If you have money to invest, the most important thing you can do is pay off your credit cards and any other high-interest loans you might have. But if you’ve done that, then you have to decide what to do with the money you have left over. Felix Salmon recommends that you follow Henry Blodget’s advice, which is conceptually simple:
- Invest in a diversified portfolio of low-cost index funds
- Rebalance automatically when the allocations get out of whack
Now, Felix complains that rebalancing is harder than it should be, and he’s right. At the same time, it’s not that hard. For most of us, it’s really not important to rebalance more than once a year at most, and it’s not as if you have to get your balancing perfect to three decimal places. If you’ve decided, for example, that you want to be invested 50% in stocks and 50% in bonds, and at the end of the year you’re 55% stocks and 45% bonds, don’t worry about it. That’s close enough. If it gets farther out of whack at the end of the next year, then move some money around. Choose a round number that gets you close to your target and you’re done. This doesn’t have to be a constant battle.
Does this sound a little too cavalier? It’s not. After all, how sure are you about your targets in the first place? Did you really have a compelling reason to choose 50/50? Or could it have been 60/40 if a few neurons had fired differently on the day you decided this? The fact is that there’s just a lot of inherent slop in this stuff for us non-experts.
Of course, this gets a little harder if you have enough money that you want to diversify into half a dozen different funds and your targets are a little more complicated. But if you have that much money, you can probably also afford to pay someone to watch it more carefully for you. For most of us, simpler is better. You’re way better off with a simple plan that gets you 80% of what you want than a complex plan that gets you 95% of what you want. That’s because (a) that 95% figure is a mirage anyway, and (b) unless you’re anal retentive and actively like fiddling with numbers, you’re a lot more likely to actually follow the simpler plan. And any plan you follow is better than a plan you don’t.