Investment Metaphor #5: Johann Sebastian Bach

Apr 13

Apr 13 Investment Metaphor #5: Johann Sebastian Bach

Charles E. Kirk, over at The Kirk Report, has an excellent archive of lazy portfolios collected from around the internet. A lazy portfolio is simply an investing portfolio consisting of a small handful of Exchange Traded Funds, or perhaps mutual funds, that one buys and holds for the long-term. Often a Dollar-Cost Averaging system is employed to enable one to invest consistently and regularly without running the risks of trying to time the market.

When I first decided to begin investing in a Roth IRA, I was quite overwhelmed by sample portfolios such as the ones listed on the Kirk Report. What were the differences between them, and what were the risks if I accidentally invested in the wrong portfolio? Two thoughts then occurred to me. First, making sound personal finance decisions has little or nothing to do with which investments one chooses. And second, although there are many differences from sample portfolio to sample portfolio, there is a great deal of overlap and many similarities between the various portfolio models.

Personal finance is a matter of living within one's means and forming the habits of saving and investing in general. The differences between the average millionaires are just not that great. Nearly every one of them has been successful in curbing how much money flows out and investing the rest in investments that will put that money to work via growth and compounding. Some invest in real estate, while others invest in the stock market. The individual investment choice does not matter so much as being consistent in one's long-term investment strategy. The exception are those who either put all their eggs in one basket due to a lack of proper asset diversification or treat the stock market like a Roulette Wheel hoping to hit the jackpot with the next big stock pick (and often times end up losing their shirts in the process).

Getting back to the lazy portfolios, there is an amazing symmetry and a similarity to the various portfolios listed on The Kirk Report's lazy portfolio archive. Almost all of the portfolios have some exposure to three basic areas: a broad market index such as the Vanguard Total Market Index or the SPDR's S&P 500 Index, a small-cap index such as the Russell 2000, and some form of exposure to an emerging market index. Like a good Bach fugue, what I began to notice were merely variations on a common theme. The ratios between these basic asset classes differed from portfolio to portfolio, and sometimes these basic asset classes were supplemented with other holdings. But in any case, the question shifted from "Will I retire rich at all?" to "Exactly how rich will I retire?" simply by changing one's outlook on money from a earn-and-spend model to a save, invest, buy and hold model. This was not a function of which portfolio to adopt but it was a function of changing one's basic assumptions about how money operates and what it is for.

It can safely be assumed that any of these portfolios will lead to a sound retirement as long as they are begun early enough in life for substantial compounding to take place. Not to be too simplistic with my faithful readers, but it just plain does not matter which strategy you use when there is a broad brush stroke difference between retiring with nothing (which is akin to not retiring at all!) or retiring with a nest egg that will provide for your final years.

So if you are reading this post and have yet to take the plunge into investing, I would encourage you to see past the differences in investing approaches and look for the essential features of a good investment strategy. Which strategy you adopt matters less than the fact that you adopt some long term strategy in general. If you like mutual funds due to their active management style and lack of brokerage fees, dive right in. If Exchange Traded Funds are your deal because of the lower expense ratios, don't be shy. If you like watching the dividends roll in, pick some good blue-chip dividend stocks and get set up on a dividend reinvestment plan. Just get started rather than fret about which strategy will work best. It really is hard to mess up a buy-and-hold investment strategy as long as you cover the basic asset classes and don't put all your eggs in any one basket.

The endless debate about which strategy will best "beat the market" begins to look like an argument about so many minutiae. Sure it gives us finance bloggers something to write and debate with each other about, but in the end that extra percentage point you might earn from having a perfectly tweaked investment portfolio will just determine exactly how rich you are going to be, not whether you will be rich at all. In any case, you will be far better off than those without the good sense to plan for their futures.