A Simpler Life

Especially around the time of the New Year’s holiday, thoughts come to mind of finding ways to simplify our lives. For this very reason, my new-client questionnaire has a section on lifestyle goals with a list of thought-starters. The purpose is to initiate discussion and to help clients prioritize what is most important to them. One of the most commonly expressed desires is to simplify one’s financial life.

Despite advances in technology and productivity, our lives seem more complex and hectic than ever before. As a result, many of us want to slow down our pace and reduce the number of things on our plates. If you are one of those people who seek to simplify your financial life, I have a couple of ideas for you.

First, do you get stressed by your investments?  Managing a portfolio should not be worrisome or difficult.  If it is, you are probably doing something wrong.   Fortunately, there are two actions you can take to make things easier and put your mind at ease.

One way to simplify your financial life is to consolidate your investments. In the mid-1990’s, Charles Schwab pioneered the one-stop approach for buying mutual funds. Now, you don’t need to have accounts spread all over the place. Schwab and competitors such as Fidelity offer consolidated accounts to pull all your investments together for efficient management.

If you’ve got multiple mutual fund or brokerage accounts, why not transfer the assets to one location? Keeping accounts with multiple custodians creates an avalanche of paper and unnecessary headaches. You can eliminate some accounts all together by combining the ones with identical registration, such as Traditional IRAs for the same person. While the title of some accounts might require that they remain separate (Roth IRA vs. Traditional IRA), they can be brought under one roof. Even better, this will make rebalancing your portfolio more effective and could also payoff at tax preparation time.

Do you still have old 401(k) accounts with any former employers? I’ve seen as many as four old employer plans for one person. To streamline recordkeeping and portfolio management, inactive accounts can be rolled into one IRA. Since many IRAs have annual account maintenance fees and 401(k) plans are often very high cost, consolidating 401(k) accounts (and IRAs) would not only save valuable time managing your portfolio, it could save you money.

Another way for you to reduce anxiety and eliminate numerous time-consuming tasks is to employ a market-matching investment strategy using index funds and ETFs. Instead of trying to beat the market, you should use passive investments to align your portfolio with the global economy. This approach provides exposure to all types of financial assets with a balance across all sectors. At any time, you will have both winning and losing investments, but over the long run you will be successful.

More importantly, for your peace of mind, many of the typical portfolio management activities disappear completely with a market-matching strategy.

  • You don’t have to spend time analyzing past performance in order to select the best funds or securities. Traditional “due diligence” is not needed because you know exactly what to expect from passive investments.
  • Fewer investments are needed, because index funds and ETFs provide maximum diversification. Therefore, your main task is to make sure that all major asset classes are covered. This can be done with just three to six funds.
  • Going forward, you can stop monitoring performance, because you effectively own the entire market rather than individual investments. Since you can’t control the market, there is no point worrying about it. As long as you set an appropriate asset allocation for your risk profile and use low-cost funds from reputable companies, you have done your job.

If you combine a market-matching strategy with the consolidation of your investments, you can dramatically reduce your portfolio management duties and essentially put your investment program on autopilot. Moreover, nothing is lost in the process because the end result is more diversification (less risk), lower-costs, and greater tax efficiency. Even though your friends and neighbors spend too much of their free-time scanning for tips in Money Magazine and worrying about their portfolios, with only a few minor changes - you can sit back, relax, and enjoy a simpler life.