Let me convince you to simplify your portfolio

The single biggest mistake I see investors make is needlessly complicating their portfolio.

I see that happen whenever somebody picks more than 3 funds. I see that happen whenever somebody decides to buy an European index fund along with a Global index fund because “US has too much weight in the Global Fund”. I see that happen whenever somebody is trying to buy Gold because “a financial crisis is imminent”. I see that whenever somebody buys a Technology index fund because “I work in IT, I understand IT and have faith that Technology is the future”.

A successful index fund investor goes through four phases:
1) Darkness – takes advice from everyone;
2) Enlightenment – realizes a market return is superior to their return;
3) Complexity – overdoing everything to find optimal;
4) Simplicity – invests in a few total market funds

Rick Ferri

A simple portfolio reduces costs. A simple portfolio has less costs because it usually involves cheaper (Total Market) funds and it involves less transaction fees because there are less funds involved. Lower costs leads to higher returns.

A simple portfolio requires less maintenance. If your portfolio has a lot of funds, you have more work to rebalance it whenever you make periodic contributions to the portfolio. You also have to rebalance your portfolio whenever it drifts from your desired allocation. A more complex portfolio may also require more work from a tax perspective depending on your fiscal residency. Index investing is about “setting and forgetting” so you can focus on what matters: your life.

A simple portfolio is good enough. There is no such thing as a perfect portfolio. The search for a perfect portfolio is a guarantee of complexity. A simple portfolio coupled with a reasonable savings rate will allow you to reach your financial goals.

If your portfolio is small, complexity won’t increase its returns. If your portfolio is small (< 100k EUR) most of your portfolio growth will come from increasing your savings rate. Therefore, you should spend more time understanding how you can increase your savings rate (through higher income or lower expenses) than tweaking allocations between equity regions/sectors.

Your reasoning for having a complex portfolio may not be correct. Do you think you have a unique and informed opinion on why US/European/Tech stocks are undervalued/overvalued? I feel like having a complex portfolio is similar to picking stocks, but instead of individual stocks one is picking index funds. I invest in index funds so I don’t have to make those choices. I invest in index funds because I don’t know which specific companies/markets will succeed but I know that the whole economy will.