As featured in The Wall Street Journal, Money Magazine, and more!
     

Rule for Building Wealth: Keep it Simple

by Flexo on December 13, 2006. Uncategorized 7 comments.

When you condense a wealth of financial knowledge into 10 “rules,” you’re taking part in a process known as “simplification.” Perhaps not ironically, that happens to be Fortune Magazine’s third rule for building wealth.

Choosing three or four index funds – say, an S&P 500 fund, an EAFE fund, and a small-cap stock fund – will give you broad exposure.

Diversification in equities has proven to be the best way to achieve high returns in exchange for little risk over the long term. The combination suggested exposes investors to American companies of a variety of sizes as well as Europe, Australia and Far East (EAFE) companies.

The magazine also suggests lifestyle or target retirement funds. You may be able to mimic the philosophies of these funds on your own without having to pay the slightly higher fees that target retirement funds charge, but there is a theory that says one may forfeit small amounts to save oneself from headaches and stress. A family member is having me review her financial position; I will probably suggest she move funds invested in annuity products to a lifestyle fund that matches her plans for retirement. (At which point, I will remind her that I am not a professional.)

VN:F [1.8.5_1061]
Rating: 0.0/5 (0 votes cast)


Email Email Print Print
Share this article: Twitter | Tip'd | Facebook | Delicious | Reddit | Digg
About the Author

Flexo, the owner and creator of Consumerism Commentary, has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow him on Twitter.

If you enjoyed this article, get the free RSS feed, get daily emails, and become our fan on Facebook.

Related Articles

Join the free Consumerism Commentary newsletter. Enter your email address here to receive weekly emails with behind-the-scenes information, exclusive giveaways, and money tips.



{ 7 comments… read them below or add one }

1 Nagel December 13, 2006 at 8:06 am

Index funds are fine when indices are performing well, but they will not go well forever. I’d rather go with a mutual fund whose manager has a consistent record out of performing his or her benchmark.

UN:F [1.8.5_1061]
Rating: 0.0/5 (0 votes cast)

Reply to this comment

2 Flexo December 13, 2006 at 10:15 am

Consider this information:

Myth 4: Index funds always underperform in a bear market. Some critics contend that index funds are sure to underperform actively managed portfolios in bear markets because index funds remain fully invested, while active managers have the leeway to hold cash as a defensive measure. In reality, the performances of most actively managed funds show that these funds did not produce superior results during bear markets.

From Myths and Misconceptions About Indexing, the Vanguard Group.

UA:F [1.8.5_1061]
Rating: 0.0/5 (0 votes cast)

Reply to this comment

3 TMT December 13, 2006 at 10:28 am

The difficulty arises when:
a. very few active managers have a consistent record of beating their benchmark, and
b. there is no way to know who these “winning” active managers are ahead of time, and
c. active managers have additional and/or higher costs than a typical index fund — administrative & management costs + the tax costs of turnover when they trade in their portfolios

My conclusion: control what you can — your costs. And don’t spend a lot of time worrying about what you can’t control — the markets & the future.

UN:F [1.8.5_1061]
Rating: 0.0/5 (0 votes cast)

Reply to this comment

4 Matt December 14, 2006 at 9:42 am

Simplicity is definitely a key to building wealth. If you can simplify your lifestyle you can increase your investments. If you keep your investments simple you’re likely to make money off them just because there’s fewer places where complexity can take money out of your pocket.

A nice simple way to invest: find a good financial advisor

UN:F [1.8.5_1061]
Rating: 0.0/5 (0 votes cast)

Reply to this comment

5 Craig December 21, 2006 at 5:21 pm

Complexity is the enemy of growth. If you can’t understand the investment and how it makes money, run like the wind. Keep it simple and cheap. Very, very few actually outsmart the market long term. It’s really very efficient.

UN:F [1.8.5_1061]
Rating: 0.0/5 (0 votes cast)

Reply to this comment

6 fin_indie February 17, 2007 at 1:57 pm

Careful on the suggestions to family. One drop in principle and you’re never going to hear the end of it!

UN:F [1.8.5_1061]
Rating: 0.0/5 (0 votes cast)

Reply to this comment

7 UH2L June 19, 2008 at 8:26 pm

But complexity and what I consider desirable overdiversificationcan can put money in your pocket too. I never understand why there’s such a movement against overdiversification. It has advantages that I would rather mention in a future blogpost. Due to job changes, with my 401K, I have 16 funds in two 401K’s and an IRA, but I like to have around 12. There are so many diverse funds such as Real Estate, Sci/Tech, Emerging Mkts, Euro, Various Bonds. Each has it’s own characteristics.

The arguments against overdiversification, (assuming you have enough money in each to avoid fees), usually make little sense. I often hear overdiversified portfolios are bad because they then mimic an index and this comes from some of the same people who advocated buying an index fund.

I don’t trust putting all my money in one Target Year Fund because in the end, you’re not diversifying human judgment by using one fund manager. Putting it all in one fund is crazy if lots of money is at stake.

UN:F [1.8.5_1061]
Rating: 0.0/5 (0 votes cast)

Reply to this comment

Leave a Comment

Connect with Facebook

Note: By submitting your comment you are agreeing to these terms and conditions. If you attempt to post spam, including promotional linking to a company website, your comment will be deleted.

Previous post:

Next post: