricate, see:
- The chapters Keep it simple and
A super simple summary: KISS investing in the book by Burton Malkiel and Charles
 Ellis, The Elements of Investing, 2010, John Wiley;
- An article
by Swedroe;
- A AAII article by Maria Crawford Scott on portfolio construction or as a PDF doc.953 .
- Our own article on simple portfolios Portfolio Management 2 - simplicity .
But a well-diversified and simple investment portfolio is usually better than an equally well diversified but very complicated one, particularly when you first decide to go the DIY route; see article by Second Opinion doc.938. And the law of diminishing returns plays an important role: each new feature (asset class, additional account or adviser etc.) you add to your portfolio has a decreasing impact on the sought-after benefits (better returns, more diversified, reduced volatility) you are seeking. Some investors end up with portfolios so complex that in blind tests (see Barber ) they do not recognize their own portfolios.
If your portfolio is not simple you may end up relying upon and paying
others, even when that may not be your objective.
Paying on a one-off basis for advice to develop your investment policy
is money well spent. Paying others on an ongoing basis, simply because
you have over time made a set of investments that have become so
complicated you can’t manage them, is not.
Here are ten suggestions to help keep things simple.
1- Do you have an investment policy?
If you don’t have a simple investment policy, you will have trouble figuring out whether you are meeting your own objectives (since you don’t really have any). You will end up changing directions and overtrading too often, since you don’t know how you are doing or where you are going. Have you written down what you are trying to do? If you can’t, your plan is too complicated.For more, see:
An investment policy:don't leave home without one
2- Be organized to know yourself
Most investors understand that investing means taking risks, but they want to take calculated (i.e. intelligent) risks. Try to be clear what your risk tolerance level is. Organizing your affairs (using a questionnaire if necessary) so that you have an overall view of your assets, liabilities and overall circumstances will help in figuring out what risk level makes sense for you.
The next task is managing your investments within your target risk level. This involves comparing your actual investments to your target. If your investment approach does not permit this (i.e. you don’t have a simple investment policy, or your investments are too complex), you will have trouble understanding and managing the risks you are taking and you will likely wobble when markets get tough (did I say panic?).For more, see:
3- Don’t have the time? Find some by indexing
When investors say they want to simplify their investing, what they often mean is they want an approach that takes less time. Indexing with ETF’s can be that route.
The simplicity or intricacy of your portfolio really comes down to the amount of time and interest you want to spend managing it, your investment knowledge, and the total amount of dollars you’ll be investing. There are, however, several investment constraints that any investment portfolio must follow: market segments. With those constraints in mind, the easiest and most cost-effective approach is to build your entire portfolio around index funds. These are passively managed portfolios that do not require you to evaluate the skill of a portfolio the market the index covers, are low maintenance and have rock-bottom costs.
And exchange-traded funds provide you with all the tools you need to do it. ……. The approach illustrated here allows you to build a portfolio that requires very little time and energy to manage, is relatively low cost, and yet provides be used with portfolios of any size, from the very modest to the largest holding millions of dollars (don’t we all wish?).
Source: Scott AAII
or as a PDF doc.953
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