I’d like to think there are some things that I am fairly good at. Assembling furniture is not one of them.

The other day I was ninety minutes into building a stand for my barbecue. Then, just before putting the wheels on and finishing it, I realised I had put the very first part on back to front.

This part literally held everything else together. So I needed to remove about eighteen screws and start all over again. The pub roast we had booked as a reward for our housework became a sorry half-time pick-me-up. I glugged my pint and reflected on what an idiot I was.

This wasn’t the first time this had happened. In fact, I can’t remember a flatpack situation that didn’t end up taking twice as long as it should have. Finally, I have realised why: I always start, without fail, by focusing all of my attention on step one of the instruction sheet.

Wait… what?

If I had looked a few steps ahead in the instructions, the mistake wouldn’t have happened.
I would have realised which side the stand’s door would eventually be attached to, and it would have been obvious (even to me) which way the top part needed to be. But I didn’t look ahead. I ploughed on through steps one, two, three... and only realised my error by the time I got to step 12.

Similarly, 90% of the investing books I’ve seen are focused almost entirely on how to pick stocks. So for a lot of my investing life, steps one and two of investing were very clear to me. Step 1 was to find and study potential companies to buy. Step 2 was to buy them.

But there is a problem with this approach. Fast forward a few years and you end up with a hodge-podge of investments that sounded good at the time. Rather than a portfolio best suited to what you are actually trying to achieve in the long-run.

You can also end up with something a lot more complicated to maintain than a retirement portfolio perhaps ought to be.

My hodge podge British portfolio

Most of my retirement savings are with my British broker. That part of my portfolio has a physical gold ETF (or ETC) and shares in sixteen different companies.

Sixteen investments made at the expense of investing elsewhere. Sixteen companies that will report earnings, trading updates and corporate actions that I should probably stay abreast of. Sixteen companies that over my 35+ year time horizon could, and probably will, experience:

  • Periods of poor management
  • Periods where investors hate the shares and they perform dreadfully
  • Periods where investors love the shares and they become crazily expensive
  • Scandals
  • Takeover bids
  • Drastic changes in competitive position or industry outlook
  • Maybe even bankruptcy

At every corner I’ll be there digesting those events. Potentially wondering if I should sell, trim, double up or do nothing. All the while, other companies that I’m not invested in – but are captured in index funds – could be creating more value for consumers and investors than I ever imagined possible.

My super simple super

Contrast this to the much smaller but faster growing part of my retirement portfolio – the super I have accumulated since moving to Australia.

I chose a retail super fund that invests in various index funds using an asset allocation mix suited to my age. I could tweak the allocations away from the default settings for my age, but I haven’t. It is 100% hands off. I just set up the contributions and leave it.

This is the polar opposite approach to the very active one I took with my British retirement savings from day one – mostly because I was a doomer that thought indexes were bound to fall at some point.

I have grown to realise and become comfortable with the fact that I actually have no idea what equity markets are going to do over the next year, let alone the next 35. But by taking the approach I have, I at least know that:

  • Through index funds, I’ll have an ownership stake in many of the biggest and most successful companies of the time.

  • As new star companies emerge, I’ll have a bigger and bigger piece of them (and won’t miss out)

  • Based on history, the asset allocation selected for me should give me the best chance of meeting my goals.

Overall, I think it’s hard to argue that my Australian approach isn’t more closely attuned to the retirement goal than my British account is. It is also less prone to a screw up from yours truly and a lot simpler to manage.

Yet I still have 90% of my retirement savings in the more complicated approach. Why? I honestly didn’t plan this, but it’s probably down to another flatpack phenomenon.

The Ikea effect

I first came across the Ikea effect in a course I took on behavioural psychology for marketers. It dictates that people put more value in something they’ve had a hand in building.

The barbecue cart I built looks good and will make it easier for me to grill. But it isn’t just that. I get pleasure from looking at something that I put together.

Same for the big collage of photos my partner and I chose, assembled and put up on our wall. We probably could have just ordered one from Harvey Norman, but where is the fun in that?

I think the exact same phenomenon is behind me holding on to my individual shares.
I know that a lot of data is against active investing. I know that I’d have more time, less worries and less compulsion to check my portfolio if I put it all in a lifecycle product. Yet I picked these shares myself and I don’t want to let them go.

It is irrational, but here we are.

The easiest fix

Another thing I realised from the flatpack debacle is that making the fix is often a lot less painful than finding out that you need to make the fix. But wouldn’t it be even better to reduce your chances of needing a fix at all?

When it comes to investing, keeping the end goal in mind and having a solid strategy in place for getting there can help you avoid ending up a with a hodge-podge portfolio you aren’t confident in. If you could use some help with this, try reading my colleague Mark’s four-step guide to forming a strategy.

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