How complex does an investment portfolio need to be? Or, as the flip-side of that question: How simple can it be?
Bank Investment Consultant looked for an answer to this question, specifically with the lower end of mass-affluent in mind, 100,000 to $250,000 in investable assets. The specific question was whether this level of client could be well-served with just a very small handful of broad-based ETFs (three to five) and annual rebalancing—and nothing else.
While those we talked to agree with the concept of simplicity in investing, there was some disagreement over the degree of simplicity we outlined.
D. Edwin Jernigan Jr., an advisor at Franklin Synergy Bank in Murfreesboro, Tenn., says that he asks prospective clients to take a short survey about their objectives and risk tolerances so he can complete their investment policy statement, which is the asset management portion of the larger financial plan document.
He asks them to spend just 10 to 15 minutes on the survey because he wants their honest, gut impressions, he says.
Once he has that in hand, he and his colleague David Mitchell Jr., a investment officer, try to keep the investments as simple as possible for clients. But that doesn’t mean they can just set a portfolio and forget it, Jernigan says. They have to remain open to tactical changes along the way.
In fact, he describes the investment policy statement as a living document. Changes in the document, and consequently the portfolio, can happen from new life events, or even a change of heart on risk tolerances. However, in those cases, he wants to weigh the change carefully to ensure that it’s a genuine change with a real reason and not an emotionally driven reaction to a market decline or increase.
Indeed, the investing conversation can begin with a simple notion, such as how much equity is wanted, says Nicholas Lacy, vice president and director of institutional research at Raymond James, which is the third-party marketer for Franklin Synergy.
However, there are inevitable follow-up questions that will lead to a certain level of nuance in the end result. For instance, an investor needs to decide how much of his equity will be U.S.-based vs. non-U.S.-based, or small-cap vs. large cap, or growth vs. value. Fixed income brings the same sorts of questions: interest rate sensitive vs. non-interest rate sensitive. (Our next two articles go into detail on some of the questions in building a portfolio.)
Moreover, which parts of the portfolio, if any, should be overweighted depending on expectations, and how much of that should be tempered for diversification needs?
Changing a portfolio isn’t necessarily a bad thing, but it needs to be done for the right reasons, says Gene Goldman, vice president of research at Cetera. When the S&P 500 is showing double-digit increases, clients may wonder why their portfolio is not doing as well and want to make changes, forgetting the price for diversification and safety.
However, when major news events happen in the world, changes in a portfolio may be warranted, he says. “Investing isn’t as simple as buying the Nifty 50 of the 1970s, or tech stocks in the late 1990s,” he says. “Today, we’re living in a faster-changing time, and clients need more hand-holding. ... You can build a simple portfolio, but you still have to react to a changing world,” he says.
Still, most of these concerns could be met by picking broad-based ETFs and letting them ride, with annual rebalancing, says Jeff Ptak, global head of Manager Research at Morningstar.
He says broad diversification would act as ballast and, in effect, answer those same concerns.
There are some limits on the simplicity idea, such as a client facing a high tax bill who wants to take advantage of harvesting strategies. But for the most part, Ptak says that such a strategy could serve investors well. And not just mass-affluent; he sees no reason that high-net-worth clients couldn’t take the simple approach, as well.
But this does not mean investors should go it alone, he says. There is still an important role for an advisor to help keep a check on the client’s emotional, often irrational reactions.
In the end, the answer for investing simplicity follows the spirit of Einstein’s often-quoted quip: As simple as possible, but no simpler.
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