The Morningstar article Why Investment Complexity Is Not Your Friend points out that out of the thousands of available ETFs and mutuals available, most of them are so narrowly-focused that you really don’t even need to consider them.
What asset classes do you really need to own? Here is their no-nonsense list broken down by “definitely need”, “probably need”, and “don’t need”.
Agree? Disagree? I do believe you can still do quite well over the long run even if keeping things very simple.
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Great post! I agree entirely with the table!
EFTs/Funds of a specialized nature are a rational investment only to (1) Hedge a known risk in one’s personal or financial life, (2) Access a market such as one country which would otherwise not be available based on its overall attractiveness. Most people do not, and should not normally, have the financial smarts and time to properly do either. When asked for investment advice by friends and clients of friends, I refer them to the 3-5 ETF portfolios found in Kiplinger’s Magazine periodically. Life is too short for them to have to learn my field of financial economics.
Mine would be even simpler – move international to the left, and TIPS to the right. I buy basic bond index funds for various durations according to the timeline when they’ll be needed. Anything beyond that is overthinking it, IMO.
While I agree that this would be a great table as a reference for a new investor, I don’t actually practice this. I’m a bit of a slicer and dicer, and I enjoy the mild complexity, which *may* provide a slight rebalancing bonus for me at some point. But mostly, it keeps the part of me that wants to tinker busy with tasks that really won’t do any harm, instead of being an active investor.
Also, rather than investment grade bonds, I do all Treasury bonds, split evenly between nominal bonds and TIPS. There is more diversification benefit (that doesn’t always show up when you want it to) with safer Treasury bonds. But I don’t think it’s necessary to direct new investors to that idea, it’s just something I consider in my own allocation.
That table makes a lot of sense. Keep it simple is a good mantra for all things in life. I definitely agree with the far left column, but I wonder how (or whether it’s even needed) to break down the US Stocks category (i.e. large cap vs small cap, value vs growth). Schwab suggests a 60/40 “moderate” risk portfolio hold 35% large cap, 10% small cap, and 15% international (along with 35% bonds and 5% cash).
I think Jack Bogle once said he only invested in large cap US stocks for his equity allocation and saw no need for international stocks, especially since the S&P 500 already drives considerable revenues from international markets. The other point to keep in mind for investment selection is where your assets are located (taxable vs tax-free vs tax-deferred) and what stage you are in (saving & growing vs spending & withdrawing). This will drive how much risk and volatility you are willing to stomach and hence where (and how much) of your assets will be invested. As a recent retiree I am thinking about this a lot in my portfolio design.