A Simple but Not Simplistic Investment Strategy

I am back from a family vacation in Japan which renewed my appreciation of the beauty of simple design. Why have a dozen flowers, when only one is needed?

The trip reminded me of a quote attributed to Albert Einstein:

“Everything must be made as simple as possible. But not simpler.”

The same is true for our personal finances. Unfortunately, too many investors choose unnecessary complexity or over-simplification. Neither is optimal.

Complexity increases risk

In my 35 years in wealth management, I have seen complex account structures which take advantage of every possible tax minimization technique. Seeking the perfect tax strategy often reduces flexibility to adapt to a changing economic environment or a family’s needs. Prospective clients have shared with me monthly statements an inch thick, with every stock and bond listed but providing little insight into what matters. Too much detail may distract from seeing the total risk exposure.

The value of a simple strategy

My view is that each family should agree on their primary financial goals and understand how their investment portfolio is positioned to achieve them. Simplicity increases the confidence needed to stay the course during difficult financial markets. Here are three suggestions:

  1. Write down your financial goals and investment approach – commonly referred to as an investment policy. If you are working with a professional investment advisor, make sure you understand the investment policy they drafted for your portfolio.
  2. Establish a logical overall structure for your financial assets. One we often use is to group them into three buckets:
  • Safety (liquid, low volatile investments for your near term needs)
  • Appreciation (higher risk and return investments to meet long term goals)
  • Aspirational (a limited number of special opportunities, which may include ownership in your company, art or vacation homes, or access to investment partnerships)

3. Implement simply through high quality, cost effective, diversified mutual funds or exchange traded funds. Avoiding the temptation of trying to beat the market will minimize unnecessary trades and help you steer clear of big mistakes.

But don’t over simplify

Einstein noted the importance of not taking simplicity too far. All your wealth invested in only one bond fund or ten stocks is taking simplicity too far. You need a sufficient number of investments exposed to independent sources of risks and returns to minimize risk and capture the value of diversification. Don’t invest in anything you don’t understand, but don’t limit your portfolio to only what you know best.

Distinguish between simple and simplistic

There are simple strategies that are overly simplistic. Subtracting your age from 100 to determine the equity allocation is one example. Simple can be a sophisticated solution as is E = mc2.

We believe in our simple but sophisticated approach to helping families achieve their financial goals and very pleased with HTG’s recognition by The Financial Times.

To read more about allocating assets to three buckets read our blog “A Sensible Approach to Allocating Wealth.”

Lex Zaharoff, CFA

Lex joined HTG in 2014. With over 30 years of experience advising wealthy families at four major private banks, Lex provides clients with a unique perspective on the art and the science of investing to achieve one’s financial goals.

As Adjunct Professor of Finance at NYU’s Stern School of Business, Lex teaches the MBA course on wealth management. He has a BSE from Princeton University and an MBA from Harvard Business School.