The investing world is awash in complexity. There are literally thousands of different mutual funds, exchange-traded funds, individual stocks, bonds, and structured investment products. With all this complexity, where do you begin?
Financial complexity is costly because it distracts you from your purpose. Reducing complexity allows you to connect your planning to your purpose. If you stay focused on “why” you’re investing, all the investment hype and sales pitches fade into the background.
Aligning financial planning with your purpose also helps inoculate you from the behavioral problems that often derail financial progress. Chasing hot investments and trying to time markets can prove costly. Some studies suggest that poor behavior can cost you approximately the same as underlying fees in terms of investment performance.
Financial complexity usually starts with believing that there must be some “secret sauce” or “trick” to investing. There isn’t. Investing is about purpose and persistence. Successful long-term investing is mostly about adopting a viable investment philosophy and “staying in your seat” during both good and bad markets.
It’s important to understand the difference between diversification and complexity. Diversification contributes to your overall financial plan, while complexity detracts from your progress. Diversification acknowledges that markets are random in the near-term, but predictable in the long term. Complexity refutes the need for diversification in favor of trying to out-guess the markets.
Because of the way investments are taxed, a certain amount of complexity is unavoidable. You probably have brokerage accounts, IRAs, Roth’s, 401-k’s, and others. However, you should avoid the extreme. Several years ago we worked with a client who came here with 36 different investment accounts. He was drowning in details and felt helpless and out of control. Most of his accounts were the result of chasing hot investments without any connection to his purpose. It took a couple of years, but we eventually managed to shed two-thirds of the accounts and connect these remaining investments to his purpose.
My recommendation is that you include finances in your “spring cleaning” routine each year. Look at each investment account and ask yourself if these holdings contribute or detract from your current planning purpose. If your planning objectives have changed since you originally made the investment, consider liquidating the investment, (with due consideration of particular tax consequences), and reposition the proceeds. The longer you allow financial complexity to exist, the harder it is to change.
Complexity has a cost. If you allow the status quo to prevail, your finances can drift well off course and your progress will suffer. Be vigilant and constantly compare where you are, with where you want to go. Start there. Ready for a real conversation?
Apollon Wealth Management, LLC (Apollon) is an investment advisor registered with the SEC. JE Wilson is a dba of Apollon. This document is intended for the exclusive use of clients or prospective clients of Apollon. Any dissemination or distribution is strictly prohibited. Information provided in this document is for informational and/or educational purposes only and is not, in any way, to be considered investment advice nor a recommendation of any investment product or service. Advice may only be provided after entering into an engagement agreement and providing Apollon with all requested background and account information. Please visit our website for other important disclosures.