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Personal Finance

My 'Too Hard' Pile Is Pretty Big

And yours should be, too.

“Charlie says we have three boxes: In, Out, and Too Hard. You don’t have to do everything well. At the Olympics, if you run the 100 meters well, you don’t have to do the shot put.”--Warren Buffett

A few weeks back, I opined that commodities-tracking investments belong in the “too hard" pile--a term coined by Charlie Munger to describe investments that just aren’t worth the effort because they fall outside of the Berkshire Hathaway team’s circle of competence. In criticizing commodities’ usefulness in investors’ portfolios, especially as a hedge against inflation, I pointed to the fact that it’s impossible to know what the intrinsic value of commodities should be unless you have a crystal ball that peers into global demand for oil, lumber, and agricultural products. No such orb exists, so that reduces commodities to speculative instruments, not investments. Moreover, investors’ timing in commodities funds hasn’t been great, and the extreme volatility of commodities makes them an imperfect hedge against inflation. (If your goal is to offset the slow but steady corrosive effect of inflation, why buy an investment where you could lose half or more of your investment right out of the box?)

As I reflected on it, I realized that my "too hard" pile doesn’t just include commodities. In fact, it’s pretty large and getting larger. As I’ve gained more investment knowledge--and more knowledge of myself as an investor and what I’m trying to accomplish--it has gotten easier to pass on investments because they’re outside my own circle of competence (Buffett and Munger’s definition of "too hard") or require more time or patience than I’m able to put into them. In Olympics terms, I’ve identified where I can be competitive and where I’m likely to be eliminated before the trials even begin.

What follows is what’s included in my "too hard" pile currently. However, I would also note that what you put there is very much a matter of personal preference. Your pile will likely be different from mine. The broader point is that on an ongoing basis it’s well worth keeping tabs on those financial jobs that are likely to deliver a good return on investment and fall within your sphere of competence and those that do not. It’s also worth giving weight to peace of mind, simplicity, and time-management considerations when deciding whether a given investment or strategy is “worth it.”

Individual Stocks

I have a handful individual stocks in my portfolio, and I can make a strong case for me engaging in individual stock investing. Some of the smartest people I know work in Morningstar’s equity research team, and I literally have their up-to-the-minute recommendations at my fingertips. I also like that our equity researchers put a big emphasis on business quality and valuation when rating stocks, which tends to give their recommendations good downside protection. And as an individual investor who’s not having her performance reported on a website every day, I can afford to be patient, even if the stocks in my portfolio don’t pay off in a year--or even a few years.

All the same, I’m increasingly inclined to put stock selection into my "too hard" pile. For one thing, I’ve monitored actively managed funds for many years, so I know how hard it is for even professional active managers to consistently outperform inexpensive index-tracking funds by picking stocks. I doubt I have any sort of edge over the pros. More important, I know that I just don’t have time to oversee a portfolio of individual stocks that’s large enough to make a difference in how my overall portfolio behaves. Given a finite amount of time to spend on managing my financial life, I believe I can earn a better return in areas like tax management than I can through managing an individual-stock portfolio.

(Most) Actively Managed Funds

I’ll acknowledge that the bulk of my husband’s and my portfolio resides in active funds, but I’ve increasingly come to put most of them in the "too hard" pile, too. As with individual stocks, I have some positive tailwinds for owning active funds. I trust the ratings put out by Morningstar analysts, and I’ve gotten to know many active managers and strategies firsthand. I also know myself to be quite patient with underperformers, and I've even added to positions in slumping actively managed funds.

So why are active funds, like individual stocks, occupying a shrinking share of my portfolio? For one thing, it’s harder to ride herd on a group of actively managed funds than it is a portfolio composed largely of broad-market index-tracking investments. My active fund picks may be introducing big bets on a given investment style, for example, or shoving my overall asset-class exposures far out of line with my targets. Managing the asset-class exposures of an all-index fund portfolio is a cinch--doing so with active funds, not so much.

To the extent that I own actively managed funds these days, I’m most comfortable with positions where there are built-in guardrails. Those guardrails don’t protect me at the total portfolio oversight level--that’s still on me--but they do help insure against picking a lemon and having it languish in my portfolio. For example, I hold active funds in Morningstar’s 401(k) plan, where a committee (that includes me) oversees the investment lineup on an ongoing basis. My husband and I also hold active Vanguard funds in our IRAs and in our taxable brokerage account; we take comfort in the fact that Vanguard’s Portfolio Review Department does a good job vetting managers and occasionally making changes when it deems necessary.

Leveraged Investing and Other Forms of Indebtedness

A recent article in The Wall Street Journal noted that many wealthy investors are borrowing against their stock and bond assets as part of a "buy, borrow, and die strategy." Rather than sell appreciated positions and pay capital gains taxes on their portfolios, they're borrowing against those positions to buy more assets. If the investment assets appreciate faster than the interest rate to service the loan, the investor will be the winner.

That sounds good on paper, but there’s a countervailing force that would make that unworkable for me. I’ve gotten addicted to the peace of mind that comes with being debt-free, and no amount of gains magnified by leverage can offset that that. That’s why I get frustrated when I see the question about the advisability of prepaying a mortgage reduced to dollars and cents. For one thing, the ROI of debt paydown is guaranteed, whereas investing in anything other than FDIC-insured cash instruments is not. That means that the risk profiles of these two “investments” are wildly different. But more important, being debt-free delivers a valuable return that can never be quantified: peace of mind. I’ve yet to meet a person who has lamented paying off a mortgage earlier than necessary.

Finally, one of my priorities is creating a financial plan that’s as simple as it can be and that could practically run itself. Leverage just isn’t part of that.

Frequent Rebalancing

“But how often do you rebalance?” One of my friends who uses a financial advisor recently asked me that question, knowing that I self-manage our assets. I shrugged and replied, “Not very often.” My friend seemed surprised, noting out that her advisor frequently rebalances and claims that doing so helps offset a healthy share of his fee.

Her advisor seems quite competent overall and doesn’t sound like a tactical gunslinger; it sounds like he’s using rebalancing to help reduce risk in his clients’ portfolios while also leaning into undervalued portions of the market. And he may well be adding value with such shifts. For me, though, frequent rebalancing just doesn’t seem worth the time it might take. More important, looking at my portfolio very infrequently helps me be comfortable with an equity exposure that’s quite high relative to most recommendations for people in my age group. At some point down the road, especially as retirement draws close, I may choose to be more active in managing my portfolio’s asset-class or intra-asset-class exposures. For now, though, it’s just too hard.

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