Warren Buffett always says that investing is simple, but not easy. This is very true. The essence of it all is very simple. To do it successfully is not easy at all. I always analogize it to losing weight. The answer is quite simple: Just eat less and exercise more. Alas, how many people can do that successfully? This leads to a huge industry of weight loss methods, books, diets, secrets etc...
But at the end of the day, it's so simple. Just increase calorie usage and decrease intake.
This is similar in investing. Simple, but not easy. How many people can resist temptation? How many people can ignore the raw emotions of greed and fear? Not many.
This leads to all sorts of unnecessary complications. People always used to ask me, they are worried about the market. How should they hedge? Should they buy puts? Buy leveraged bear index funds/ETFs? Should they buy oil ETFs to hedge against rising oil prices? Should they buy oil stocks? What about housing? Should I short housing stocks to hedge against my own house price from falling?
The financial press doesn't help either by encouraging all sorts of distractions. They will tell you that stocks are no good so you should diversify into alterative assets, like commodity-linked ETFs or mutual funds. Buy gold. Buy this. Buy that.
Even in a stock market bull market, they will keep complicating the issue. Small caps did well last year, maybe you should diversify and own some small cap stocks.
Then they tell you global stocks are good. Diversify more. Buy international funds. Buy small cap international. Buy large cap U.S., but also mid caps too. Buy a mid cap mutual fund. Buy small cap mutual fund. Buy domestic value mutual funds, but hedge against that by also buying some domestic growth mutual funds. But don't risk missing out on the same globally. So buy the international value fund and also the international growth fund. Oh, and don't forget that small caps outperform over time so don't leave out the international small cap fund. But also, since value does better than growth, buy the international small cap value fund too.
Oh, and inflation is inevitable, so don't forget to get into the domestic hard asset fund, and also the global natural resource fund too. Just in case, get some commodity ETFs too!
On and on and on.
What you get is a portfolio that sort of looks like the Rube Goldberg picture above: Complicated contraption that most likely won't work!
Worried about oil prices? How about just investing in businesses with pricing power so that they won't get too hurt by rising oil prices. Inflation? The dollar has lost 98% of it's value over the past 100 years and Coca-Cola did just fine, thank you very much. Good businesses will have pricing power and will be able to pass on inflation to the consumer. No need to own gold and forestry stocks.
People like Warren Buffett, Joel Greenblatt, the folks at Leucadia National, Leows and others have done extremely well over time by focusing on what's really important and not getting distracted by this or that every other day and setting up (inadvertantly) a complicated, underperforming portfolio.
As is often the case, oftentimes, the cure is worse than the disease. I think that a lot of Wall Street problems and blowups have occured in the past partly due to people's urge to avoid or reduce perceived (but not real) risk.
A great example is Black Monday, driven by portfolio insurance. Portfolio insurance was a Rube Goldberg-like contraption that was designed to reduce downside risk in a portfolio (that did precisely the opposite in the end).
People buying bear funds and put options to hedge against temporary declines in the stock market has been really good for Wall Street and the sellers of these products, but have been horrible for performance of the end users.
If one is worried about stock prices and can't sleep at night, maybe it's better to keep it simple and sell enough stocks so that they *can* sleep at night (instead of complicating it with derivatives and ETF shorts and whatnot...).
A lot of people's portfolios are jammed with crap from years of accumulating things for all sorts of reasons; the various mutual fund types above because they were marketed to cover different opportunities, various stocks for various reasons like; housing stocks to hedge against rising house prices since they didn't own their own homes yet, pharma stocks to hedge against rising health care costs, emerging market stocks to hedge against the rise of emerging markets, commodity and land bank stocks to hedge against inflation etc...
Obviously, a portfolio managed (or unmanaged) this way can't possibly perform well.
If you need to wipe something off your face, just pick up a napkin and wipe your face!