The Simple Secret To Being A Sophisticated Investor


By Walter Updegrave, RealDealRetirement @RealDealRetire

“Simplicity is the ultimate sophistication,” Steve Jobs, the late Apple co-founder, once said. That applies not just to designing Macs and iPhones that perform complex tasks yet are easy to use, but to investing as well. So whether you’re a newbie just starting to build a portfolio or a veteran investor looking to improve results in a challenging market like today’s, ignore the complicated-is-better model that passes for wisdom on Wall Street and instead follow these three tips for creating a simple-but-sophisticated investing strategy.

1. Diversify widely but not wildly. Many people equate savvy investing finding a place in their portfolio for every Next Big Thing investment that comes along—smart beta funds, market-neutral ETFs, liquid-alt funds, etc. Big mistake. The more niche investments and arcane asset classes you clutter up your your portfolio with, the more unwieldy and difficult to manage it becomes. You end up “di-worse-ifying” instead of diversifying.

In fact, a simple mix of broadly diversified U.S. stock and bond funds is really all you need to build wealth over the long run. If you want to go for more a bit more gusto, you can add some exposure to foreign stocks. And as you near or enter retirement, you may want to consider throwing a plain-vanilla immediate annuity or longevity annuity into the mix as part of your retirement income plan.

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But once you’ve covered the basics—which you can do with just a small handful of funds or ETFs—proceed with caution. Otherwise, you run the risk of ending up with investments you don’t fully understand or need (I mean, really, who needs an ETF that sells covered call options?), not to mention a lot of overlapping holdings. To see whether you own the same or similar securities multiple times in different funds or ETFs, plug the names or ticker symbols of your funds into Morningstar’s Portfolio Manager tool.

2. Go with low-cost index funds. There are two compelling reasons to make inexpensive index funds (or their ETF counterparts) the cornerstone of your SBS (simple-but-sophisticated) strategy. The first is consistency. Index funds slavishly follow a well-defined benchmark or index, so you know exactly what you’re getting. This makes index funds excellent building blocks for a well-balanced and streamlined portfolio. You don’t have to worry that your investing strategy will go off the rails because a manager who runs a large-cap stock fund decides to get fancy and venture into higher risk small stocks to juice returns.

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The second reason is performance. It’s tough for managers of actively managed funds to consistently beat the market over long periods. If you doubt that, consider this: For the 10-year period through the end of June, 80% of large-cap stock managers underperformed the Standard & Poor’s 500 index, according to S&P’s SPIVA Scorecard. Much of index funds’ superior long-term performance stems from their lower fees: Many active funds charge upwards of 1% of assets or more each year. By contrast, you can easily find index funds with annual fees of 0.20% or less, and some charge less than 0.10%. That’s not to say that you need to avoid actively managed funds altogether. But you should include an actively managed fund in your portfolio only if offers something you need that an index fund can’t and there’s a good reason for you to believe it can overcome the burden of higher fees.

You can build an easy-to-manage portfolio that gives you diversified exposure to almost the entire U.S. stock and bond markets with just two funds—a total U.S. stock market index fund and a total U.S. bond market index fund. Throw in a total international stock index fund and total international bond index fund, and you’ll have broad exposure to foreign markets as well.

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3. Resist the urge to “improve” performance. This may be the toughest part of being a sophisticated investor. The message from many investing pundits and advisers is that a savvy investor is constantly scanning the financial markets for new opportunities and is ready to quickly shift investing strategies to capitalize on them. But that approach is actually naive. The more moves you make, the greater the chance that one or more of them will backfire. Fact is, it’s difficult, if not impossible, to consistently outguess the market.

Which is why once you’ve build your broadly diversified portfolio with a mix of stock and bond index funds that jibe with your tolerance for risk, you pretty much should leave it alone, except to periodically rebalance your holdings (and perhaps gradually shift to a more conservative stance as you age). By all means monitor your progress toward retirement by going every year or so to a good retirement income calculator that uses Monte Carlo simulations to make its projections. But don’t feel you need to overhaul your portfolio or tweak your investing strategy just because stock prices go up or down or because some pundit wants to venture a guess (emphasis on guess) about where prices might be headed.

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So the next time you hear some expert implying that to be a sophisticated investor you’ve got to be willing to engage in an intricate strategy or dart in and out of market sectors based on the latest buzz, remember that in investing (as with much else in life) complexity is your enemy, simplicity is your friend.   (9/28/15)

Walter Updegrave is the editor of RealDealRetirement.comIf you have a question on retirement or investing that you would like Walter to answer online, send it to him at You can tweet Walter at @RealDealRetire.

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