Simplicity is its own Value

Years ago I went and saw a stand-up comedian who left us clutching our sides on a rip-roaring bit about, of all things, Thanksgiving stuffing. The bit, succinctly, was that the comedian wanted so badly to know the secret of his neighbor’s stuffing. Stuffing that was the stuff of legends, that brought family to this neighbor’s home every year from other states. After much prying, nagging, and begging, the comedian was finally rewarded with the answer. “Here’s the recipe. Go to the store, buy one box of pre-made stuffing, and don’t mess with it whatsoever when you get home. Just make it according to the instructions on the box. That’s it, that’s the secret.”

While I might hear some protests arising from the back of the reader’s room, let’s be honest: celery no more belongs in stuffing than it does in chicken salad; it is a worthless vegetable whose only merit is “crunch” or the ability to convey peanut butter to children in a semblance of a healthy-ish snack (don’t look at the amount of calories in peanut butter if you don’t want to ruin it for yourself). It no more belongs in any meal, let alone stuffing, than does cat food pâté. This is my hill, and I will die on it.

But what’s the point of bringing up stuffing and celery in a financial blog? The moral of the story from the comedian’s tale is not to critique celery or people’s desire to muck with something that is otherwise perfectly good on its own, but to simply amplify that not everything is made better with more complexity. Finance is no different. Today we’re remarking on the elegance that simplicity can bring to your financial picture and what unnecessary temptations lie in the future when you reach a financial threshold that tempts you with “more.”

The Merits of Simplicity

Let me lay out the generally ideal construction of a household’s financial assets:

• 1 Joint Checking with 1-2 Months Spending Cash
• 1 Joint Savings with 2-3 Months Spending Cash
  • Optional: Money Market or CDs for excess emergency funds.
• 2 Traditional IRAs or IRA Rollovers (one for each spouse) invested in low-cost index funds (perhaps favoring fixed income in the aggregate household allocation?)
• 2 Roth IRAs (one for each spouse) invested in low-cost index funds
• 1 Joint Brokerage Account invested mostly or entirely in equity index funds to reduce dividend and interest tax drag
• Primary Residence
• Optional:
  • Current workplace retirement accounts (particularly if still working; if not still working, then balance quality of plan with convenience of consolidation)
  • Inherited Accounts
  • Separate pre-marital property accounts
  • A closely held business interest, equity compensation accounts, or secondary/rental or commercial property.

Boil it all down, and I’m of the opinion that you should have “enough cash” but not too much, be investing primarily in your retirement accounts unless all contributory options are exhausted, and then be investing largely in tax-efficient and low-cost investment vehicles in any non-retirement accounts. Unless life delivers you an inherited asset or high-quality company retirement plan, or there are otherwise pre-marital or non-spousal assets that need to be segregated, then I leave the final optionality to ownership of closely held business assets or otherwise of nominal investment property holdings. Keep in mind, as I share this opinion, that I’m not critiquing more complex business holdings, real estate, or other financial vehicles; I’m simply highlighting my position that while the complexity may add an interesting character to a household’s finances, that complexity is not an element of “ideal.”

What does this setup really produce? Simple: the foundation to effectively manage assets in the three major tax types (pre-tax tax-advantaged, Roth tax-advantaged, and non-tax-advantaged), no more financial accounts than necessary to effectuate their management, and the avoidance of complicating financial assets from a tax, compliance, and legal standpoint. Perhaps not so simple when summarized, eh? Again, the point in emphasizing this simplicity is not to critique the presence of other types of assets or more complex arrangements, but to highlight that from a financial perspective: there is no need to be more complicated than what is presented here. Life can be plenty complex on its own, and that’s not to say that more issues and items may arise, but a financial life can be fully supported and effectively implemented with this composition of asset holding and asset management “vehicles.”

None of this is to say that you wouldn’t have good cause to open other accounts: 529s for kids’ college, UTMA/UGMA accounts or trust accounts to control or gift assets over time, or otherwise a plethora of financial instruments to assist in mental accounting, taking advantage of credits and rewards, or otherwise looking for specialized financial instruments to transfer or mitigate risks. But simply that you can effectuate efficient wealth building and wealth-preserving life on the composition of assets above; no more or less is required.

What Does Simplicity Buy You?

Without wishing to belabor that term of “simple” when answering the question, simplicity is its own value, generally speaking. However, simplification of your financial life reduces an enormous amount of headache both present and future. You can mitigate the burden of additional taxes and tax documentation, implement an effective asset location strategy, and otherwise manage exceptional events or unusual things that arise in your financial life with this composition.

More so, you can de-stress with a reduction in unnecessary complexity. There is a good bit of wisdom in the world of finance: “If you can’t understand it, you probably shouldn’t invest in it.” Understanding cash, checking, savings, money markets, and CDs is relatively straightforward. Buying index funds or ETFs that track broad markets of domestic and/or international equity, or that cover bonds of all durations of specific durations, is relatively straightforward: “I’m buying a fund that holds some or all of this particular type of investment at the lowest cost possible based on this index or that index that tracks this or that type of investment.” Nothing that deviates from that is generally any more simplistic; even the active equivalent of an index fund carries greater complexity. Who is managing that fund? How frequently do they turn over the assets in the portfolio? By what philosophy, principles, or systems do they decide what to buy or what to exclude? Do they stay true to an ultra-specific asset-based mandate or do they engage in alternative strategies such as market timing, shorting the market, utilizing margin or leverage, and so on? Do they invest solely in efficient publicly traded assets, or are there alternatives that produce special tax documents that not only make assessing performance and cost more difficult, but also all but assure we’ll be filing a tax extension every year?

And that’s just one example of one asset that adds to complexity.

As financial planners, we’re not strangers to complexity. Yet, in over a decade of practice in comprehensive wealth planning, I’m yet to encounter anything more complicated than an index fund that has generated excess wealth or value. Ironically, the inverse has been true: I’ve seen more than a few overnight millionaires arise from holding a bit too much company stock in places like Seagate, Apple, or Micron, obtained through RSUs or ESPPs. Yet, though those examples are delightful success stories, we still find ourselves bemused at the idea that, beyond diversifying away some of the risk such concentrated success has brought to our clients, suddenly getting interested in something far more complicated is likely to yield superior results.

The Pied Piper of “More”

So what becomes of us at some point when we look around at the elegant simplicity we’ve constructed in our financial lives? Herein another old expression helps: Idle hands do the devil’s work. We get bored. Money is supposed to be flashy and exciting. Shows such as Billions or Your Friends and Neighbors hint to us that people just a bit wealthier than us have it all figured out and have found a way to transform their money into something more exciting. Thus, as we move up in tax brackets and we creep from 6-figure wealth to 7-figure wealth and on toward 8-figure wealth, we find ourselves entreated with “good ideas.”

“Buy some commercial property.”

“Start a small business.”

“Look into angel investing.”

These are, amusingly, among some of the most benign options. Other more serious temptations might come in the form of crypto, or private credit offerings for those classified as accredited investors. We worry about taxes and watch webinars by presenters showing us how, by investing in a real estate syndicate and using both leverage and accelerated depreciation, we can rapidly increase our wealth but also avoid taxes; better yet, we can roll those investments from investment to investment to investment via 1031 exchanges, such that we’ll never pay taxes!*

*Provided we never decide to spend the money, otherwise we’ll merely avoid taxes by dying. How exciting.

But what does an overpriced long-short tax-efficient fund buy us other than a more complicated tax return? Tax deferral is a powerful strategy whether it’s accomplished through a pre-tax IRA, cost segregation study, tax loss harvesting, or any other mechanism; but it’s still only deferral so long as we don’t wish to enjoy the benefits of the wealth we’ve built up and saved.

Bear in mind, I’m not saying this as a financial luddite. We run a wealth management firm. We’re delighted by the accomplishments of our clients’ long-shot bets as much as we commiserate with them at losses that have funded their latest tuition bill in the school of lessons learned. But we find ourselves more often pushing our clients to spend and enjoy their money far more often than we find ourselves pushing them to engage in financial complexity for the sake of deferring a tax bill or otherwise exploring something more exciting, if less risk-reward efficient or fee- and expense-conscious.

It Begs the Question

What is all this financial stuff for if not to live a great life? Don’t get me wrong, we have clients every year fending off 6-figure tax bills who look to us to help reduce them as much as possible. We have to have that wry-smile discussion about how paying taxes means we’ve made money and it’s a privilege, albeit one we’d certainly enjoy only half of. Yet, at no point in the discussion of money do we ever find ourselves talking to someone whose priority is to make their life more challenging. We help people much like a massage therapist or good chiropractor: “God, I really should have come in to see you sooner. This was incredible.” Not because we’ve casually had the opportunity to present excellent returns or greatly diminished tax bills, but because there is a sense of relief in having someone affirm to you that you’re alright and that you’re going to be alright.

I’ve never seen more complexity be the bearer of that experience, but I’m open to the idea that I’m missing something. That said, I think we’d all be far happier getting back to that book we haven’t quite finished, or focusing on the work that we love and that makes us happy, or simply by focusing on spending more time with the people we care about. Bob Marley said it best: “Some people are so poor, all they have is money.” So take it with you and keep in mind that, as always, money is merely permission; a means to an end, not the thing of life itself.