I recently wrote an article on my “too hard” stack – Charlie Munger’s term for investments that are too complicated to fit into Berkshire Hathaway’s portfolio of companies. Some people collect more investments and build more complex portfolios as they gain experience and assets. I’m trying to take Munger’s initiative and go in the opposite direction. The more I know, the more I cannot be disturbed by the arcane, the volatile, the difficult to understand. Instead, I’m looking for simplicity, peace of mind, and the ability to fall asleep at the switch and know that everything will be fine. I also attach great importance to my time. If an investment requires frequent monitoring, I leave.
I am not alone in this state of mind; I heard from several readers after the column was published that they too had “too hard” batteries. In light of this, it made me wonder why risk and reward dominate the discussion about the value of investments? Why don’t we also judge investments, portfolios and financial choices based on their peace of mind, simplicity, quality of life and low maintenance?
The tyranny of what can be quantified …
I have a guess: this is because attributes like simplicity and peace of mind cannot be quantified and are subjective, while other things can be weighed and measured. Investment researchers have created dozens of metrics to help describe how well an investment has balanced risk and return: the Sharpe Ratio, Treynor Ratio, Sortino Ratio, and Morningstar Rating, to none. name a few. We also discuss how the investments fit into the efficient frontier – how well they have compensated investors for the volatility they have assumed.
Meanwhile, attributes such as whether an investment provides peace of mind or requires minimal monitoring cannot be quantified because they are inherently subjective. You could have peace of mind knowing that your portfolio is positioned for long-term growth, whereas another investor’s definition of peace of mind is more conventional. You might be okay with spending five hours a week researching investments; another investor might say that five hours one year that’s more time than he wants to give.
… and what cannot be
Still, creating the right portfolio for you should involve some personal reflection on these more delicate issues, as optimizing your investment choices is not just about risk and return. It’s about creating a portfolio that can get you to achieve your goals without interfering with the rest of your life. It’s also likely that your perspective on these issues has evolved over time, so you may need to correct your course to ensure that your portfolio reflects your current thinking. The portfolio of individual stocks that you hired when you were younger may seem too complicated and labor intensive – not to say too risky – as you approach retirement.
Here is a short list of unquantifiable and decidedly subjective issues that should be factored into the relevance of your investments and overall plan.
Peace of mind: Some might argue that an investment’s volatility is a good indicator of whether it provides peace of mind, but I don’t think that’s the case for everyone. For me, peace of mind comes from knowing that my plan is on the right track, even if it involves having money in volatile assets. If my portfolio fluctuates periodically, I take that as the price I pay for the chance to achieve strong long-term returns. Others might have a more conventional definition of peace of mind; the volatility of their investment portfolios keeps them awake at night. The key is to think through your own definition of peace of mind and make sure your portfolio strikes the right balance.
Quite: Investment guru Bill Bernstein advised “if you’ve won the game, stop gambling.” Jack Bogle has written an entire book on this subject. Still, I don’t think we talk enough about how to identify our own versions of ‘winner’ and ‘enough’ when we think about our own portfolios and plans. One of the most illuminating portfolio transformations I have worked on was that of a retiree who lived on a very modest amount but was content with a very conservative portfolio. My instinctive response was to increase the risk in his portfolio to improve his return potential. Didn’t he want to spend more or leave a bigger nest egg for his daughter, I asked? No and no, he replied; he was very happy with his lifestyle and knew his daughter would be fine too. I wish we all functioned with so much awareness of ‘enough’ – how big our portfolios need to be, how much we need to save and spend to have a good life, and how much risk we need to take in our portfolios to ensure quality. high life. “Enough” is an element relating to peace of mind, but it is arguably an even more fundamental consideration because it is directly linked to lifestyle choices.
Simplicity / Ease of use: Here is one factor that has greatly influenced my increasingly “too hard” stack: How simple are my investments and how long does it take to manage and my total portfolio? How foolproof is an investment in case, for some reason, I’m not able to pay attention to it for quite a while? I know Morningstar.com attracts a lot of investment enthusiasts, and if that describes you, this consideration probably doesn’t speak to you at all. But the older I get, the more I realize that the only real finite resource in this world is time, and I don’t want to spend a lot of time managing my portfolio and underlying investments. If you’re on the same side, you might consider adopting a truly minimalist index fund portfolio, purchasing a simple target date fund, or delegating oversight of your portfolio to a financial advisor. At a minimum, think about your succession plan for your portfolio in case you won’t be able to manage it on your own for a while.