What’s Better: Easy to Manage Investments or Investment Performance?

by Kevin on March 10, 2011

In the fall of 2009 my wife and I helped facilitate a group going through Dave Ramsey’s Financial Peace University at our church. In that class we all learned that in most relationships there are two very different types of people: financial nerds and free spirits. If you’ve been through Ramsey’s material you’re already familiar with this concept.

For those that haven’t been to FPU or aren’t Dave Ramsey fans, let me explain. A financial nerd is the person who enjoys doing the budget, crunching the numbers, and looking at spreadsheets. The free spirit is the one that has always had trouble holding on to money. It always seems to be spent before the end of the week, and savings are difficult to accumulate.

This relationship description is spot on for my wife and I. (I’ll give you one guess as to which one I am.)

We’re currently working on sharing some of the money management duties. Right now I handle the reconciliation of all of our debits and credits in our accounts. But life is short, and bad things happen. What if I get hit by a bus tomorrow? Where she know where all of our money is at? Will she know how to log in to our Roth IRAs or how to file my life insurance claim?

All that may sound silly, but for the financial nerd in me it’s a huge flashing warning sign that sometimes keeps me up at night. If my wife can’t run our finances without me then I’ve truly failed as her financially adept husband.

Ultimate Investment Performance or Ease of Portfolio Management?

As we look toward the future we’ve elected to save a majority of our retirement funds in a Roth IRA. Within our IRAs we have the option of selecting whatever investments that our account provider offers. We could pick individual stocks, specific ETFs, actively managed mutual funds, or passively managed index funds.

I wouldn’t try individual stocks due to the level of risk, but the other options are completely acceptable. I’m a huge fan of index funds, but if you wanted to pick a portfolio of ETFs that would mimic an index fund that would be fine, too. I could handle managing either portfolio as we grow older.

But what about my wife?

Easy to Manage Target Retirement Funds vs. Hand Crafted Portfolio

So which is better? Easy to manage target retirement funds or a hand picked portfolio that needs rebalancing every year?

If you hand pick a portfolio of mutual funds and ETFs you might generate superior performance to an index fund.

Might.

Then again your portfolio might perform worse than the market. You’re adding a layer (or two) of complexity for an unknown impact on your portfolio. Even if you were to generate superior returns over an index fund think of what might happen if you weren’t around. Would you spouse know to rebalance the portfolio every year? Would they know to drop that gold ETF because the market is peaking to pick up small company growth stocks?

On the other hand the easiest investment you could possibly have is a target retirement fund. These funds accept your funds and then invest them based on a predetermined methodology. Your investments usually end up in a overarching “fund of funds” that holds index funds in the account. You pick the target retirement fund based on the year you anticipate retiring. So if you plan to retire in 2040 you pick a fund that is targeted toward that retirement year.

As time goes on and you age your portfolio automatically adjusts to become more conservative. By the time you reach your target year you’re mostly in conservative, income-generating investments rather than high risk stocks. The portfolio runs itself — all you do is add more money to it.

Sacrifice Potential Portfolio Return for Ease of Use

In our case we’ve made the decision – for the time being – to stick with a target retirement fund. It couldn’t be easier to save for retirement. We may be sacrificing a bit of portfolio performance in the process, but I know that my wife would be able to stick to our investment plan and retire financially secure if something were to happen to me.

I can’t say the same if we had a bunch of ETFs that needed constant monitoring, tweaking, and rebalancing.

What about you? Have you thought about how your spouse would handle your portfolio if something were to happen to you tomorrow?

{ 4 comments }

Derek March 10, 2011 at 9:55 am

Hey Kevin,
Great post with some important points. Although you and I might find it fun or interesting picking stocks, mutual funds or ETFs, our spouse may not be so compelled. And if you and I are the ones making those decisions, we could certainly put them in a bind if we were no longer around. So, I think it is imperative to keep it simple, but it is also important to have your complete financial situation organized in a way that your spouse has access to all of the critical information. I use a binder that my wife can grab at any time and it’s full of personal, legal and financial stuff. I want her to be prepared if I do “get hit by a bus.” Thanks for the great read and have a wonderful day.

MoneyIsTheRoot March 13, 2011 at 3:20 pm

Thats a very good question! My highest returns are coming from Lending Club right now, which is great, but its difficult to manage. Scoping out loans for a discount, in small increments, and reading each prospectus is just good due diligence, but its also time consuming!

http://www.moneyistheroot.com

John Barthel July 28, 2011 at 9:24 pm

Morningstar just had a series of articles on “widow/widower proofing” your portfolio by Christine Benz that was very interesting.
http://news.morningstar.com/articlenet/article.aspx?id=357162

and I agree with you. I have written down “suggestions” for her to follow, along with the names of people I trust to help her.

John Barthel July 28, 2011 at 9:25 pm

We had to do the same thing about 4 years ago due to job relocation requirements, but got lucky and sold just as the bubble was bursting. After talking to a Realtor and getting their appraisal for a sale price, we were lucky enough to find a buyer a before we listed it (a family in the neighborhood was renting, and wanted to stay in the ‘hood). We showed them the Realtor’s plan and we agreed on a price less than with the commission and boogied. We paid off almost all of our debts for cash flow purposes (I have VA mortgage available=0% down if I want, so I am not worried about qualifying or down payment), and have been renting since we relocated. We have been looking to buy since then, but now are in the fortunate position of having watched the prices drop. I have friends who listed just 2 months after we closed in 2007, and their homes are still for sale.

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