Its the start of the new year, and most of you have been thinking about some grandiose plan for self-improvement. Quit smoking, lose weight, clean out the basement, exercise, spend more time with family and friends, floss.

May I suggest taking control of your portfolio as a worthwhile goal this year?

I have been thinking about this for awhile now. Last year (heh), I read a quote I really liked from Tadas Viskanta of Abnormal Returns. He was discussing the disadvantages of complexity when creating an investment plan:

“A simple, albeit less than optimal, investment strategy that is easily followed trumps one that will abandoned at the first sign of under-performance.”

I am always mindful that brilliant, complex strategies more often than not fail. Why? A simple inability of the Humans running them to stay with them whenever there are rising fear levels (typically manifested as higher volatility and occasional drawdowns).

Let me state this more simply: Any strategy that fails to recognize the psychological foibles and quirks of its users has a much higher probability of failure than one that anticipates and adjusts for that psychology.

Toward that end, as you make your financial plans for the new year, I would suggest that you keep in mind these simple ideas for your portfolio:

BR’s Guide to Simple Investing

1. Use ETFs to get equity exposure more often than picking individual stocks.

2. Valuation when making purchases matters more than anything else I can think of to your long term investing success.

3. Low Cost passive investing, dollar cost averaging into 5 broad indices (Big cap, tech, emerging markets, fixed income, etc.) is ideal for do it yourself investors.

4.  Rebalance across various asset classes regularly. Do so at least annually, preferably quarterly. (Online tools for doing this should drive your broker selection).

5. Keep your Costs and Expenses low. This may be the only free lunch in all of investing.

6. Reduce your Turnover level; keep it low (this helps with #5, plus most of these)

7. Avoid the Noise: Reduce your consumption of useless chatter, be it in print or on TV. Classic investing books are vastly superior to ephemeral market gossip.

8.  Review your portfolio regularly. Check your allocations monthly. To see how your holdings are doing, use weekly, not daily charts.

9. Venture Capital and Private Equity ain’t easy — if you lack the skills, capital and risk tolerance, avoid them.
9B. Most IPOS are a sucker game.

10. Avoid new financial products at all costs.

I am curious as to your comments or thoughts on this. If there is interest, I may expand it into a full column.

Category: Investing, Psychology, Rules, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

41 Responses to “Keep Investing Simple”

  1. I’d love feedback as to these rules — which are good, bad, should be expanded, have exceptions, etc.

  2. Orange14 says:

    I think the rules are quite good and pretty much in accord with my philosophy. I would add one more however and that one is “consider what your needs are: income vs capital appreciation.” I don’t know how to frame it any better and you can probably do a more thoughtful job on this. I’ve been retired for a couple of years now (do a little bit of consulting and my wife is still working full time). Preservation of capital is key here but so is an income stream. With bond yields at historical (maybe hysterical) lows, equities provide a dividend stream are key to my portfolio. I’ve managed to craft a portfolio that had a 3.7% income stream last year ( S&P 500 = 2.1%) yet also pretty much matched the S&P in terms of capital appreciation. All of the companies in the portfolio have very solid balance sheets good cash flows and one mortgage REIT is there for income. I basically do a modified Graham/Dodd analysis of any prospective equity that I consider either adding or subtracting from the portfolio.

    Hope this helps!

  3. Conan says:

    Good advice, but watch correlation of your “diversification”. If you pick 5 different ETFs and they are very correlated, then you are not diversified.

    Dollar cost averaging is good up to a point, but don’t forget the comment on valuation. Most times you are better of to get define your targeted ETFs for diversification and then purchase the ones with the best value.

    Lastly passive investing is fine in a Bull Market, but in a secular Bear market like today, you will need a rule to go to cash. This goes to the human factor as most folks can’t take a swing to a Bear Market low. Much different than buying on dips in a Bull Market.

    look at this simple model from Doug Short:

    http://advisorperspectives.com/dshort/updates/Monthly-Moving-Averages-Preview.php

  4. Iamthe50percent says:

    Thank you for the guidance. An old investor also told me to “listen to your gut, when you have trouble sleeping – GET OUT”. I followed this advice in 2000, avoiding the dot-com bust. My gut was screaming at me during the Great Collapse, except I listened to my adviser, finally bailing out 50% down instead of 20% down like my gut was telling me. Now, I listen to my gut. Advisers are fine to get technical information, but, in my experience, they (except you, Barry) never tell you to head for the hills.

  5. courageandmoney says:

    SP500 Trading Plan
    1. BUY 1/3 Weekly pullback (USE $NYMO -80 reading Daily , Major FIB or Trend Line..Hopefully both)
    2. BUY 1/3 MACD Cross (any good pullback after the cross)
    3. Buy 1/3 TLB Weekly
    All weekly…..Simple but super effective in bull market. I trade this with SSO. It buys first 1/3 on weakness $NYMO -80, Looking for Major Fib or Trend, but not necessary. Second purchase on MACD Cross up on the weekly. Upper trend line break for the final third. As we speak only 1/3 in, But if things continue may add this week with upper trend line break, and MACD on weekly crossing up. Very simple, SCALE in with strength, sell Major TLB.

  6. catman says:

    From Schwager’s most recent interview book: Do more of what works and less of what doesn’t.

  7. Lukey says:

    Excellent advice throughout Barry. But I would agree with Conan that someone following your advice would benefit from some simple rules about when to tweak asset allocations. The Dow Theory? Price/Volume changes? 50 day moving averages? 200 day moving averages? I know you move your allocations periodically and I wonder if you think there are any simple rules to follow when making those decisions?

  8. Lukey:

    Set up the 5 asset classes in a simple % model (i.e., ABC 25%, XYZ 20%, JFK20%, etc.), then when you do the rebalance, it is back to those percentages in the model.

    Alternative is to do the rebalance only when you hit a fixed percentage away from your original weightings — i.e., 15% or 20% away (12% is 20% away from original 10% weighting) — for discipline reasons, you limit these rebalances to quarterly as well

  9. rd says:

    I would combine Rule 1 with Rule 3 as ETFs are a good way to do passive investing. The reason for combining them is that I think another rule is required which is “Understand your risk tolerance over the short and long term – write down your acceptable short-term losses as well as your long-term financial goals – review and revise these annually.”

    This forces people to look inward at themselves and understand how they react to times when things are not going well. The single most damaging event for people’s portfolios is when they bail out in the heart of a bear market and can’t get the courage up to get back in early in the bull market. As a result, a fixed percentage (say 50/50 or 60/40) once they hit age 40 with an understanding of how that has performed over the years in the ups and downs is often a very good way of managing the fear and greed of a typical person.

  10. alanvw says:

    Comment on item #8 re: use of weekly charts

    This is good but for most investors it flies in the face of the earlier comment: “A simple inability of the Humans running them to stay with them whenever there are rising fear levels (typically manifested as higher volatility and occasional drawdowns).”

    Overall this is a good list and deserves expansion into an article of some kind.
    Can’t say enough about keeping it simple: an investor starting 2012 with the equity portion of their portfolio in just QLD and SSO would be sitting on roughly a 30% gain by doing nothing.

  11. Irwin Fletcher says:

    This is great advice.
    I get tempted to start “trading” and I always lose!
    My advice is don’t try to trade anything short term. You may be right, but trading is all about timing.
    I am a smart guy, but suck at trading. Plus, it dominates your mind and you waste so much time tracking
    stuff and getting emotional. Not to mention that you are going up against machines.

    My simple approach (written plan to ensure I stick with it) involves generating good yields. Double digit
    yields can double your balance sheet in 5 years or so. High yield, dividend payers are my preference.
    I study the Financials to make sure they are earning enough to pay the dividend. I stay away from Private Equity deals because illiquidity is bad IMO. And historically, there is not a large enough premium to justify the illiquidity.

    Would love any thoughts on these points.

  12. Concerned Neighbour says:

    If I may be so bold, may I submit a Rule #11 during these years of central bank excess:

    “Buy anything!”

  13. faulkner says:

    Incoming ‘urgent’ information and (inner and) social pressure are also a problem. Your #7. “Avoid the Noise” is good general advice, but not sufficient as investors need to know on what basis to #4. “Rebalance across various asset classes regularly. … preferably quarterly.” and #8. “Review your portfolio regularly. Check your allocations monthly.” So the investors need to seek out and evaluate certain kinds of market information. What is this information? And on what basis are they to do this? If these activities are not seriously circumscribed, there will be violations of #6. “Reduce your Turnover level.” You start to describe what these are. Most investors will need to a detailed procedure to keep themselves on track.

    I am reminded of a passage from Robert Hagin’s Investment Management. “The skills that lead to success in most human endeavors are not necessarily the skills that lead to investment success.” The everyday investor needs to be reminded of this, especially if s/he has been very successful elsewhere.

  14. Terry says:

    Great list. Basically rules I follow. Shared this post with my family.

    As a senior, I also emphasize lower risk in investments, especially when income relies on dividends/interest payments. “Simplicity and safety” are the two key words in my personal investing strategy as a senior.

    In that sense, with regard to portfolio balance, you may also want to characterize balance in terms of age/life stage as well as the market driven factors you highlight.

    Nice list!

  15. SWMOD52 says:

    Find a good low cost low volitile fixed income fund to anchor your portfolio. It should pay monthly and alllow for reinvestment of dividneds. Should be liquid. Vanguard GNMA fund comes to mind.

  16. wally says:

    Excellent rules. I’ve come to some of the same thoughts the hard way over the years. However, I think Orange14 and Terry add a factor (posts above) that people should consider. There is too much equity speculation emphasis in almost every advice book and blog; that implies a timing strategy, whether short term or long. Consider: if you own a non-dividend paying stock, 100 shares, you will never have more than 100 shares when you sell… so you must have price appreciation in order to profit. But if you have a dividend payer, 100 shares plus reinvest the divs, you might have, say, 120 shares when you sell.

  17. aweber9 says:

    Great list.

    I think it would be helpful to add a point on tax efficiency (income assets in tax deferred accounts, focus on capital gains in taxable accounts, etc.). Obviously this may all change with the tax conversations underway in Washington, but it seems worth a mention in any case.

  18. Matt P. says:

    As someone who will chime in here from time-to-time espousing passive investing and, at a minimum, low-cost investing, I think this is a fantastic list Barry. Let’s be honest, virtually everyone who knows anything about the literature and research and the industry knows that the market(s) are efficient in the sense it applies to retail investors. The one excuse I hear from many in the biz is that people aren’t disciplined enough to do things like rebalance or stay put in down times. This is because they listen to blogs like this and CNBC, etc. (The “noise”) So here is my ONE RULE STRATEGY* that would suit 90% of all retail investors. Pick a Vanguard LifeStrategy fund and be done with it. Low cost and rebalancing done by the pros for you. Spend the time you waste obsessing about the markets on important things like your family or your golf game. *If you have serious assets then the bonds outside of a tax sheltered account is probably not the best but in this type of environment is no biggie. When/if rates rise it could be more of an issue.

    The Vanguard LifeStrategy funds span a wide range of stocks and bonds allocation, by varying it in 20% steps:

    80% stocks and 20% bonds in VASGX
    60% stocks and 40% bonds in VSMGX
    40% stocks and 60% bonds in VSCGX
    20% stocks and 80% bonds in VASIX

  19. mikeinconyers says:

    I think the very best point is the one regarding our foibles. I came to that late, but I’ve gotten there. I find that having a strategy that I can actually execute is much less stressful.

    I would love it if you expand on valuation, both in terms of stocks but also the market.

  20. rd says:

    I would add another rule:

    Look for simple opportunities that the pros can’t take advantage of.

    An example is I-Bonds from Treasury Direct: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

    The limitation is $10k/year per SSN – this won’t even remotely be on the radar screen of a professional trader but a couple could save $20k per year in this vehicle which is serious change for 99% of households. A guaranteed small return above inflation (CPI-U) for 30 years, US government guaranteed principal, no fees, and good liquidity is about a good a deal as you will get for cash/bond savings.

  21. constantnormal says:

    Good rules for those who are unwilling or unable to devote the time and effort into ferreting out the gold from the fool’s gold, monitoring the markets, industries, and stocks to try and figure out when the wind has shifted (and why), or those with sufficiently large asset pools that their interest lies maining with tracking the averages and not taking much risk.

    For those who want to put the time and effort in (and I left one thing out of the above list: error analysis and learning from the inevitable mistakes) to individual stock picking, with the intent being a short-term performance that beats the market and indexers (in the long term, we are all, as Keynes noted, dead), different approaches are needed.

    As to the impossibility of outperforming the markets on a reasonably long time frame, take that up with the likes of Warren Buffett, Peter Lynch, and Ray Dalio. They have proven to my satisfaction that beating the markets IS possible, because they have done it, even with the huge impediment of managing tons and tons of money.

    Of course, there’s a yawning chasm between “possible” and me & thee. But unless one is willing to try, you’ll never know if you can do it.

  22. Chad says:

    I don’t entirely agree with #3, as it conflicts with #2. Dollar cost averaging seems a foolish idea when you can just save up and buy on small dips, which happen at least a few times every year. I realize #3 is labled as “passive”, but what I suggest is only a few more mouse clicks a year…hardly “active.”

    More info on #2 Valuation would be nice.

  23. Matt P. says:

    Excellent advice rd regarding the I-Bonds.

  24. [...] On the value of keeping investing simple.  (Big Picture) [...]

  25. rockedbottom says:

    Thanks for this Barry – as always, very educative. I do however disagree with dollar cost averaging and will draw your attention to a truism that Paul Tudor Jones espoused : Only Losers Average Losers!

  26. constantnormal says:

    Some things that I think would help this list:

    Links to web pages that do a reasonable/exceptional job of defining terms such as:

    Valuation

    Rebalancing … note that this is mainly a reassessment of directions and how well your portfolio is tracking that direction, in terms of allocation (and possibly content) … is there a benefit to performing rebalancing at times other than at the beginning/end of the month?

    Turnover level

    I would advise examining ETF’s for their ten ten or largest holdings, and undertake some in-depth study of a prospectus … before making a significant move into the ETF. One of the things that I miss in an ETF (or in mutual funds, or almost all financial aggregates) is information on the aggregate debt (on a per share basis) of the assets of the ETF, or many of the other things that are trivial to examine in most (American) stocks.

    Continuing along that thought-thread, in these times of incessant urging of investors to diversify globally, nobody bothers to mention how difficult it is to get financial metrics for foreign stocks comparable to those available for American stocks. I’m a believer in global investing, but I really, really notice the difference in financial transparency between here and ANYWHERE else.

    Why NOT use daily charts? I think the important thing is to make sure that the span of time encompassed on the charts is sufficiently large, I like a finer granularity rather than a coarser one. A week-long daily chart is nonsense, but a 2-5 daily chart should look pretty similar to a weekly chart over the same interval, and also provide finer detail if one wishes to look into why things are going wrong/right.

    I would amplify on the points made in #8 … I carry aggregates of each account, grouped appropriately into higher-level aggregates, and also track the S&P 500 index and Russell 2000 index for comparative purposes (on a daily basis). One could extend that to much greater detail (industry groupings, geographical, etc), but this level of comparative monitoring is what I need to provide the illusion that I’m on top of things in my oversight responsibiliies.

  27. rd says:

    I see some posters decrying dollar-cost averaging. Please keep in mind that dollar-cost averaging is completely in line with the quote that BR references about using suboptimal strategies that are easily followed.

    The primary opportunity that the vast majority of people have for long-term tax-deferred savings are 401ks, 403bs, IRAs etc. The best tool for maintaining discipline in these is the payroll deduction tool which is a dollar-cost averaging tool. If the average household set aside 10%-15% of their pre-tex income using a dollar-cost averaging payroll deduction into an indexed target date or balanced fund with expenses of less than 0.75%, we would not have a retirement savings problem in this country. They would be greatly aided in their investing process if they did not even look at their statements until they are thinking of retiring as that would eliminate the urge to “do something” during periods of market volatility.

    Dollar-cost averaging is probably the key tool for maintaining the discipline of saving while the passive nature of the process means that they are unlikely to make ill-timed moves. A dollar-cost averaging investor in a balanced fund over the past 30 years is currently sitting on a large pile of money despite the wild swings of the various markets.

  28. sooperedd says:

    Great tips Barry.
    A reminder to many of the others posting comments. The article was titled “Keep Investing SIMPLE.”

  29. mgblock17 says:

    Regarding rule 8, keeping reviews to a monthly routine is great, but I think one should use daily data for charts.

    Weekly data often does not mesh with month end data, quarter ends, etc. As a result, it can be a pain, or impossible to match up weekly data with all types of narratives (e.g. the market was up x% this quarter, your statement shows this value at month end, and so on).

    Also, high-level discussions of technicals, specifically movements above a DMA, assume daily data. Of course, one can argue that a simple investing strategy should not consider technicals.

    Lastly, weekly chart lines smooth out the intra-week volatility, which can be useful to see. I know that there is a debate about avoiding too much data and having signals drowned out by noise, but for graphs, the use of daily versus weekly is not going to swamp one’s neurons. Perhaps this was the whole point for insisting on weekly data, so people don’t fixate on such volatility, but I think you address this concern by having only monthly reviews.

    Having said all this about charts and graphs, I believe one should take the opposite approach for tables of numbers. In this case one should use not daily, nor weekly, but monthly data. Otherwise the flood of data does become overwhelming.

  30. mbreuter says:

    Barry;
    Thanks for your ongoing series on investor mistakes and keeping things simple. Two things:
    I think everyone should have a small position in at least one common stock, even investors who are otherwise entirely invested in a diversified ETF portfolio. Lately it seems to me that all the talk is about asset classes making it easy to forget that you are investing in companies with real employees selling real goods and services in a competitive marketplace.
    Second, all investors have a small circle of competence, unique to each of us and probably smaller than most of us imagine. I have long experience investing (at times) in the iron and steel industries for instance, but have learned the hard way to avoid sectors like retail or semiconductors, where I bring no insights to the table. Because I own small stakes in these businesses via an S&P 500 index, I am now much less apt to foolishly buy stakes in individual companies outside of my own narrow circle.

  31. scottinnj says:

    I think if one simply followed rule #7 alone that would save many investors many headaches.

    I also think there a place for a ‘reversion to the mean’ rule. Basically you see time and time again money flow into the top performing funds/asset classes at their peak. Chasing funds that look good in the rear view mirror isn’t typically a winning strategy.

    And someone above mentioned this as well but if you buy a Vanguard LifeStrategy Fund,you pretty much have #1-#6 covered.

  32. Chad says:

    @rd

    Good luck finding any fund in a 401k with expenses below .75%. 401k’s are still full of traditional mutual funds that overcharge.

    You can still use a 401k and use valuation to invest the money. Just dump the money in the money market fund in your 401k and invest the balance when the market has a slight pull back. Rinse and repeat. This way you have the money automatically pulled from your paycheck and you aren’t putting the cash in at a high. This won’t be perfect, but it’s better than than investing every 2 weeks no matter what is happening. Plus, it barely takes anymore work.

  33. [...] first from Barry Ritholtz at The Big Picture lays outs ten (or so) rules to investing that hew quite closely to this idea of valuing simplicity [...]

  34. [...] Ritholtz at The Big Picture has some musings about portfolios for the New Year.  I think he’s right about keeping it simple—but I also think his thought is [...]

  35. [...] Ritholtz at The Big Picture has some musings about portfolios for the New Year.  I think he’s right about keeping it simple—but I also think his thought is incomplete.  He [...]

  36. [...] Keep investing simple – The Big Picture [...]

  37. Mal Williams says:

    Enjoyed your list and do think you should expand because I respect your opinion. However, there is one of your points that I h ave never known how to do. For a do it your self investor, I am probably one of the most knowledgable of your readers, yet I have no good ideas on how to buy at the most favorable time. My only tool is following a momentum strategy which I publish for free, along with monthly data on http://www.copstrat.com. Please, Please expand.

    On another subject. I have done very well in the past with build america bonds in my IRA account. For most of 2011 and 2012 it seemed like an innefficient nitche (please excuse my typing). I rarely see any mening full news or opinion on this subject. Any ideas?
    Mal Williams

  38. [...] On the value of keeping investing simple.  (Big Picture) [...]

  39. [...] Yesterday’s Bloomberg Surveillance show, Tom Keene referenced some of my bullet points from Keep Investing Simple. (One bullet was to Ignore the Chattering Class, but I was not referring to Tom, whom I have a [...]

  40. emaij says:

    How about adding criteria one could use when deciding whether to use BR’s Guide to Simple Investing or to use BR’s management services?