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7 Ways to Simplify Your Investments

Robert Berger
stock chart

Investing doesn't have to be difficult. Eliminating complicated investments can make your portfolio easier to manage and could even boost your returns. Automating your finances can also make it easier to save money and track your investments. Here are seven ways to make investing simple.

1. Consider a robo advisor. Automated online investment management platforms or robo advisors such as Betterment and Wealthfront can make investing incredibly simple because they automate asset allocation, rebalancing, dividend reinvestment and even tax-loss harvesting. These programs typically start by determining your risk tolerance through a questionnaire and then build an investment portfolio to match it. The portfolio is generally comprised of several exchange-traded funds to achieve broad diversification and minimize transaction fees.

2. Use a simple asset allocation. You don't need a lot of funds to be diversified. You could achieve diversification by investing in just three mutual funds that cover virtually the entire stock market. For example, a diversified portfolio might include investing equal amounts in just three broad exchange-traded funds, including total market U.S. equities, total market international equities and total bond market.

3. Consider a target-date fund. If you want to further simplify your investments, you can use a target-date fund. This would allow you to go from three funds to just one. Target-date funds are sometimes referred to as a fund of funds, because it is a single fund that holds positions in several funds. For example, Vanguard's Target Retirement 2030 fund holds five mutual funds including four stock funds and one bond fund. Just as is the case with the three fund portfolio, diversification is achieved through a small number of broad-based funds. But all you need to do is invest in a single all-encompassing fund and you're done.

4. Use automated tools to track your portfolio. Even with simple portfolios, keeping track of investments can be a chore. Rebalancing investments that span multiple accounts further complicates the process. A simple solution is to use a free automated investment tracking tool that can give you a snapshot of your investments across multiple accounts. In addition to monitoring asset allocation, these tools also show your investment costs.

5. Set up automatic payroll deposits to fund your investments. Most savers are familiar with the use of automatic payroll deposits to fund a 401(k) plan. But you can also use the same method to fund any of your investments. Most employers will allow you to allocate direct deposit arrangements into several different accounts. If you already have direct deposit with your checking account, you can also use it to direct money into an investment brokerage account, IRA or mutual fund.

6. Use index funds generously. It can be fun, and sometimes very profitable, to invest in individual stocks or actively managed funds. But those investments also carry a greater risk and higher investment fees. If you enjoy that kind of investing, restrict it to a small slice of your portfolio. But keep the majority of your money invested in index funds. Most index funds offer low costs, tax efficiency and higher returns over the long term compared to actively managed funds.

7. Select an investment-friendly tax preparation software package. Providing cost basis information can be difficult and time consuming when filing your income taxes, particularly if you are an active trader. You can simplify the process with a good investment-friendly tax preparation software package. For example, TurboTax's premier edition is made for investors, particularly active ones. The software automatically imports investment information from participating financial institutions. That capability can save you many hours and countless phone calls and e-mails to collect cost basis information from various investment brokers. This is in addition to the fact that tax preparation software packages cost only a fraction of what you would pay to an accountant to prepare your taxes.

Rob Berger is the founder of the personal finance blog the Dough Roller.



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