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Several months ago, I wrote of my wife’s and my decision to simplify our financial lives by reducing our investments to the bare minimum. Our thinking is in the same vein as our editor’s, and a number of others in the HumbleDollar community, judging from my recollection of reader comments.
Now, I know that many others have a different opinion of where to place their money, and that’s okay. I’m not implying they’re wrong. Indeed, I freely admit that I don’t know the future, and time may show that their decision is justified. But, given the uncertainties of life, of our health and mental capacity as we age, is the chance of a little more gain worth the risk of greater loss from the gradual erosion of our ability to nimbly manage a complex portfolio?
And what of the present? An interest in investing is, perhaps, the thickest common thread that brings us together here. It’s an intensely interesting hobby for many of us. But with time ticking progressively faster, is it a habit that keeps us from other pursuits that may bring more happiness?
We each have our own answer to that question, but aside from taxes and similar good reasons for keeping the complexities in place, why wait to embrace simplicity?
I’m curious as to what people think what “simplification” means from an investing viewpoint. For us, I’ve been trying to create an income stream (nowadays, to address our RMDs) that we can collect monthly with the appropriate tax withholding while reducing, if not eliminating, the what, when, and how much to buy or sell. In essence, my goal is to do away with the need to rebalance, especially as we enter our 80s and may have to deal with cognitive decline at some point. Presently, while my investment strategy is based on diversified low-cost index funds (simple in itself), I have a somewhat complicate tax planning and dynamic asset allocation approach along with a multi-year structured Roth conversion plan. Fortunately, our conversion plan is coming to an end and simplification is now becoming a priority for us.
To explore this approach while I have the mental acuity to assess the outcome, I have set aside a $100K account with a 60/40 asset allocation to test out a concept. This account has 30% in S&P 500 for growth (fully reinvested), 30% in US Div 100 (dividend-paying equities) for growth and income, and 40% in 20-year Treasury bonds for income. Currently, this trial account has experienced (at an annualized rate) a 10% capital growth with a 3.6% dividend/interest “income” stream. The historical growth for this mix has been closer to 7% while the dividend/interest has been close to 3%. Since our RMD withdrawal needs is about 3% (due to 40% of our portfolio in Roth), this income stream seems like a good candidate mix for simplification (short of using an advisor). The actual mechanism is that the monthly withdrawals come from the cash reserve, which is the repository of all non-reinvested dividends and interest). Due to uneven deposits, the cash reserve can be seeded with sufficient assets to satisfy monthly withdrawals. Furthermore, if the cash reserve should be depleted, a backup account (S&P500 index fund, for example) can be used to address any shortfalls (automatically). One thing I’m looking closely at is the consistency of the “income stream” compared to the monthly market volatility (NAV vs dividends). Since you are not selling anything, all growth can be viewed as long-term. This assume that the dividend income is somewhat reliable on an annual basis.
I know a “total return” strategy would result in a bit more gain but this seems like it could be a good trade-off if the “income” (over a year) satisfies the RMD withdrawals.
Some of the most complex portfolios I’ve seen were held by seniors, widows or widowers, or divorcees. In many cases they did not understand their portfolios, what they were paying, or where it came from. Many wanted to change but didn’t know how. This often happens when one person in a couple controlled the finances and the other person had little knowledge or experience with their finances.
I’ve seen the same thing many times Rick. These folks almost always work with a commission mad advisor who sells then something new at every review. I had a few clients who must have had 20 K1s and a handful of indexed annuities.
I have simplified to a point, but I still have about 20% of our assets with a local advisor. Dustin is a young fella I befriended 20 years ago during my short tenure in the business. This is money I transferred to him when I gave up my license and started my tax practice. Dustin referred his clients to me for tax prep, and those clients referred many more people to me. About 1/3 of my practice came from Dustin. His fees aren’t bad but I could still save by consolidation to my other account. But I just can’t do it, I’d feel terribly disloyal.
Ed, not sure what reducing investments means in this context. Do you mean putting most in cash or simply consolidate with one company or fewer funds?
That a good clarifying question. No, not going to all cash. That move may represent ignorance of the risks of a portfolio that’s too conservative. But gathering our money into a few broad stock- and bond-index funds at one discount broker with low fees may reduce the risk having too much to handle before it’s too late to recognize that we can’t.
Got it. I’m with you.
Great question, Ed. One thing that’s struck me lately in reading comments and articles on HumbleDollar: We can suffer cognitive decline without realizing it — and, while we may imagine there’s always a chance to take action later, including simplifying our finances, that chance can all too easily slip away.
You’ve been struck by this when reading HumbleDollar? That does not reflect well on commenters and authors on your site, Jonathan. 😂
Jonathan is absolutely correct. I’ve seen this first hand. Highly competent people can lose competency quite rapidly, possibly due to disease, a fall, or surgery. If this happens the burden falls to your family or friends.