How Complex Should Your Portfolio Be?
Some people seem to think their investment portfolio isn’t doing the job unless and until it becomes highly complex in nature. But how true or helpful is this? Can you really say your investment portfolio is better for being more complex?
Too complex is as dangerous with regard to investments as being too simplistic. Striking the right balance can be tricky and it can sometimes feel as if you’re trying to get a pendulum to stop at the exact right point for you. Let’s look at the pros and cons of being simplistic or complex with regard to your investments.
The pros and cons of staying simple
The main advantage of keeping things simple is you will be able to gain a better understanding of where your investments are and what they are earning. The more you have the more complex it becomes and the more likely it is you will miss a trick somewhere.
Of course, keeping things simple can backfire on you too. This is because you can end up with too few investments that don’t really serve your needs as well as they should. However different people have different requirements so you have to think about whether a simple investment plan would suit you, or whether you want something more involved.
The pros and cons of being more complex
Here the main advantage is you can put money into a wider range of investments. However the downside is clear – there is a higher chance of investing in something you don’t fully understand. You may also find it harder to keep track of your investments, so you won’t find it as easy to see when they are no longer working as well for you.
What is the bottom line?
The bottom line is you should be able to understand your portfolio. If you can’t understand it you’ll end up with no idea of whether it is performing well for you or not. You cannot make a confident decision about an investment if you cannot understand it properly.
Some people rely on advisers to give them the information they need to build a portfolio. Yet while advisers can be useful to an extent, there is a tendency to rely on them a little too much. This is why you need to make sure you can understand your own investments instead of taking the easy route and trusting someone else’s explanation and signing on the dotted line. This is never a good way to approach things and it should not be your main method for choosing investments. Do your own homework and make sure you understand every investment you sink money into, whether it is one investment or ten.
There is no clear answer to the question of complexity. Yet it is fair to say being either too simplistic or too complex makes it more likely you will run into problems in some way. Consider your own investment plan and ask yourself whether it veers into either extreme.