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I’M TOLD THAT younger investors tend to trade more. That’s because those of us in our 20s and early 30s tend to be more confident—and perhaps overconfident—and that leads us to actively manage our portfolios as we seek to outpace the market averages. On top of that, it takes time to learn what works and what doesn’t, and that can also lead to frequent trading.
That brings me to 2021 and the four key portfolio changes I’m making:
1. Sell actively managed funds. Over the past few months, I’ve reduced my holdings of actively managed stock funds by 85%. I still think these funds could perform well, but I now believe index funds are more likely to deliver decent performance—and without the risk of lagging behind the market.
“Attempting to beat the market must also introduce the risk of underperforming the market as well,” writes financial advisor Ashby Daniels in How I Invest My Money. “If we don’t need to beat the market to achieve our financial goals, what sense would it make to introduce the possibility of moving us further from our goals?”
In other words, why chase higher returns that may never materialize at the expense of risking an investment return I’d be happy with? The opportunity cost is too high.
Still, selling my actively managed funds has been hard. First, it meant realizing losses and admitting my mistake. Second, I couldn’t help thinking, “What if these funds start outperforming?” But fearing I’ll miss potential gains wasn’t a good reason to stick with these investments. If I were constructing a portfolio from scratch, I wouldn’t invest in these funds, so why hang on to them?
In the past few months, two friends asked me how to start investing. I found myself recommending low-cost index funds. That made me realize my holdings didn’t reflect my views—and that prompted my portfolio makeover.
2. Add other asset classes. I started the year with just two index funds: Vanguard Group’s S&P 500 index fund and its European stock index fund. I wanted broader stock exposure, so I recently added Vanguard’s global and emerging market stock index funds.
Because different parts of the stock market tend to be highly correlated, I also wanted to add an uncorrelated asset class, such as real estate investment trusts, gold or commodities. I ended up picking real estate investment trusts, because they offer exposure to physical assets and they kick off regular income.
3. Increase my stock exposure. In an article last July, I wrote that I didn’t want more than 70% of my money in stocks. Now, I believe it could be a bit higher, given that I won’t need this money for the foreseeable future.
In fact, I’ve ended up with less in stocks than I intended. Amid the pandemic, I drastically cut back on travel, eating out and entertainment. These account for most of my discretionary spending. Because I don’t usually spend much anyway, my savings rate increased significantly—and I accumulated a lot of cash. To bring that down, I’m planning to raise my monthly stock market investments.
4. Simplify my finances. My ideal portfolio is one that requires little maintenance. In the past, I opened checking accounts at different banks, looking for higher yields. But the extra interest I received was modest and probably not worth the effort, plus I had to deal with the mental clutter of more paperwork and passwords.
Similarly, the active mutual funds I used to own resulted in multiple investment accounts, each with the respective fund management firm. But with the brokerage firm I now use to buy index funds, everything is in one place.
Marc Bisbal Arias holds a bachelor’s degree in business and economics. Marc started his professional career at Morningstar, performing research and editorial tasks. He currently lives in Barcelona, Spain, where he spends his spare time trying to understand the financial markets and human behavior, as well as reading nonfiction, listening to podcasts and watching TV shows. Follow Marc on Twitter @BAMarc and check out his earlier articles.
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…and almost 25x expenses saved up. Nice work!
If someone is moderately interested in doing a little work to improve their portfolio’s performance, then spending the time to find portfolio managers (not funds but portfolio managers – remember, investors were investing in Peter Lynch, not Magellan) who run actively managed funds can be very rewarding. There are many who have excellent, long term track records handily outperforming their benchmarks over the medium and long term. I have found that owning a mix of both actively managed and index funds has worked very well over the past 40 years.
Could you provide documentation that “many” portfolio managers have outperformed their benchmarks over the long term?