Apply Occam's Razor to Your Finances, Investments

I’ve reviewed hundreds of investment portfolios from many types of physicians—emergency medicine physicians, neurosurgeons, radiologists, cardiologists, dermatologists, and more.

A common theme emerges: many are unnecessarily complex.

Here are a few examples:

• Opening investment accounts at 10 different custodians

• Owning 5 mutual funds that invest in pretty much the same thing even though the funds have different names

• Hiring 3 different financial advisors who all tell you something different: one tells you to get out of the stock market; another to put more money into the stock market; and the third just wants you to invest in “alternative investments.”

• Buying multiple properties, such as condos, and renting them out, thus creating tax nightmares and potential cash flow problems.

I could go on, but that’s just a taste of what I’ve seen after meeting with many physicians over the years.

Some complexity is inevitable especially as your assets grow. But self-created complexity for no real financial goal simply sucks your time away from you and results in a disorganized financial life.

The Occam’s razor principle states that if there are multiple competing hypotheses, the one with the fewest assumptions should be selected. In other words, simpler is usually better.

It’s also applicable to your finances and investments. Complexity doesn’t necessarily result in higher investment returns or a lower tax bill. You always give up something when you make your financial life complex just to save a few bucks here and there.

So sit down and figure out the parts of your finances and investments that you don’t understand. Make a list of all of your accounts—investment, banking, credit card, whatever—for both you and your spouse, if married. Now use Occam’s “financial” razor to slash things down to a manageable and understandable number.

Which accounts can you cut completely? Which accounts can you consolidate into one? Can you transfer accounts from several custodians to just one? That way you’ll get one consolidated statement to view every month rather than a dozen.

Do any of the mutual funds you own overlap in their underlying investments? Do you own individual stocks that the funds also own? If so, sell the most expensive funds and the individual stocks (keeping in mind the tax consequences of doing so).

If you have more than one financial advisor, choose one and fire the rest. Better yet, fire all of them if you’re not getting objective advice that is in your best interests, if they’re not communicating with you, or if their investment philosophy is not based on academic evidence.

Replace them with someone who resonates with you, walks in your shoes, acts in your best interests, and has an “evidence-based” investment philosophy.

Or do it yourself if you truly have the time, interest, knowledge, and discipline to pull it off for the rest of your life. But be brutally honest with yourself about your likelihood of being successful.

And what about those condos and other real estate you bought?

Unless direct real estate investing is what you do full time (unlikely since you probably practice medicine full time), cut your losses, sell ’em and move on.

It’s a headache you don’t need and the payoff is dubious anyway.

Applying the financial razor periodically can have a huge positive impact on your life since you’ll actually see how different parts of your finances fit together.