• The San Juan Daily Star

Invest well by keeping things simple

By Paul B. Brown

My friends are smart and hardworking. And, much to my chagrin, most of them have no interest in personal investing.

Yes, it can be confusing. Ads for new products and services are everywhere, new personal finance apps pop up all the time, and entities ranging from financial planners and traditional investment firms to robots want to offer you advice for a fee.

No wonder most of the people I know feel overwhelmed. They think about investing the way I do about eating leafy green vegetables: Even though they do not like it, it is something they have to do.

Occasionally one of my buddies will ask me for guidance. A friend, who says she really did not understand her financial adviser’s advice, handed me her brokerage statement and asked for suggestions. She promised to carry them out, as long as I kept things simple and kept her investments diversified.

No pressure.

Simplify. Simplify. Simplify.

I would rate her existing portfolio somewhere around a “C.” The holdings themselves deserved a higher grade, but there was a lot of overlap among her nine stock and three bond funds, and the fees were on the high side — about 0.75% for the stock funds, for example.

I thought she could do better, investing the stock portion of her holdings in low-cost index funds and simplifying her bond holdings. But what to recommend?

I made an initial list of what I thought she should own, but it contained 11 mutual funds from several of the major fund families, including American Funds, BlackRock, Schwab, Vanguard and Fidelity. What was I thinking? While my recommendations would create a solid portfolio — I had made sure she would have full representation among small, midcap and large stocks as well as domestic and international bonds — simple it was not.

I kept winnowing the list and settled on what seemed a reasonable solution. If she bought one stock index fund with a representative sample of the U.S. stock market, and a bond fund with a solid cross-section of the global bond market, she would be fine. I decided to recommend only two funds.

One was the Fidelity Total Market Index Fund, which tracks the entire U.S. stock market and charges 0.015% in fees. You cannot do much better than that.

The other was the Vanguard Global Credit Bond Fund, an actively managed fund that has almost 60% of its holdings in U.S. debt and the rest in international issues. Its expense ratio is 0.35% for the basic fund, and it drops to 0.25% if you invest at least $50,000 in it.

It has only been around for three years, but I liked some things about it. First, the majority of its non-U.S. holdings are hedged, so my friend would not have to worry about currency risk. Second, according to the Vanguard website, the fund holds only 26% of its portfolio in bonds with maturities of 10 years or longer, reducing some of the risk of rising interest rates, which hurt longer-duration bonds more severely than short-term instruments.

Settling on just two funds and on these two in particular were arbitrary decisions. I could have given her just one — a global balanced fund, for example. That is the term for a mutual fund that invests in both stocks and bonds around in the world.

But if you go that route, you are locked into exactly how the fund manager thinks your money should be invested. I wanted to give my friend more control.

A potential objection to my stock recommendation is that the Fidelity fund holds only U.S. equities. Many experts say a diversified portfolio should include stocks from around the world, but I am not so sure. After all, the largest U.S. companies receive a significant part of their revenues from overseas. About 30% of the sales recorded by members of the S&P 500 come from outside the U.S., for example.

I figured that would cover international diversification. Is that a perfect solution? No. But I was striving for a solid and relatively simple recommendation. Besides, this was an argument that John C. Bogle, the founder of Vanguard, endorsed. If you invest in the S&P 500, he maintained, you are investing in the world.

I could have recommended a global stock mutual fund but did not find one I was completely comfortable with. For example, while I liked the T. Rowe Price Global Stock Fund, it has only 55% in U.S. equities, and that was not enough for me.

I recommended traditional mutual funds, not exchange-traded funds, which trade throughout the day like stocks. Traditional mutual funds price only once each day. I see that as a virtue. Because ETFs trade continuously, it is easy to obsess about their price and easy to trade them. I believe in investing for the long term, and while you can do that with ETFs, the temptation to trade may be too great for some people.

The two-part payoff

So, yes, my choices were idiosyncratic, but they were so by design. I wanted my friend to understand what she owns and have an easy way to find out how well she is doing. If the U.S. stock market climbs 1% tomorrow, her stock index fund will as well, minus the index fund’s small fee. And even though it is not an index fund, her bond fund will reflect the markets, too. There is less day-to-day news about bonds, and that is probably a good thing.

My friend took my recommendations. Then the only other factor to consider was how the money should be divided between the two mutual funds. Her adviser had suggested 60% stocks and 40% bonds. She has decided to be a bit more aggressive — 70% stocks, 30% bonds.

In addition to helping my friend, this exercise will benefit me as well. My wife and I own 17 mutual funds between our individual retirement savings and our personal holdings. We will try to simplify them.

I doubt that we will get down to two funds. If simplicity is not the overriding objective, I will probably want to have an international stock fund in addition to a domestic one, for example. But I will definitely try to eliminate the expense and complexity that comes with having overlapping holdings. Simpler will be better for us, too.

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