Let’s assume that 30 years ago, you invested $100,000 and had an average annual return of 8 percent. If you put it into an ETF that had an expense ratio of 0.20 percent, it would now be worth about a million dollars. That same investment into a higher-cost fund with an expense ratio of 1.19 percent would be worth $242,079 less.
Reducing your costs may be the only free lunch in all of investing.
6 Rebalance your portfolio. I mentioned holding various asset classes in a hypothetical model of 33 percent big cap, 25 percent small cap, 20 percent emerging markets, 15 percent bonds, 5 percent REITs and 2 percent commodities. After a good run in any asset class, your model will have drifted from the original allocation. Rebalance at least once a year for smaller holdings and semiannually or quarterly for larger portfolios (in which the frictional costs won’t matter much).
Rebalancing back to the original allocations accomplishes three things: You buy more of what has become cheap, sell a little of what has become dear and keep the diversification of the original design. This should be easy to do, with most online brokers having automated tools for rebalancing.
7 Avoid the noise. Our goal is to block out the things that send you down the path of pointless complexity. A good start includes dramatically paring down your consumption of online, print and TV financial news.
You don’t have to go cold turkey, but ask yourself: Has this outlet helped me make money? If the answer is yes, then keep it. Pare back 90 percent of everything else. You will be much better off spending your time reading classic investing books than consuming ephemeral market gossip.
8 Review your portfolio regularly. At least once a quarter. Check your allocations, see what is working, what is lagging. If you like to look at charts, use weekly, not daily, charts. A lesson we learned over the past century was that when markets are down 30 percent or more, you can raise your allocation to equities some; when markets are down 50 percent, raise it some more.
Throughout the collapse, I heard tales of investors who refused to so much as open their monthly account statements for three years. They missed a lot of opportunities by putting their head in the sand. The ostrich approach to investing hardly ever pays off.
9 Steer clear of venture capital and private equity. With the new rules on marketing private investments, hedge funds and other non-public forms of risk-taking, I expect to hear about a lot of losses over the next few years.
Why? These forms of investing are extremely challenging. The numbers of even the best venture investors are lots of zeros, a handful of break-evens or small winners and very few home runs. It ain’t easy — and odds are you lack the skills, capital and risk tolerance for these sorts of high-risk early-stage investments. What is available to you are the leftovers — typically, what the VCs have already picked over and passed on.
9b Most IPOs are a sucker play.
10 Avoid new financial products at all costs. New financial products are seemingly created all the time. They tend to be complex, expensive and dangerous. For the most part, they are designed primarily to capture a fee for the underwriters.
The major asset classes have hundreds of years of history. When products have proven themselves, like low-cost ETFs, you can freely buy them. Their costs, risks and downsides are known entities.
10b Don’t buy “house product,” either.
Investing has become so complicated because so many entities have a vested stake in keeping you active and paying excessive fees.
By keeping it simple, you avoid that problem. You reduce your costs and stay on target to meet your goals. But most of all, you prevent yourself from doing something rash that you later regret.
Simplicity is a virtue.
Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. On Twitter: @Ritholtz.