Is Your Portfolio Overdressed?

The story goes that in the late fifties, Chrysler Corporation did extensive market research to see what the American consumer really wanted in an automobile. The survey results were clear. The American auto buyer wanted a sensible car with clean lines and no frills. Above all, he was tired of the large ornamental tailfins which most cars sported at that time.

Chrysler’s design decisions for the coming year were made accordingly. But, one top executive decided, “I like tailfins.” He threw out the survey and the next model year saw Chrysler cars sporting the largest tailfins ever. And that year the company had its best sales in history.

Fins vs funds

In a similar comparison, many DIY investors said they wanted a simple, low-cost portfolio that, once it was set up, took so little time to manage that it was called “couch potato” investing.

As far back as the late 1980’s, in a magazine column, financial writer Suze Orman advised readers to make regular contributions to an S&P 500 index mutual fund. I didn’t accept her recommendation then and I was probably in the majority. However, those that did this would have been quite successful.

On January 1, 1987 the S&P was 264.5 and on January 1, 2017 it was 2,275 (October 23/17 topped at 2566.24). Keeping in mind that there were several years when the return was negative, the annualized return over those thirty years – including dividends – was 10.19%.

Not too shabby.

This was a one fund recommendation, before advisors complicated things with proper asset allocation, rebalancing, reducing fees and maximizing tax efficiency. Let me be clear, these strategies are important – and they can enhance returns – but many DIY investors obsess so much over trying to get it right that they often sabotage their own returns.

Over-diversification

To make things even more complex, many investors are not satisfied with a simple core portfolio of two to four funds that may be all you need to capture most of the returns out there.

They can go overboard with constantly altering the asset classes, adding more sector and foreign funds – precious metals, emerging markets, Danish cheese, etc. – to squeeze out a little more return. And then selling if the returns don’t materialize.

Related: Are your investments diversified, or diworsified?

The end result is a portfolio that is difficult to manage, especially when it comes to rebalancing, as well as higher costs if you’re paying upwards of $9.99 for every transaction.

Set it and forget it

There’s no such thing as the “perfect” portfolio. Once you decide on your optimal allocation, settle down and stick with it. All you need to do then is rebalance about once a year.

Don’t slice your portfolio pie too thinly, especially when you are just starting out and have a modest balance. It may be worth adding a few other asset classes once you get into six figures, but investors who want to keep it simple shouldn’t feel compelled to do so. The best strategy is one you can easily maintain.

Let’s face it. When it comes to our portfolios, it’s hard to just stick with simple. We’re still coveting those big honkin’ tailfins.