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Principle #6: Portfolio Simplicity
How you implement your asset mix and construct your investment portfolio is as important as determining the proper asset mix, and proper implementation will greatly impact your overall performance.
A well-diversified and simple investment portfolio is usually better than an equally well diversified but very complicated one. It is easier to monitor and to control the asset mix when the investment portfolio is straightforward. Furthermore, a complicated portfolio is more difficult to rebalance as the markets evolve and personal circumstances and objectives change. With an uncomplicated portfolio you have more time to think about the important issues.
When there are more than a half dozen mutual funds in individual accounts the complexity is increased. This is especially true when some of the funds invest across different asset classes or different geographic regions. In most cases the added complexity does not improve performance nor reduce the risk of the portfolio.
When a portfolio is more complicated than necessary it is more difficult to:
- understand the risks involved,
- modify the portfolio as circumstances change and
- monitor the portfolio properly.
As an investor, you should be aware of the benefit that Exchange Traded Funds (ETFs) offer for diversification and simplicity.