Wednesday, April 21, 2021

If Simplicity in Investing is Good, Why is My Portfolio Complicated?

My recent article on A Life-Long Do-It-Yourself Investing Plan describes a way to make investing uncomplicated while keeping costs to a reasonable level.  Reader reactions were very positive, but some of the questions I received are worth discussing.

“You’re advocating simple investing, but your own portfolio is complex.”


That’s true.  If the all-in-one exchange-traded fund VEQT had existed back when I was switching to index investing, I might have used it for all my stocks.  Unfortunately, it wasn’t around back then, and I settled on a mix of 4 stock ETFs.  In trade for this complexity, I estimate that I save approximately 0.29% per year in MERs and foreign withholding tax (FWT) compared to owning only VEQT.

As it happens, I’m well suited to building a spreadsheet to manage my portfolio, including automating rebalancing and following asset location rules.  Even so, if I were starting out today with no spreadsheet, I might forgo the savings and just buy VEQT for all my stocks.  However, given that I’ve already done the work to decide on a set of rules and have automated them all, I’m happy to save the 0.29% each year.

Much of my writing on portfolio details over the years has been aimed at investors like myself.  If you enjoyed your high school math classes, then maybe you have the temperament to manage a more complex portfolio.  However, I’m confident that the vast majority of people would be happier with something simpler.  It’s not just about a trade-off between effort and savings; there are many ways to mess up a complex portfolio.  You could end up doing a pile of work and saving nothing, or worse.

“Can I see a version of your spreadsheet with your personal details removed?”

I’ve started to make a public version of my spreadsheet several times.  Each time I despair at how hard it is to make such a spreadsheet generic enough to be widely useful, and simple enough to be understandable.  So, I doubt I will ever complete this task.

This may be rationalizing, but I’m not sure I’d really be helping my readers if I made a version of my spreadsheet available.  Maybe being willing and able to do the work of creating your own investing spreadsheet is a necessary condition for success at managing a more complex portfolio.

“You’ve got me thinking I should change my portfolio to match the simple portfolio you described.”

The biggest potential problem with making such a change is capital gains taxes.  If you have investments in a non-registered (taxable) account, you may have to realize capital gains to make a change.  Think carefully about adding a tax burden when making such a change.

If you’ve got a complex portfolio, it might make sense to simplify it, at least in your TFSAs and RRSPs/RRIFs.  However, if you already have a simple portfolio using one of the all-in-one ETFs that include bonds, the benefits of switching may be small.  The prospects for long-term bonds aren’t great right now, but your exposure to potential losses may be fairly low.  It pays to do some calculations before jumping on the latest investing idea.

If you’re already running a fairly simple low-cost portfolio successfully, there may be no reason to change.  If you want to change your portfolio because it will give substantial benefits, then go ahead.  But if you find your reason is an emotional need to seek perfection, then I suggest giving yourself permission to have a portfolio that isn’t quite perfect.  In my own portfolio, I sometimes have some fixed income in the wrong account because it was just easier to do it that way when I rebalanced.  The financial cost of doing this is trivial, and I’m not seeking perfection.

“There are other good ways to keep investing simple.”

That’s true.  I laid out one good way for someone to start an investment portfolio and then maintain it simply for a lifetime.  There are other ways, including many differences in the details.  Maybe you want an 80/20 all-in-one ETF, or you plan to buy an annuity with 25% of your portfolio when you retire.  We can debate the merits of these choices, but at a higher level, they just represent small differences.  The important things to focus on are simplicity, low costs, and avoiding mistakes.

7 comments:

  1. Michael, thank you for your excellent articles.

    Reflecting on your remarks about the complexity of producing a generic spreadsheet that investors could use to follow your portfolio management strategy prompts me to comment on my own investment journey.

    Prior to retiring 7 years ago at age 64, I self-managed my family’s portfolio using index funds. While contemplating retirements, two facts lead me to change our investment management strategy once I retired. My spouse has never shown any interest in managing our portfolio beyond a yearly update as long as the “monthly cash infusion is in the bank”. I worried about how she would be able to take over self-management of a complex portfolio of RRSP’s, RRIF’s, LIRA’s, LIF’s, TFSA’s and Non-Registered accounts should something happen to me. I have also read many studies that point to seniors overestimating their ability to make rational investment decisions at the same time as their cognitive ability declines over time.

    At retirement, we decided to turn our portfolio management over to a wealth management company with fiduciary responsibility. Yes, I still think I have the ability to self-manage our portfolio 7 years later but what about tomorrow? It costs us probably an extra .5% fee over a self-managed portfolio but the piece of mind, tax planning/reporting, performance monitoring and prompt response and action on any request or query is worth every penny.

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    1. Anonymous,

      My own limited experience with wealth management companies has been somewhat strange. I've had a chance to ask three people with multiple millions who use such services what they pay. None knew initially. One looked through some statements, and she concluded that is was about 0.05%/year, which is obviously ridiculous. She rejected my claim that it had to be higher. A second made a concerted effort to find out what he pays, and he pushed through several attempts to deflect his questions. In the end he was told about some of the fees, but not all of them. The third gave up after his questions were deflected.

      With this as background, I'm left uncertain what to think of your statement "It costs us probably an extra .5% fee over a self-managed portfolio." Do you really know what you're paying? I agree that you get valuable services, but price matters.

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    2. Hi Michael, thanks for the follow up comments, I know everybody is different and in the case of the three examples you provide, I think it proves my point. These folks definitely need some outside adult supervision for their portfolio management if they don’t know or understand their fees. In my case, I know exactly what I pay in fees. For 2020 it was .85% all in including MER, TER, taxes etc. with a large part of these fees tax deducible. Besides relieving me of management tasks, I look at the added cost over self-management as good risk insurance in case something happens to render me incapable of self-managing our portfolio.

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    3. Anonymous,

      For your fees to be that low, I'd guess that you have about 5 million or so.

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  2. My experience with wealth management companies has been similar to the people you canvassed, Michael. With my second and last wealth manager, it took five attempts before I was told what may true fees were. By then, the relationship was so frayed, we couldn't continue. Unlike Anonymous (the other one), I don't think people necessarily need "outside adult supervision for their portfolio management". What they need are honest managers who don't make it a point of hiding the (fee) ball on their own clients. The unethical conduct in this industry is staggering (recognizing that not everyone operates that way).

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    1. Anonymous (#2),

      I agree that wealth managers are often unwilling to reveal the total costs they charge, and that this is a serious warning sign for potential clients. It's hard to disagree with the idea of having "outside adult supervision", but it has to come at a reasonable price, and you need to actually receive good advice instead of just random active investment moves.

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  3. Thanks for the post as always. Obviously respect your decision on the spreadsheet thing, but if I may: I have asked to see it not because I necessarily want to use yours directly (not my intent) or because I can't create my own (I have). More just curiosity and "comparing work". Sorta like how one artist might like to look at another's work, but in a more lame, excel nerd kinda way. :)

    I always grab others' sheets and tools, just to see. Sometimes utilize a part or approach here or there. That's all!

    Cheers!

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