The Beauty in Simplicity

I’m back in the US from a multi-week hiatus. While traveling, I learned two things: I would gain 30 pounds if I lived in Europe, and Swiss trains make Amtrak look like an oxcart.

Along with catching up on the latest Presidential tweets and Jeff Bezos’ continued shock and awe campaign, I saw an interview with a writer I admire.

Morgan Housel of The Collaborative Fund (formerly of the WSJ and Motley Fool) revealed that, other than cash and his home, he keeps his investments in a bare-bones portfolio of two securities: the Vaguard Total Stock Market Index Fund (VTI) and Berkshire Hathaway (BRK.B).

I absolutely love this. I’m not suggesting this should be everyone’s portfolio, but there is an undeniable appeal in the simplicity of this approach. Housel gets equity diversification through the index fund and additional exposure to an individual stock. He has found two securities he believes will compound wealth over time and bought those, plain and simple.

He explains that this extreme simplicity is intended to manage behavioral risk. Because he knows investors tend to “buy and sell at the worst possible times” and “change their allocations based on emotional hunches”, Housel believes his simple approach can help limit his own mistakes. If he’s only thinking about two securities, he will be less likely to trade one for the wrong reasons.

Housel is making an admission of bias that’s rare among financial commentators and would be practically unheard of for a pundit on TV. The greatest challenge in investing is knowing yourself, and by using this simple approach, Housel admits his own faults. It’s also just a good idea, it’s inspired me to reexamine my own portfolio.

When in doubt, here’s a rule of thumb: be more inclined to trust people who admit their own weaknesses. Distrust the advice of those who don’t.


Postcript

In a previous post, I demonstrated that the volatility of an all-stock portfolio isn’t necessarily bad for a young investor. Just for fun, here’s how a 50/50 portfolio of the Vanguard Total Stock Market Index Fund and BRK.B would have performed during the time period I studied: