Simple Portfolio Outperforms Actives for Intermediate Goals
Investors pursuing intermediate-term goals grapple with a complex landscape. While actively managed funds and bond funds can be appealing, recent data suggests a simpler approach may be more effective.
Research shows that only 7.1% of large cap blend funds outperformed index funds over 20 years. Similarly, only 21% of actively managed funds beat their passive counterparts over 10 years. This makes it extremely difficult to consistently beat the stock market today.
Target-date retirement funds can be a great option for workplace plans, offering diversification and age-appropriate asset allocation. However, a simple portfolio of US and international stocks plus investment-grade bonds can also be effective. This approach is easier to review, explain, and manage, especially in case of incapacitation or inheritance.
The KISS strategy (Keep It Simple and Smart) advocates investing in a few low-cost funds that track overall market performance. This reduces decision fatigue and stress, and may help assess if more savings are needed to meet financial goals. Even with well-performing investments, insufficient savings can hinder progress towards financial goals.
Given the challenges of consistently outperforming the stock market, a simple, diversified portfolio may be the best strategy for intermediate-term goals. This approach, along with adequate savings, can help investors stay on track towards their financial objectives.
