Simplify Your Portfolio

Years ago, just after the fall of the Iron Curtain, a joke was making the rounds regarding a recent immigrant from a former communist nation who walks into his first American shoe store to buy a pair of shoes. Citizens of communist nations had grown accustomed to a limited supply of all basic goods and services. This new immigrant was no different. He had grown up in a world where you were lucky to even find a pair of shoes in your exact size, much less a selection of them. Now, as he surveyed the vast array of choices available to him, he became increasingly exasperated. Finally, he turned to leave without making a purchase.

"Didn't we have anything you liked?" asked the salesman.

"That's the problem," exclaimed the immigrant, "There are so many choices I'm too confused to make a decision!"

Investors today have vastly more investment choices than ever before. Yet, despite this wealth of available options, investors continue to struggle. Could it be that the flood of products, vendors and account alternatives is actually making the investment decision process more difficult? Are there ways to simplify your approach and still succeed?

Starting With the Proper Perspective
There seems to be a prevailing misconception that one can quickly "invest" his or her way to a fortune. Throughout history, only a rare few individuals have accomplished this feat and even they typically took on vastly more risk than the average investor could tolerate. Finding the next Microsoft (Nasdaq:MSFT) or day trading your way to wealth is not the mindset one should have when approaching the investment landscape.

As a general rule, you will generate substantially more income and wealth-building potential from your job than you ever will from investing. Wealth is created over time by saving part of this generated income. With a generous income and a disciplined saving habit, a material amount of wealth can be accumulated over an extended period, even if that wealth is invested in nothing more than a traditional bank savings account. Enlightened investors, however, recognize that they can expand the growth of net worth by investing accumulated savings in other assets with greater growth potential.

Different Packaging, Similar Contents
Tax laws generate a great deal of unnecessary complexity for the average investor. A number of products and account structures are created to take advantage of tax policy, including variable annuities, IRAs and 401(k)s, to name just a few. Keep in mind, however, that the government rarely gives away anything for free. Capital gains in a taxable account are taxed at lower capital gains tax rates when realized. Those same capital gains are taxed at higher income tax rates when realized and withdrawn from a variable annuity or IRA. These accounts may make sense in many instances, but in other instances they may not be the best alternative.

Financial firms, recognizing that they are all fishing from essentially the same asset ponds, seek to attract clients by finding different ways to combine and package investment assets. As a result, thousands of mutual funds exist today that are essentially just different combinations and packaging of the same stocks and/or bonds. The result of all these multiple account structures and packaging options is that investors often accumulate investments in a hodge-podge manner over time.

Owning several different investments can often mean that little thought is given to how these various parts work in concert with one another. In addition, there is typically no way to discern how they are performing in the aggregate. The task of keeping track of the many statements and assorted paperwork becomes a logistical nightmare for investors and their tax advisors. As a result, investors start looking at the individual accounts and investments as separate parts rather than one, concerted investment portfolio. This is known as "mental accounting" in the behavioral finance world, and it can be detrimental to your long-term investment success. It would be far better to employ a more simplified approach.

The Impact of Asset Class
Despite all of the many different ways they are packaged, investments largely contain one or more of just a few asset classes. These asset classes include stocks, bonds, cash (or cash alternatives), or physical assets like land, real estate, precious metals and commodities. Other, more complex investment alternatives are based on these underlying assets. Derivatives derive their value from some asset. Options give you the option to buy or sell an asset at a particular price and at a particular time. Futures give you the right to deliver or take delivery of some asset at some set price and at some set point in the future.

The more exotic investment alternatives serve their purposes in certain settings, but you do not need to use them. In fact, you can create an effective investment strategy by sticking to the asset classes with which you may be most familiar - stocks, bonds and cash. The world of investing can be immensely complex, but you can build significant wealth over time without ever getting involved in the esoteric areas of investing.

In the July/August 1986 issue of the Financial Analysts Journal, a study by Brinson, Hood and Beebower entitled "Determinants of Portfolio Performance" concluded that 93.6% of the variation of returns in a diversified portfolio is explained by the asset allocation policy. While this study has since been the subject of some questioning and has no doubt been somewhat distorted by various marketing materials within the financial services industry, the disproportionate impact of asset class exposure on the return and volatility of a properly diversified portfolio appears evident.

Different asset classes have demonstrated certain performance characteristics over time. No one can predict the future, but a basic knowledge of how these asset classes have tended to perform and how they relate with one another will go a long way in helping you establish a long-term investment strategy that stands a chance of meeting your goals and objectives.

The Bottom Line
A simple and straightforward approach can be employed by anyone who wants to establish and maintain an effective long-term investment strategy. First, keep the proper perspective. Do not attempt to get rich quick. In other words, keep your day job! Second, keep accounts and product selection to a minimum. Finally, focus on asset class selection and the overall asset allocation of your entire portfolio, making sure that your asset class exposure is fully diversified. As you can see, your approach does not have to be overly complicated, it does not have to be time consuming, and it does not require a vast array of products or accounts. In the end, you may actually find that less is more.



More From Investopedia

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • Singapore scion buys 49 percent stake in Rolling Stone AFP News - 14 minutes ago

    A Singapore firm headed by a scion of one of Asia's richest families has bought a 49 percent stake in Rolling Stone, with plans to diversify the iconic magazine into new business including live events and merchandising. BandLab Technologies, a … More »

  • German business confidence soars as Brexit fears 'disappear'
    German business confidence soars as Brexit fears 'disappear' AFP News - 15 minutes ago

    German business confidence soared to its highest level in more than two years in September, the Ifo economic institute said Monday, recovering from a post-Brexit slump and signalling a rosier outlook for Europe's largest economy. "The German … More »

  • UK mortgage approvals hit 19-month low, more weakness seen
    UK mortgage approvals hit 19-month low, more weakness seen Reuters - 17 minutes ago

    Britain's housing market showed signs of slowing in August with the number of mortgages approved by banks falling to its lowest level since January 2015 and analysts said they expected further weakness ahead as Brexit uncertainty dampens demand next … More »

  • BOJ's Kuroda sees no big rise or fall in bond buying for now
    BOJ's Kuroda sees no big rise or fall in bond buying for now Reuters - 18 minutes ago

    The pace at which the Bank of Japan buys bonds will depend on what is needed to achieve its yield curve target but no big increases or decreases were expected for now, Governor Haruhiko Kuroda said on Monday, dampening speculation that the BOJ was … More »

  • AP Top Extended Financial Headlines at 5:56 a.m. EDT Associated Press - 30 minutes ago

    Global shares are mostly lower as market attention turns from central bank policies to the U.S. presidential race ahead of a highly anticipated debate … More »

  • PBOC Drains Most Funds in Six Months Amid Debt Curb Speculation Bloomberg - 33 minutes ago

    The monetary authority has signaled that it wants to limit runaway borrowing, with Deputy Governor Yi Gang cited as saying that the goal is to bring down leverage ratio growth. The central bank has in the past month restarted the use of both 14- … More »

  • Contagion Risks Rise as China Banks Fund Each Others’ Loans (3) Bloomberg - 35 minutes ago

    Wholesale funds, including those raised in the interbank market, accounted for a record 34 percent of small- and medium-sized bank financing as of June 30, compared with 29 percent on Jan. 31 last year, Moody’s Investors Service estimated in an Aug. … More »

  • Gold slips on firm dollar; market focuses on U.S. debate outcome
    Gold slips on firm dollar; market focuses on U.S. debate outcome Reuters - 40 minutes ago

    Gold prices edged lower on Monday as the dollar firmed, though the market is focused on the outcome of the U.S. presidential debate later in the day, that could see investors buying more of the metal as a hedge against financial uncertainty. Spot … More »

  • S.Korea prosecutors seek arrest warrant for Lotte Group chairman Reuters - 41 minutes ago

    South Korean prosecutors asked a court on Monday to approve an arrest warrant for the chairman of the Lotte Group conglomerate on suspicion of embezzlement and breach of trust, a prosecution source with direct knowledge of the matter said. The … More »

  • Carige eyeing state guarantee in 900 million euro bad loan sale - sources Reuters - 46 minutes ago

    Banca Carige is considering using a state guarantee to sell 900 million euros ($1 billion) in bad loans, two sources close to the matter said on Monday, as Italian banks seek to tackle a major source of weakness for their balance sheets. The … More »

  • Top tech investor Marc Andreessen has quit Twitter (again)
    Top tech investor Marc Andreessen has quit Twitter (again) Business Insider - 48 minutes ago

    Michael Kovac/Getty Images for Vanity Fair Marc Andreessen. … Continued The post Top tech investor Marc Andreessen has quit Twitter (again) appeared first on Business Insider. … More »

  • Markets drop as Fed rally vanishes
    Markets drop as Fed rally vanishes AFP News - 56 minutes ago

    World markets dropped on Monday, picking up where they left off after last week's Fed-inspired rally ran out of steam. The stay of execution for easy money served to bolster the Japanese yen, knocking the stuffing out of Tokyo which ended down 1.25 … More »

  • TABLE-TOCOM Sept rubber deliveries at 279 lots Reuters - 1 hour 0 minutes ago

    TOKYO, Sept 26 (Reuters) - Following are deliveries and expiry prices of contracts that have expired on the Tokyo Commodity Exchange in the past six months. Each lot is for 5 tonnes. Contract Sept Aug ... … More »

  • How Russia's central bank chief held the line Reuters - 1 hour 3 minutes ago

    One Thursday evening in March, Elvira Nabiullina, governor of Russia's central bank, faced down a rival in the struggle for influence inside President Vladimir Putin’s entourage. At a meeting chaired by Putin, Economy Minister Alexei Ulyukayev … More »

  • Oil steady as market awaits Algiers meeting; funds cut bullish bets
    Oil steady as market awaits Algiers meeting; funds cut bullish bets Reuters - 1 hour 7 minutes ago

    Oil held steady on Monday, as the world's largest producers gathered in Algeria to discuss ways to support the market, although scepticism about any deal being reached has prompted money managers to cut their bullish bets to a one-month low. Price … More »

  • China Stocks Decline Most in Two Weeks as Volatility Resurfaces Bloomberg - 1 hour 15 minutes ago

    Hong Kong’s Hang Seng Index retreated 1.6 percent, paring Asia’s best quarterly performance. The sudden drop came after turnover on China’s equity exchanges fell to the lowest level in two years as a booming housing market and an equity rally … More »

  • Alibaba keen to promote Sabah's tourist attractions in China Business Times - 1 hour 15 minutes ago

    HANGZHOU: Global online marketing giant Alibaba Group has expressed readiness to help promote Sabah's tourism attractions through its online travel marketing platform, Alitrip. Its General Manager for Destination Division, Tony Duan, said Alibaba … More »

  • Brexit shock has been digested for now, Ifo economist says
    Brexit shock has been digested for now, Ifo economist says Reuters - 1 hour 25 minutes ago

    MUNICH (Reuters) - The shock over Britain's decision to quit the European Union has been overcome for now, Ifo economist Klaus Wohlrabe told Reuters on Monday after the institute's monthly survey showed ... … More »

  • China flies military planes over strait near Japan
    China flies military planes over strait near Japan AFP News - 1 hour 29 minutes ago

    China has sent fighter planes for the first time over a strait near Japan, the two governments said Monday, after Tokyo announced it may patrol alongside the US in the disputed South China Sea. More than 40 Chinese military aircraft on Sunday … More »

  • South Korea prosecutors seek arrest warrant for Lotte Group chairman
    South Korea prosecutors seek arrest warrant for Lotte Group chairman Reuters - 1 hour 34 minutes ago

    South Korean prosecutors asked a court on Monday to approve an arrest warrant for the chairman of the Lotte Group conglomerate on suspicion of embezzlement and breach of trust, a prosecution source with direct knowledge of the matter said. The … More »

  • Germany's Lanxess to buy U.S chemical firm Chemtura for $2.7 billion
    Germany's Lanxess to buy U.S chemical firm Chemtura for $2.7 billion Reuters - 1 hour 37 minutes ago

    Lanxess AG is to buy U.S. speciality chemical company Chemtura for 2.4 billion euros (2 billion pounds) including debt in the German company's largest ever takeover, moving it further away from its main synthetic rubber business. Lanxess's offer … More »

  • Robert Kuok's grandnephew buys 49pct stake in Rolling Stone Business Times - 1 hour 41 minutes ago

    SINGAPORE: A Singapore firm headed by a scion of one of Asia’s richest families has bought a 49 percent stake in Rolling Stone, with plans to diversify the iconic magazine into new business including live events and merchandising. BandLab … More »

  • Lessons to learn from property investors
    Lessons to learn from property investors ZUU online - 1 hour 44 minutes ago

    Lessons to learn from property investors What does it mean to be truly wealthy? Or at least to... … More »

  • Don't expect pace of JGB buying to fluctuate sharply - BOJ Kuroda Reuters - 1 hour 49 minutes ago

    OSAKA, Japan (Reuters) - Bank of Japan Governor Haruhiko Kuroda said on Monday he does not expect the pace of the central bank's government bond buying to increase or decrease sharply for the time being. ... … More »

  • Robert Kuok's nephew buys 49pct stake in Rolling Stone Business Times - 1 hour 49 minutes ago

    SINGAPORE: A Singapore firm headed by a scion of one of Asia’s richest families has bought a 49 percent stake in Rolling Stone, with plans to diversify the iconic magazine into new business including live events and merchandising. BandLab … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.138+0.002+1.47%
    N21.SI
    0.74+0.02+2.78%
    BS6.SI
    0.141-0.002-1.40%
    5DM.SI
    0.265-0.005-1.85%
    5ME.SI
    0.355-0.005-1.39%
    E5H.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.225+0.025+12.50%
    BTF.SI
    0.475+0.050+11.76%
    AWC.SI
    0.147+0.011+8.09%
    5NF.SI
    0.60+0.04+7.14%
    BDR.SI
    0.195+0.013+7.14%
    43B.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.345-0.060-14.81%
    BLR.SI
    1.16-0.20-14.71%
    P01.SI
    0.164-0.026-13.68%
    AWI.SI
    0.22-0.03-12.00%
    BJD.SI
    0.425-0.055-11.46%
    BLL.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.3604+0.0022+0.16%
    USDSGD=X
    1.5298+0.0062+0.41%
    EURSGD=X
    1.7607+0.0035+0.20%
    GBPSGD=X
    73.8380-0.284-0.38%
    SGDJPY=X
    5.6982-0.0073-0.13%
    SGDHKD=X
    3.0403+0.0135+0.45%
    SGDMYR=X
    9,595.6553-59.8779-0.62%
    SGDIDR=X
    4.9009-0.0057-0.12%
    SGDCNY=X
    1.0371+0.0021+0.20%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,340.80-0.90-0.07%
    GCZ16.CMX
    19.51-0.30-1.49%
    SIZ16.CMX
    95.76-3.02-3.05%
    ^XAU
    2.19-0.01-0.57%
    HGZ16.CMX
    43.85+0.41+0.94%
    CLV16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.15-0.02
    ^FVX
    1.62-0.02
    ^TNX
    2.34-0.01
    ^TYX