Do you really need that many mutual funds?

I look at “lazy portfolios” as an option for people who want the simplest and easiest way to invest in the market.

(Note: This is not investment advice. Please see my Disclosure Policy for details.)

Recently, I took a look at a statement from a financial advisor who worked with someone I worked with.

As this person was a fee-based advisor, I had no reason to doubt that they were providing a valuable service in terms of asset management and investment advice, two things a financial advisor does that I don’t.

Nevertheless, one thing that surprised me was the sheer number of mutual funds listed as part of this person’s portfolio.

I forget the exact count, but it was well over a dozen.

And I thought to myself, why? Was that strictly necessary to have that much granularity in one’s investments in order to achieve an optimal return?

Whether you’re a DIYer, or are currently paying a financial advisor to do this kind of work for you, you probably want to know whether you’re okay with this.

Occam revisited

Many years ago, I wrote that you should think of Occam as your investing advisor. Occam, as in Occam’s Razor, which states that:

“Pluralitas non est ponenda sine neccesitate”

Or, with less Latin:

“One should not increase, beyond what is necessary, the number of entities required to explain anything.”

Or, more simply:

“The simplest explanation is usually the best.”

What I meant by this, is that we shouldn’t seek to equate complication with potential success.

Complication feels crafty. When you hear someone talking in a way that sounds complex (and that you don’t understand), you tend to think that they must be hyper-intelligent, even if they are talking complete nonsense.

And that’s the issue: just because something is incredibly complex, doesn’t mean that it’s smart.

To take an example, let’s look at a Rube Goldberg device.

Here’s the Self-Operating Napkin. Can you see how it works? (I couldn’t, but luckily there is a key on the Wikipedia page).

Source: Wikipedia

It doesn’t take much thought to realize that that is an awful lot of construction to wipe one’s own chin.

And yet, I worry that this is what we’re doing when we have an excessively complex portfolio.

Mutual funds revisited

Remember what a mutual fund is: it’s a basket of stocks or other funds designed to achieve a particular objective.

For example, an S&P 500 index fund is designed to track the performance of the S&P 500 index as close as possible. A more active mutual fund may invest in real estate, or technology, or health care, or all three.

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The advantage of mutual funds is that they diversify your risk. You’re not betting your future on a single company (no matter how much you love Apple). A mutual fund allows you to invest in hundreds, if not thousands, of companies.

Cool right?

Diversifying diversification

But it’s not just companies. Mutual funds can buy bonds too, diversifying your risk in different ways. After all, conventional wisdom says that when stock prices drop, bond prices go up, though that’s not always the case.

And even these aggregate mutual funds you may want to mix and match. For example, a “Total Stock Market” index fund excludes the world outside of the U.S., and geographic diversification is an asset too.

Point being, that complexity might be creeping into the decision making process even if you don’t want it to.

Get lazy

But it doesn’t have to. There are proponents of a system called “lazy portfolios”, which are designed to provide broad, diversified access to investment options in a way that allows for a “set and forget” mentality.

These portfolios also are “lazy” in the sense that they typically involve only a few different funds to invest in. This sounds simple!

A good source of lazy portfolios is this page on Bogleheads, a site for people who are fans of Jack Bogle and his investing theories (he’s the guy who founded Vanguard).

Take a look at the site and most of the lazy portfolios listed have a maximum of 4-6 funds, with some having three or even 2 funds!

Source: Bogleheads

Take that, complexity!

As for how these funds have performed, that information isn’t available here, but a six- fund lazy portfolio by David Swensen has had its performance tracked, and it’s been returning 8-9% over the long haul.

I highly doubt that financial advisor is going to be able to top that for very long.

And if they top it by 1%? Well, they’re probably taking a 1% fee off the top anyway, so you’re right back where you started from.

Now, I’m not saying that financial advisors don’t provide a valuable service, and I’ve argued that you probably could use one. After all, even managing a lazy portfolio is more work than hiring someone to do it for you.

But don’t let someone try to hoodwink you through complexity. Make sure that they are managing your money with care and competence. And if you don’t have enough money to hire a money manager, well, take a look at a Lazy Portfolio. You can probably just do it yourself, at least for a little while.

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