- Investing and managing a portfolio can be daunting tasks.
- Simplify things by investing in just one stock fund and one bond fund, says JPMorgan.
- This strategy reduces stress, saves time, and cuts down costs associated with active management.
Figuring out where to invest your money can be a challenging undertaking.
Information is plentiful in this age of the internet, and market conditions are constantly changing. Even if you have the time and energy to research and develop an investment thesis, how do you know it will be right?
According to JPMorgan, investing doesn't have to be so complicated. In a recent note to clients, strategists Jan Loeys and Alexander Wise said that for most individual investors with relatively small portfolio sizes, a more simplistic approach should get the job done.
And when they say simple, they mean it. For most investors, holding just one passive global stock market fund and one passive global bond market fund over the long term is the best way to construct a portfolio, the strategists said.
While some more time-consuming, complicated strategies may allow for higher returns, this approach gives investors the best all-around bang for their buck, Loeys and Wise said.
This is because investors can reduce stress, save the time that comes with actively managing a portfolio, and cut back on the fees and tax costs associated with trading assets. These costs might come in the form of bid-ask spreads when looking to exit a position, taxes on short-term trading profits being higher than those on long-term investments, and fees on actively managed funds being higher than those on passive funds, Joeys and Wise said.
"Our main contention is not that KISS investing, (short for 'keep it simple, stupid'), is absolutely optimal and doing anything else is irrational and/or a bad investment. Our point is instead that we believe you can achieve most, if not all of your financial objectives by following our KISS approach. Adding more products or complexity in our mind produces steadily falling extra benefits," the strategists said.
While they didn't specify exact allocation percentages for each fund, they said that allocation to equities should generally come down the older the investor gets. This helps to reduce risk, as equities are generally riskier investments. A classic allocation structure to start is 60% stocks and 40% bonds.
The funds should track big indices in their respective asset classes, the strategists said, because they will then be more liquid, allowing investors to pull money out easily and at a fair price point.
Two stock funds that do this include the Vanguard Total World Stock Index Fund (VTWAX) and the SPDR Portfolio MSCI Global Stock Market ETF (SPGM). On the bonds side, two that fit the bill of JPMorgan's description include the iShares Global Aggregate Bond UCITS ETF (AGGG) and the Fidelity Total Bond ETF (FBND).
In addition to lowering costs, owning passively managed index funds reduces risk, they said.
"Simpler passive products and strategies are more transparent and easier to understand, and when invested in global funds will have longer time series across which to better analyze volatility and long-term risks," Loeys and Wise said. "The longer the history you have on different asset classes, the more confident you should be about its behavior, including its return and volatility. This translates directly into more accurate forecasts of future returns, and thus the ultimate potential downside, or risk."
For investors who want to do more with their portfolio, Loeys and Wise suggested dedicating 80%-90% of one's portfolio to the above strategy, and using the other 10%-20% on other investments. These might include investment themes like renewable energy or tech, or alternative investments like private equity or private credit, they said.
