Stop Making Investing So Complicated

Because I’ve wasted spent wisely many, MANY, hours reading about stocks, bonds, portfolios, and other related financial stuff, I’m 100% confident I know more about it than the average Joe.

This leads to a problem. I’m known as the go-to guy when it comes to this stuff for my friends, family, and even acquaintances. I’ve had friends of friends phone me up for investing advice, especially lately as the Toronto stock market has begun to show some weakness. My enthusiasm can turn simple questions like “why are my stocks going down?” into a 20-minute answer about interest rates, economic outlooks, and specific ways to value the market.

It’s something I’m constantly fighting against. Because, let’s face it. Most people don’t care about the ins and outs of the stock market.

I once compared it to tires. When I shop for tires, I don’t care what the brand is, or any of the fancy features each tire has. I care about being safe, and that’s it. I’m happy to just listen to the tire salesman’s pitch and choose whatever he says. I might be overpaying, but I don’t care. I’m not about to do the research to see which tires are best. I just want to get fixed and back on the road.

Most people have a similar problem with their investments. They want to make sure they end up wealthy, without worrying about the details. It’s the result that matters, not the process. Most people couldn’t care less about geeky stuff like asset allocation.

And yet, the internet is filled with all sorts of complex investment advice. There are millions of different blog posts by thousands of different folks, all with their own individual tweaks. It might make for good reading for guys like me, but most everyone else doesn’t care. Their eyes gloss over and they tune out.

Why this matters

We all know that mutual funds are terrible products, right? They’re fee-riddled purveyors of mediocre results that do a better job of getting investment advisors and fund managers rich than they do delivering results for investors.

There are a couple of reasons behind that. Firstly, most mutual funds invest in the same thing. It doesn’t really pay to stick out in the investing world, so most managers don’t. They buy the same stuff their peers do, at least when it comes to large companies. Combine that with a management fee of 2-2.5%, and it’s easy to see why most managers underperform the index. If an index returns 8% a year, a fund has to do 10.5% just to match the index after fees are deducted.

Take it from someone who picks stocks. That’s hard.

Banks are really good at marketing funds as the simple solution. “Just show up at the bank” says the marketing, “and we’ll take care of you. It’s easy. It’s fun. And you’ll end up rich.”

This appeals to the vast majority of people, those who don’t know squat about finance. They crave the simple solution, even if it costs them dearly in the long run.

The simple, cheaper solution

For investors who want to avoid the fund fees, there’s an easy solution. Just invest in ETFs, which offer management fees of just a fraction of those offered by mutual funds.

But there’s an issue. Most financial advisors work exclusively in mutual funds. And many fee-only financial advisors recommend complex portfolios, partially so they can justify their fees as well.

Which means we don’t have many people teaching investors how to build easy portfolios with low fees. Let me be that person. It’s really easy.

Here’s a portfolio that will work for the vast majority of people reading this. It can be set up in just a few minutes, and can be set and forgot about — with the exception of an annual rebalance.

33% – Vanguard Canada All Cap ETF (management fee 0.05%)
33% – Vanguard World (Ex-Canada) ETF (management fee 0.25%)
33% – Vanguard Canadian Bond Index ETF (management fee 0.12%)

That’s it. This portfolio gives investors exposure to nearly 4,000 different companies from around the world, with extra emphasis given to investments close to home. It’s an easy portfolio just about everyone can build on their own.

We can argue all day long about whether our imaginary investor would be better off with a smaller allocation to Canada, or whether they should perhaps have some foreign bonds in the portfolio. And we’d be missing the point. By keeping portfolios simple, we have a fighting chance of getting more people invested. And that’s a good thing.

 

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