Keep it Simple!

Financial issues are extraordinarily complicated -- except when they're not.

Sure, there are lots of complex products out there. Things like annuities, Roth and traditional IRAs, trusts, life insurance policies, life-cycle funds... The list seems endless.

But ordinary investors can do well by keeping it simple. In fact, they may do better, since all these complex, confusing products come with big fees that can chew away at investment gains.

I believe that lion's share of the ordinary investor's retirement accounts should be very simple -- in most cases no more than three or four mutual funds containing various kinds of stocks and bonds. The first choice should be index-style funds that match the moves of the broader market. Indexers have extremely low fees, often less than 0.2 percent of your holdings a year. And because indexers are designed to automatically track a common market gauge like the Standard & Poor's 500, you don't have to worry about your "hot" fund manager quitting, losing his touch or retiring. You can stick with an indexer for decades -- and sleep at night.

In the past few year's we've seen that it's unrealistic to count on stupendous stock-market gains -- we're just not making the 20 percent annual returns we enjoyed in the 1990s. Instead, reaching an important financial goal like retirement will depend on the savings rate -- the amount of money you set aside every month. To save more, you need to trim expenses. And to do that with as little pain as possible, you need to think hard about what expenses are really worthwhile.

Cutting back on snacks, unused cable and phone services, and other "little" expenses is pretty easy. It's harder to keep a car going for seven or eight years when you're used to a new one every four. But it doesn't seem like such a sacrifice if you think it will help you retire five years earlier, which it can.

For a further look at my financial philosophy, read the column below. It was my fairwell after 12 years of writing the On Personal Finance column at The Philadelphia Inquirer.

-- Jeff Brown

The Two Essential Financial Truths

January 28, 2007

                            By Jeff Brown
                    The Philadelphia Inquirer

     Can years and years of thinking about investing and personal finance be boiled down to a few essentials for everyone?
     I'm going to try.
     This is prompted by a change. For nearly 12 years, I have written this column three times a week. Starting today, it will appear only on Sundays. After 20 years at The Inquirer and 32 in newspapers, I left the paper Friday for a riskier life. I'll write the one column a week as a freelancer.
     I am taking my pension, digging into a pile of freelance writing assignments, strapping on my carpenter's belt, brushing up my piloting skills, looking forward to my 12-year-old's baseball season and, I hope, launching a project to deliver basic financial education to employees in the workplace, face to face.
     Why would a reasonably sensible 50-something trade a good-paying gig with health insurance for a life of uncertainty? Because I followed my own advice and set up my household finances to make this work.
So here are the two basic financial truths this job has taught me:
     First, success comes from smart budgeting, not super-smart investing.
     I am not an investing whiz. Long before I started this column, I dabbled in stocks, and during one period I even traded options. The results were awful.
     When I became a business writer about 15 years ago, I stopped buying individual stocks to avoid conflicts of interest. I turned to mutual funds.
I'm not a whiz at that, either. My returns just track the overall market.
     The key to building a nice nest egg, I've found, is not getting a dazzling return. It is trimming expenses so you can invest as much as possible. For years, my wife and I have set aside about 30 percent of our pretax income, sometimes more.
     To do that on newspaper pay - she is in the business, too - takes trade-offs. My pickup is 10 years old, and her car is 13. The house we bought 14 years ago was a fixer-upper, and we've done most of the work ourselves, and paid down the mortgage. We had just one child.

     Thrifty budgeting isn't about a life of want, it's about trimming the things that don't really matter - so you can have the things that do.
The other essential personal-finance truth is that investors should suppress the ego.
     Americans celebrate winning, and most investors define that as a big return - beating the overall market, at least. That generally means lots of buying and selling, which can rack up annual fees and tax bills equal to 2 percent or 3 percent of the money invested.
     That doesn't sound like much, but an inexperienced, passive investor can escape those costs - and match the market's returns - simply by holding low-fee index-style funds long-term.
     Because of the extra costs, the active investor has to beat the market by 2 or 3 percentage points just to match the passive investor's results. If the market averages 10 percent a year, the active investor has to get 12 percent or 13 percent to break even - and perhaps 14 percent or 15 percent to justify the enormous work involved.
     That equates to doing 40 percent to 50 percent better than average. It's like lifting your bowling score from 200 to 300 - and keeping it there. Forget it.
I'm not against striving for excellence. If my son wants to be a major-leaguer, I'll pitch him a million baseballs. But I'll also insist he get good grades.
In the same vein, the investor who wants to beat the market should try it with only a small slice of his holdings.
     For me, big returns are not the goal. I want to send my son to college and then retire comfortably.
If I can do that with tight budgeting and investments that simply match the market, I feel I'm a winner.