Resolution 2022: How to Declutter Your Investments this Year

I’ve found that if I allow things to become complicated in my investment portfolio - to have too many moving parts - I tend to review it less when, in fact, the increasing complexity demands even more attention and monitoring. As a New Year’s resolution, perhaps we should take a hard look at our increasingly complex portfolios and resolve to simplify things. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Why Less is More

From the early days of this blog, I’ve emphasized the value of simplicity in one’s approach to investing. The clutter surrounding our investment portfolios – or our financial lives in general – can easily distract us from what investing is really all about…arranging for a less financially stressful here and now and for a later, comfortable retirement.

As I grow increasingly creaky, a more complex portfolio just might make life difficult for those left behind in the event of my untimely demise. Of course, if simplification is in order, it should be approached wisely from a tax standpoint. Particularly in taxable accounts where modest changes often involve opportunities to offset gains with losses - always a good thing to do in the event of some unwelcome setbacks.

Start Here...

Whether you’re a new investor or a grizzly veteran who has decided to simplify an increasingly complicated portfolio, a terrific place to begin the process is to survey the field of unmanaged index funds. By definition, unmanaged funds require less monitoring than managed funds and most assuredly less nursing than a covey of individual stocks. And with individual stocks there’s the problem of how to maintain an effective diversification approach.

Yeah, I know, going the index fund route means you’re foregoing the opportunity to beat the market (I call it Daring to be Average). But is trading shares of individual companies really worth all of that research involved in attempting to beat the market? Countless studies indicate that most traders fail in that effort. It wasn't passive investors who financed the glitz and glitter of Vegas! Those flashy tall buildings were made possible by the gambling instinct commonly associated with traders. Index fund investors, however, prefer highly diversified, good quality, low cost portfolios – and typically exercise the patience required to optimize the Amazing Power of Compounding while devoting their “saved time” to other pursuits. Equities traders are less patient…and more inclined to take the occasional plunge. Nothing wrong with being a trader - it's just not my cup of tea.

Two Vs. Many

Wily veteran non-traders in pursuit of diversification likely will have already opted for large- and small-cap funds, value and growth funds, and a small selection of international funds. But do you need all of these to achieve a similar highly diversified equity portfolio? Might owning one or two broad-based funds (yep, I’m again thinking index funds) accomplish the same task?

An investor can accomplish that same goal - sufficient diversification and quality - by pairing a single Total Stock Market Index Fund with a single Total International Stock Fund. These two highly diversified, quality funds provide sufficient exposure to the global stock market…and at a very low cost.

Hands-On Vs Target-Date

Many investors, experienced and new, prefer to retain control of their portfolios, meaning they like to take a Hands-On approach to investing. However, in recent years, there appears to be a growing preference for balanced, and more particularly, Target-Date Funds. Both ways of managing your investments offer asset-class diversity (stocks and bonds) in a single fund. So, how do they differ?

Balanced funds typically rebalance back to a preferred target mix.
Target-date funds provide an age-appropriate stock/bond mix. The investor selects a target-date fund close to the year that he or she intends to retire. In short, the mix becomes more conservative as retirement approaches by automatically increasing the bond position relative to the equity stake.

Corporate 401(k) administrators accelerated the target-date funds "trend" after being granted the option to automatically enroll new employees in 401(k) plans, and within those plans, into target-date funds. Studies show that automatic enrollment has increased participation in 401(k) plans, and employees tend to stay put once enrolled. And because many employees show minimal interest in closely monitoring their 401(k) investments once selected - and because target-date funds in particular reduce the need for constant oversight - their overall popularity among 401(k) participants has increased.

A Step Further

While you're simplifying, why not take it a step or two further? Automate your bill payments and put savings on autopilot. It's the equivalent of target-date fund investing: SET IT AND FORGET IT.

In Sum

Because the average person has a broad range of interests in life and investing is only one of them - albeit an important one - many folks are looking for an approach that meets their day-to-day financial and retirement needs. The importance of simplifying your investments and creating an efficient and effective portfolio that meets your objectives of minimal monitoring and achieving a market rate of return cannot be overstated. It's a pretty easy resolution to make and even better one to stick to - in 2022 and beyond.

Remember, there’s nothing wrong with daring to be average.