It was late at night when the bartender called last round. She was wearing a sophisticated little black dress, seated alone at a small table, when our eyes met across the room. Full of liquid courage, I made my way over, asked what she was drinking, and ordered two.
I'd heard rumors about her before in the books I was devouring at the time - books about factor investing, sector diversification, various models of "lazy" portfolios on the Bogleheads Forum.
By the end of our drink together, my gait was tilting like a Fama and French portfolio as she used her wile to seduce me. Her name was Complexity, and although I found her charming, I soon realized our long-term vision was not aligned.
I Enjoy DIY Investing
Every Do-It-Yourself investor has at one time considered a highly optimized, exceedingly complex portfolio that takes into account regional geopolitics, lunar phases, commodity prices and butter production in Bangladesh.
When you first drink from the hydrant of financial literacy, there is a compulsion to put every bit of what you learn to bear in your personal portfolio all at once.
It's why newbie investors who have been paying financial advisors 1% of assets under management fall madly for robo-advisors. They are beside themselves at being able to diversify so cheaply, and they can barely hide their enthusiasm for tax-loss harvesting done using primarily low-cost, passively managed index funds.
It Turns Out I also Value Simplicity
These same investors eventually find themselves transferring their assets out of robo-advisors and into frugal brokerage favorites like Vanguard, Fidelity and Schwab several years later.
As Rick Ferri put it on a recent WCI Podcast interview,
"There is no such thing as the perfect portfolio...You’re going to keep on adding things, taking things out, trying to find the ideal mix, trying to find negatively correlated asset classes...what works is a simple portfolio, something like the three-fund portfolio.”
Gasem (among other physician finance bloggers) has made a convincing case that the three fund portfolio has clear shortcomings, and is the purported diversification benefit of adding international equity is not built on sound math. He has suggested a two fund portfolio would do better, and provided evidence to that effect.
Does this clash of the investing titans mean Rick Ferri is dead wrong? I'd suggest Rick has realized that there's value in a good enough portfolio.
Just as adding the nth stock to a well-diversified basket of equities will not significantly reduce your risk beyond a certain point, it turns out that adding complexity to a good-enough portfolio leads to marginal return on time invested.
Will Gasem's two fund outperform the Bogleheads' three fund portfolio with greater return and less risk over time? I'll leave it to the reader to weigh the evidence.
What Is Your Time Worth?
The root question you should be asking is whether the time you spend on that final optimization is worth spending on your portfolio, since the additional time required to rebalance a finely sliced and diced portfolio is time that might have gone to other (higher?) purposes.
Did it make you late for date night?
Did it prevent you from a flying a kite with your kid?
Did it bleed into that hour you'd allotted for daily fitness?
Did it somehow prevent you from connecting with friends or reaching out to family?
For the hobbyist who enjoys portfolio management, by all means, continue managing a portfolio with complexity (although I'd advise you to have a clear plan B in place if something should happen to you such that your spouse or next of kin can manage the complex portfolio they inherit).
For the average Joe, there's truth in Jack Bogle's perspective on "the majesty of simplicity."
It's Not You, It's Me
After a brief and heady romance, I ended my relationship with Complexity. She was alluring, and she was seductive, but she was no match for her archrival, Simplicity.
Complexity wanted all of my time and attention. Complexity was in perpetual crisis, full of drama.
Simplicity was willing to make a long-term commitment. Simplicity did not feel threatened by allowing me to pursue other interests and friendships. Simplicity felt secure.
I ended my relationship with Complexity. Let her down with, It's not you, it's me.
Simplicity and I have never looked back.