Despite all our good intentions, it is often said that we are our own worst enemy for the many foolish things we do that come back to hurt us. Nowhere is this saying more relevant than in the world of finance, where bad decisions are the norm not the exception. Even the smartest superstar fund managers will readily admit their mistakes and chalk them up to some contorted form of tuition.
It is in this spirit that veteran investor, advisor and commentator Barry Ritholtz penned a recent column extolling the virtues of simplicity when it comes to portfolio planning.
In this installment of Investing 101, the CEO of Fusion IQ and author of The Big Picture blog lays out five tips to keep things simple and increase your chances for success.
1. Go Passive
Simply put, Ritholtz says, "Most investors are far better off with a passive index than trying to pick the next great manager." Sure it is tempting to chase a highly decorated fund or hot performer. However, "80% of managers underperform each year and that it's a different 80% each year," which is enough to give Ritholtz pause. He will tell you the behavioral ramifications just aren't worth it when you add in the "cost, taxes and expenses of constantly chasing the hot hand."
2. Diversity Across Asset Classes
According to Ritholtz, when it comes to diversifying your investments it isn't just about stocks, bonds and cash anymore. He suggests that a broader selection will serve you well. He goes on to say that investors would be wise to add some real estate or REITS, perhaps a 10% exposure to commodities, as well as other types of bonds than U.S. Treasuries, including corporates, high yield, municipals and maybe even some foreign debt too.Read More »from Investing 101: Keep it Simple to Succeed, Says Ritholtz