Keeping It Simple

This post is more of a philosophical one than anything else.

I read the BusinessWeek cover story about toxic mortgages and was motivated to write this. Last week I wrote about whether or not there might be a lending bubble where residential real estate is concerned. Whether there is or is not a bubble will provide no solace to the people profiled in the b-week piece or anyone else facing mortgage problems. It is like the one-liner about it being a recession when your neighbor loses his job but when you lose your job it is a depression.

The people profiled in the article seemed like they all had 5% conventional mortgages and then went looking to lower their payments from there, which is where their trouble started. They had simple but then made it complicated.

Where your home is concerned; don't buy more than you can afford. Even better, how about less house than you can afford? My wife and I know a retired couple in their early 60's who are in good shape financially, but are not loaded. They recently moved into a nice home that cost more money than their old home. Their mortgage is about $4000 a month. They are not over-leveraged but I think life would be easier in retirement with a smaller nut to cover, or even better no nut.

Savings; Richard Bernstein was on the Connie Mack show on PBS and he said the US has a negative savings rate. He went on to acknowledge flaws in what that covers but he said it used to not be negative, now it is, something has changed.

Save money. Blah, blah, blah, this, that and the other. Just save money.

As for managing your portfolio; while this is far from an original thought I have written that investing can be a simple or as complex as you want to make it. While I believe what I do is simple it is a full time job for me. Most people don't want investing to take up 80% of their every waking hour. Below is one idea for very simple.

US Large Cap 25%: A dividend ETF
US Small Cap 15%: A product that captures small cap value
Foreign 25%: Any broad-based foreign fund or ETF
Commodity 10%: Any product that captures broad exposure
Fixed Income 25%: Any broad-based fixed income product

There is no shortcut for research and picking the best products for these categories. You can, and should, pick your own percentages and then rebalance once a fill in the time interval that makes sense to you.

This mix is riddled with flaws but it is simple and covers a lot of bases. This simple concept does not absolve you from paying some attention over time nor are you off the hook for making changes but there will be no day to day management of the portfolio.

While the above gives you simple it probably gives you no realistic chance of beating the market with any consistency. I do think it would let you be reasonably close and if you have saved enough (this is more important than what you pick) you have a very good chance of having enough money when you need it.

Credit cards; do I even need to say anything here?

Lastly, and I alluded to it above, live below your means. If things take a bad turn, like losing a job, a $3000 budget is easier to cover than a $10,000 budget. This is obviously tougher for some folks, especially younger people but this will afford flexibility with regard to career changes, lifestyle changes, financial shocks and anything else you can think of.

I mentioned that managing your portfolio can be a simple or complex as you want to make it, I think the same can be said for our financial lives. From where I sit, simple is always better.