Keeping it Simple—Additional Thoughts

simplicity in investments additional thoughts

A previous blog posting (May 15, 2019) cited a quote from Albert Einstein which reads, “Everything should be made as simple as possible but not simpler”.  This earlier writing suggested that many people try to oversimplify a financial plan and neglect to take its many possible facets (e.g. income taxes, multiple types of insurance, estate planning) into account.  One aspect of financial planning where many are prone to overcomplicate, however, is within the realm of investments.

It’s easy to see how people fall victim to this temptation because there is no shortage of choices.  At one extreme, banks offer savings accounts and certificates of deposit which are very simple to purchase and understand.  Conversely, there are inordinately complicated insurance and hedge fund products and thousands of mutual funds, exchange traded funds (ETF’s), not to mention all of the individual stocks and bonds that comprise them.  It’s no wonder that people fall victim to overcomplication in this area!

Vanguard Group founder Jack Bogle was an active promoter of simplicity in investments. Bogle recently passed away at age 89 and an article he had written in 2007, which originally went unpublished, was released in 2019 by Barron’s.  Bogle recommended a portfolio of only two investments:  a bond index fund and a stock index fund with the mix adjusted for the age of the investor.   How did this portfolio perform since the original essay was written?  Through May 1, 2019, a 40 year-old investor would have received an annualized return of 7.3% and turned $100,000 into $236,000.  This compares favorably to Vanguard’s own 2035 Target Date fund at an annualized 6.1%, even with both investments including the terribly negative effects of the Great Recession in 2007-2009.

Bogle emphasized four axioms: (1) Focus on costs, (2) Diversify broadly, (3) Allocate prudently and (4) Stay the course.  For the most part, these can be followed without excessive complexity.  In defense of Vanguard’s 2035 Target Date Fund, it must be noted that it includes international stock and bond investments, while Bogle’s simple portfolio is purely domestic.  Since foreign markets have been underperforming US based securities for an extended period. it’s not surprising to see a lesser return from the 2035 fund.  Bogle might even agree, however, that the foreign investment component of the target date fund would be justified as it follows his imperative #2 to diversify broadly.