Even though most of the articles I write are geared towards young professionals, I still find myself receiving a lot of questions from all types of investors. Most basic investing principles actually apply to investors of all ages but how you apply those principles is what differs.
Obviously, a younger investor should have a more risky allocation while an investor nearing retirement should have a more conservative allocation. But one thing that I've noticed is that not everyone likes spending hours and hours reading about and researching personal finance like I do. I think more people should spend time researching their finances but ultimately I know most won't.
So whenever I come across a newbie investor or someone looking to be put on the right financial path, what do I tell them? I could go into a detailed breakdown of what asset allocation is and what their different investment options are but most of the time I don't.
Investing isn't the toughest subject on the planet to master but it does take a lot of diligence and patience. I know that investing is more of a chore than a hobby for most people so I usually start them off with the same advice.
My One Piece of Advice
Inevitably, everyone wants to know if there are any magical investments they can drop their money into and get a guaranteed 10% return or maybe they're looking for some insider tips and tricks. Unfortunately, I haven't figured anything like that out yet so for now I tell them to just keep it simple. This might not be the answer they're expecting but if I could only tell someone one thing, that's what it would be.
Investing can be as complex or as simple as you want it to be. There are some really complicated investment options and some really simple ones. For your typical investor, I don't think it makes a ton of sense to invest in the complex ones since ultimately risk and reward will always be related. There's no magical investment that provides a better risk-return ratio because it is extremely complex. Instead, I've found it's usually the complex investment options that cause you to lose money since you may not fully understand them.
The Golden Era of Investing
It's easier than ever to invest your money these days. Companies are competing for your business by lowering their fees and offering better products and it all benefits the consumer. You can trade instantaneously and often for free so it seems like it should be easier than ever to invest and get it right.
You really don't even have to know what you're doing anymore with the addition of lifecycle funds. Ultimately, I think these types of funds will be a huge game changer since as long as you can pick the right date for your retirement, you're pretty much set. That's keeping it simple right there. All you really have to worry about is the expense ratio and contributions after you select a lifecycle fund and you're done.
Complexity Doesn't Always Add Value
I think a trap that people tend to fall into often is thinking that complexity will somehow add value. This is rarely the case in my experience since you don't need complex investment strategies to make a lot of money. Investing is an exact science when you're going for average returns but when you start trying to beat the average that's where you'll run into some trouble. I like to base my investment decisions off reason and science rather than guessing or timing and until I see empirical evidence of success with the latter, I'm going to stay away from those types of strategies.
In fact, I still use the same three-fund portfolio that I started with years ago. In that time span, I've learned a ton about investing but none of it has made me want to change my investment strategy and make it more complex. I've rebalanced here and there but even that seems trivial at times since there are studies that show rebalancing may not have as big of an effect as we once thought it did.
If there was a monetary trade-off between keeping your investments simple and earning less than if you were to go with something more complex, I might be inclined to change my mind. But so far, I haven't seen anything that would lead me to believe that complexity is a good thing for investors. So, KISS — keep it simple stupid!
Readers, what do you think about keeping it simple? What would your one piece of advice be to someone who asked you for investing help?
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Keeping it simple is probably the best advice for most people. I do have some of my portfolio in index funds. Most of my portfolio is in individual stocks which might not do any better than index funds in the long run, but they have done pretty well for me so far.
I’m not huge on investing in individual stocks due to the uncompensated risk but as long as you’re investing in solid blue chippers it’s not the worst strategy in the world.
Index funds are super simple. Very easy for asset allocation. Even better, target date funds. They reduce the complexity of investing although you might not get the same returns.
Warren Buffet’s Recommended Investment Vehicle: Index Funds.
Well that makes me feel better haha, thanks for the ego boost. I’ll definitely check out the speech, thanks for the link!
Keeping it simple for beginners is a sensible advice. Nothing can screw up your journey to financial freedom more than confusion and conflict in your financial choices. This is a great article.
Thanks Marissa, investing can be as complex or as simple as you’d like. The funny part is that the returns will be very similar as long as you use the same principles..
My nephew asked me this the other day. I told him two things: DRIP investing to build your foundation, and then use it to diversify into real estate.
It’s simple, cost effective, and relatively safe in today’s unpredictable, government driven, economy.
Sounds good to me Jack, keeping it simple and effective are definitely a bonus today. Only problem with real estate in my area(SoCal) at least is it’s so damn expensive. You sometimes have to really sacrifice where you live in order to buy.