You may have heard of the “KISS Principle”: Keep It Simple, Stupid. (Or a slightly nicer variation: Keep It Simple, Silly.) It helps to keep these sayings—at least the philosophy behind them—in mind when managing your investments.
Nowadays, there’s a huge temptation to make investing overly complex. Case in point: there are television commercials that advertise complex funds offering twice the daily return of the Toronto Stock Exchange. At first glance, this seems like a dream come true for an investor who wants exposure to the stock market. Why earn 10% if the market rises when you can earn 20%?
Sadly, it’s just not that simple. Without getting into all the details, these funds do not magically make you twice the return of the stock market. Held for the long-term, they’re actually quite likely to lose you money. They’re really only appropriate for very advanced traders, yet may attract unsuspecting everyday investors.
So what does a KISS investment strategy look like and what are the benefits?
To start with, keeping it simple with your portfolio means only investing in straightforward products with long-term goals in mind. In other words, nothing exotic or highly speculative, such as the funds described above.
Keeping it simple also means keeping fees as low as possible. In practice, this will probably mean choosing an index fund over an “actively managed” mutual fund for the equity part of your portfolio. The former will have annual fees of 0.3–0.5% versus 2.00% or more with the latter. Keeping fees down means keeping more for you.
Simple investing also involves long-term thinking. It’s one thing to rebalance your portfolio from time to time if you really think it’s necessary, (like reducing your equity exposure, for example). But what you want to avoid is over-trading, where you’re trying to ride every up and down in the markets. Unless you’re a professional trader, this could mean losing a lot of money (and paying huge trading commissions in the process).
Hands in lots of cookie jars
Another aspect of simple investing is diversification. A diversified portfolio is one that has money spread among different investment products that ideally do not move in tandem with one another. In this regard, when one investment goes down, it’s great to have another one that goes up to offset it.
It’s crucial to have actual diversification and not just the appearance of it. Here’s why this is important: imagine you own an index fund that tracks the Canadian stock market and another index fund that tracks the Australian stock market. On the surface, you are diversified. But you’re actually not, because Canada and Australia have very similar, resource-heavy economies. As a result, their stock markets will tend to mirror one another. A possible solution would be to sell one of the funds and buy an index fund that tracks European stocks, for instance.
When it comes to the fixed income portion of an investment portfolio, there are many options. Some of them, like corporate bonds, will offer the potential for higher returns. This is most true with regards to so-called high-yield bonds, sometimes referred to as junk bonds because the credit quality of the issuers is lower. If everything works out, you’ll make a higher yield than with more conservative fixed income products. But if the issuer defaults, you won’t just lose out on interest, you’ll also lose part, if not all, of your principal.
The safest play
If you’re really looking to keep it simple with your fixed income investments, three examples stand out: savings bonds, GICs, and high-interest savings accounts. The government guarantees all three investments in some capacity. These investments don’t come with high yields but they do offer greater protection of principal than other, risker fixed income possibilities.
If you’re interested in keeping it simple, check out Canada’s best GIC rates on our site.
Flickr: Jonathan Warner