Establishing an effective investment strategy can take a lot of effort and research. That may entail perusing prospectuses, talking with financial advisors, and reading business magazines to determine the latest trends. This will help you create a diversified portfolio and avoid putting all of your financial eggs into one basket.
But while diversification is important, you shouldn’t have to waste time trying to wade through your investments and relearning your financial strategies every time you examine your portfolio. Plus, there’s no law that says your collection of investments has to be intricate and convoluted in order for you to earn a solid return. Therefore, you should aim to simplify your portfolio while maintaining a smart investing position at the same time.
With that in mind, here are ten approaches to simplifying your investments.
1. Adopt a straightforward strategy. In the hustle and bustle of investing, it’s easy to forget where you’re going. You can help prevent this by outlining an investment strategy that can be written down in 50 words or less. For example, you could write, “Get a Roth IRA, buy three Large-Cap Growth Stock Mutual Funds, buy three index funds, Put aside 15% of your money from each paycheck, and don’t touch your portfolio for 20-30 years.”
2. Use online tools. If you use your computer to check account balances, pay bills electronically, and transfer money between bank accounts, then why aren’t you doing the same with your investments? There are plenty of online tools that can enable you to view your entire portfolio at a glance – so you can always know where you stand. Two of the best are offered by Morningstar: Instant X-Ray and Portfolio Manager.
3. Combine several funds into one. If you’ve got several different investment funds, it may simplify your life to just roll them into one fund that’s similar in makeup and risk. Or you can stick to a single fund family like Vanguard or Fidelity. You’ll love the consolidated statements and reduced amount of paperwork.
4. Invest funds automatically. Like the concept of automatic bank drafts to pay monthly bills, you can set up your bank account to deposit a certain amount of funds into a given investment account. Some employers will even bypass your bank entirely and put the funds directly into your designated investment funds. This way, you’re less likely to forget or neglect a monthly deposit.
5. Dabble in real estate sparingly. The housing bust of a few years back may already be enough for you to shy away from real estate investments. But if you decide that you do want real estate in your portfolio, adopt a strategy where you purchase a property with cash or a hefty down payment. Then most or all of the rent you charge will be money in your pocket (less tax and maintenance expenses, of course). Don’t count on the property to appreciate and boost your bottom line; if it happens, great – but you could also see your money flushed away if the value decreases.
6. Tune out the noise. The 24-hour news cycle has now invaded market reports and business channels. Listening to all of the so-called “experts” telling you to buy, sell, get in, or get out is enough to make your head spin. In reality, the vast majority of what’s happening in financial markets probably has nothing to do with your portfolio or investment strategies. So resist the urge to jump at the latest media rumor.
7. Consider one-stop funds. These are funds that mature on a given target date, making them ideal for college savings accounts or retirement plans. One-stop funds usually consist of stock, bond, and cash components that grow more conservative the longer you hang on to the fund.
8. Look into index funds. This approach simply calls for indexing your portfolio to the returns of the overall stock market, which is historically a safe bet. Index funds work well for someone who is tired of trying to figure out the next investment strategy that “beats the market.”
9. Write down what each fund is for. If you’re juggling several different accounts or funds, it’s wise to write down why you set them up in the first place. For example, you can put down “college fund for kids” on the folder that contains your index funds, and “retirement” for your IRAs and/or your one-stop funds. Referring to your notes will help you keep in mind what your overall investment goals are and what you like about a particular fund – so you can better determine if you’re moving in the right direction.
10. Adopt a “hands-off” approach. If your portfolio is diversified and well-managed, the best thing you can do is leave it alone for years (or even decades) at a time. Generally, the less you tinker with it, the better off you’ll be in the long run. In contrast, many a fortune has been lost by nervous investors pulling out of the market when they hear bad news. That’s why is wise to view your investments like you would a home alarm system: know it’s always there, but you never have to worry about messing around with your security.
Unless you’ve got advanced degrees in economics or several years of experience trading in the stock market, the “keep it simple, stupid” method of investing is almost always the best way to structure your portfolio.