As the Shelter-in-place order is lifted, many begin to focus beyond immediate survival and wonder what impact social distancing and other adjustments to COVID-19 will have on the way we live and the way we work. Thinking more broadly, we wonder how it will affect the economy and, by extension, our investments.
During a call earlier this week, I was reminded that the answer to the question about how changes will affect our investments is quite simple. In fact, it’s so simple that it adds meaning to the expressions “Don’t Outsmart Yourself” and, one that I need to remember more often, “Keep It Simple Stupid!”
Because it aligns with guidance many of us received from our parents, which is “focus on what we can control”, the answer might touch a nerve and resonate very deeply.
AND, to quote my friend, Jay Alexander, “It just gets better.” What we can control drives investment success. No, it’s not predicting what will happen to interest rates or the Dow Jones Industrial Average or unemployment or the GDP or who is elected President of the United States. You do not need to read the Wall Street Journal, Barron’s, or watch Cramer’s Mad Money. You need to avoid those noisemakers because they work for someone who is trying to sell you something. They are not giving you advice or trying to help you.
Accept Market Prices
Instead, accept the reality reflected in the market prices today. Remember, KISS and you are being humbly Stupid. When you do, you’ll be doing what Wells Fargo’s Management Sciences Department did when its team launched the first index fund 50 years ago. I doubt that you’d call any of them Stupid. The team member with the least impressive-sounding academic credentials had earned a master’s degree in Engineering from Stanford. (My call earlier in the week was with him.)
Accepting market prices frees you to focus on what you can control, in this case, the two most important decisions that affect investment success. The first decision, which is by far the most important, is portfolio design or asset allocation. What types of investments do you own and in what proportions?
The second is controlling costs. Most investors currently believe controlling costs means keeping the fees charged by financial advisors and the operating expense ratios reported by mutual funds as low as possible. Unfortunately, if they stop there, they miss hidden costs which, for most, greatly exceed the reported costs.
Avoiding hidden costs may be the real reason index funds have succeeded. How else can you explain the success of an investment program that is known for blindly buying and selling securities without any research? In the spirit of KISS, I won’t go further in explaining how they avoided hidden costs, at least not in this article.
But remember, KISS your way to investment success by focusing on what you can control – the design of your investment portfolio and controlling costs, including avoiding (or at least minimizing) hidden costs.
I hope you find this article helpful and welcome the opportunity to discuss how to avoid hidden costs or another topic of interest or concern to you.
As always, please share this information with someone who might be in need of financial advice and let them know that I will be happy to meet with them and, at no cost or obligation, provide a 2nd opinion about their financial situation.
Stay safe, stay healthy, and keep washing your hands,