A Portfolio is Not a Plan

Portfolios are now free.

Vanguard and Schwab got it 95% of the way there with near-zero expense index products and now a handful of do-or-die startups like Covestor have carried it the last mile.

The race to the bottom has concluded.

The war is over.

But your war is just beginning.

The difference between a portfolio that costs 1.5 percent and zero percent is negligible in the grand scheme of things if you have no idea how to act, implement, and react to varying conditions. If you can’t control yourself in the presence of news, data, opinion, regulatory changes and volatility – and know what’s important and what isn’t – then it really doesn’t matter how many basis points you’re paying for your portfolio, does it?

The data suggests that people are on their absolute worst behavior at the absolute worst moments. This cycle is inexorable. It is why markets function to begin with – people have to lose and the masses have to lose massively at major turning points. And they do. The dollar-weighted returns of even the best performing funds prove this every year. The free-ness of a portfolio thus becomes irrelevant, a triviality in the shadow of our colossal inability to act professionally.

Of what consequence are a handful of basis points when we can barely maintain an awareness of our elemental cognitive deficiencies?

When people obsess about the costs of a fund or of a particular investing strategy, I sometimes have to bite my tongue. Absent the context of a plan, it is a meaningless conversation.

Because their true cost – that of an aimless, lawless course of investment, replete with emotional leniency and non-descript, nebulous objectives – is probably going to bury them anyway.

As Nick Murray writes in his fifth edition of Simple Wealth, Inevitable Wealth:

A portfolio is not, in and of itself, a plan. And a portfolio that isn’t in service to a plan is just a form of speculation; it can have no other goal than to beat most other people’s portfolios.

But “outperformance” isn’t a financial goal. An income you don’t outlive – to cite one critical example – is a financial goal. If your portfolio “outperforms” mine, such that I run out of money when I’m 76, and you don’t run out of money until you’re 82, it isn’t going to matter much when we’re both 85, sitting on a park bench without two nickels to rub together between us.

A plan involves a portfolio that is calibrated to deliver what the plan calls for as an acceptable outcome over time. It involves calculations and assumptions. It utilizes statistical fact and educated guesswork. It creates scenarios and populates them with probabilities.

What it does do is demand rational, deliberate behavior on the part of the investor and his trusted advisor.

What it doesn’t do is fixate on basis points.

Focusing on the performance or cost of a portfolio relative to something other than a plan is like decorating a house that has no foundation.

Making poor decisions – even if at a low cost or even no cost – won’t do anyone any good.