This is the third in a series of posts about my investing philosophy – Elegant. The investment process should be elegant, efficient, and low-friction.
Before diving into what that means, Tadas at Abnormal Returns has collected posts that remember investing legend Jack Bogle, founder of Vanguard, who recently passed away. If you’ve invested money in the last 40 years, you have more money in your pocket than past investors because of Jack Bogle. Skim the headlines and pick a couple to read. It will be worth the time.
If you were to build your portfolio from scratch today, would it look like what you own right now? Are the investments in your portfolio pieces of a larger financial plan or accumulated trinkets of an investment collection?
When tempted to overthink a portfolio, I remember an urban legend from the space race. While NASA spent $1 million developing zero-g pen. the Soviets just used pencils. Whether it’s true or not, the lesson stands: There’s no reason to make investing more complicated than it needs to be.
Control what you can control
Taxes and expenses compound just like savings and investments do. Investors should strive to keep these tax and expense snowballs as small as possible. Assets such as bonds and real estate that throw off income are prime candidates for qualified accounts (such as IRAs). While it’s pleasing to see income from these assets, Uncle Sam will want his share at the end of the year if they are located in a taxable account.
Thoughtful asset location helps investors keep more of their money and take control of the timing of paying taxes. Asset location not only offers control over taxes, but also lowers the friction of managing a portfolio. If you had four accounts and invested each the exact same way, you would incur higher trading costs than necessary. If you wanted to rebalance, it would mean four separate sells and four separate buys. Asset location provides for fewer, more tax-efficient trades.
Investors also have control over psychic frictions through the media they choose to consume. People addicted to disaster fantasy are less likely to follow their financial plan through an entire market cycle. It’s good to consume different viewpoints, but it is unhealthy to obsess over experts seeking to outdo one another with what could go wrong. This is similar to people who undermine their self-worth by reading mom blogs or busy-ness porn (“rise and grind” / “let’s get that bread”).
Market movements, pundit opinions, and peer speculation cannot be controlled. Pundit opinions and peer speculation can’t even be verified. Everybody loves to talk their book and conveniently forgets their losing trades. In defense of most investors, they oftentimes don’t get a true accounting of their performance from their broker, just statements. Everybody feels like a winner if their losses are hidden from them.