Embrace Wabi Sabi in Your Investing Plan

To reach financial freedom, you need a personal investing plan. And Ideally this plan is summarized and made concrete in a written personal financial plan. But, it won’t be perfect. And that’s where the Japanese concept of wabi sabi comes into play with investing.

What is wabi sabi?

I first came across this idea in Adam Grant’s book, Hidden Potential. In basic terms, wabi sabi is the Japanese concept of embracing betray, simplicity, and imperfection in life.

This obviously resonated with me as I always talk about embracing simplicity in life and how finding and learning from “simplifiers” in medicine, finance, and life in general.

And while Adam Grant didn’t talk about wabi sabi in the context of investing, that’s almost immediately where my mind went. Largely due to a recent interaction with a colleague.

Finding wabi sabi in investing

A few weeks ago, a colleague of mine approached me asking to look over her investments. Up until this point, this colleague had just invested via our hospital’s pension plan. She didn’t have other investments and wanted to start investing in a taxable account.

She had opened a Fidelity account but had not invested any money. It just sat in a money market account. To her credit, it only sat like this for a week or so. I know many others who have huge sums sitting in a money market account rather than being invested for years and years. That is a mistake. Remember, the formula to build wealth is to create and invest the margin between what you earn and what you spend.

Anyway, this colleague had a few “requirements” for investing. She:

Didn’t have a great financial education and honestly didn’t have a desire to learn more than the bare minimum
Did not want to pay a financial advisor a ton of money
Wanted it to be as simple as possible

These are all reasonable requirements.

As a result, she had signed up for the Fidelity robo-advisor but then got cold feet, worrying that the recommendations would not be good. She wanted me to review the selections to see if it was ok to invest more of her money.

So, I reviewed the selections that the robo-advisor made. There was an approximate 60-40 stock bond split which was appropriate for her career stage. Stocks were mainly in a S&P 500 index fund and an additional international index fund. Then the bonds were split up between short and medium term bonds and a municipal fund. All expense ratios were 0%.

Was this perfect? No. But was it good enough? Yes! And it met her requirements.

And this is basically exactly what I told her. It would not necessarily be what I would have chosen for her. I probably would have gone simpler like a two fund portfolio. But this would require some more work and active rebalancing on her part. If this arrangement would get her to invest, it was more than worthy.

How you can use wabi sabi to become a better investor

Most actual or potential investors get too bogged down in the weeds. And then it either keeps them for investing at all or they trip over their own shoelaces by wasting too much time researching investments or investing in suboptimal investments.

And wabi sabi is the investing antidote to this.

Here are the critical steps to investing with wabi sabi in my mind:

Identify the most important factors for you to be a successful investor
Create and enact an investing plan that achieves these factors
Ignore the rest

Just like no treatment plan in medicine is ever 100% perfect, no investing plan is perfect either. Before surgery, a patient and I discuss the benefits as well as the risks of any treatment plan. The benefits have to outweigh the risks to move forward. And even then, complications happen!

Same goes with investing. Weigh the risk and benefits of every plan. For it to make sense, the long term benefits have to outweigh the risks. And even then, sometimes investments lose value.

So, what are the most important factors to be a successful investor?

Low expense ratio (definitely <0.1%)
Broad diversification (invest in the overall stock market, don’t try to stock pick or time the market)
Low turnover rate (indicates that the fund you are investing in is not changing stocks frequently)
Asset allocation between stocks and bonds balanced to your risk tolerance/stage of career (more tips on this here)
Minimal enough amount of different funds that you can easily rebalance at least yearly

That’s really it. So why make it more complicated?

Well, I think the reason investors make it more complicated is because we lack a solid financial education. We think it must be more difficult or complicated than this. And without an understanding or knowledge base, we think we must be doing it wrong if it’s this easy.

If you fit into that category, my recommendation is to do what I do. I love learning about investing. So I’ve read books all about stock beta and different investing theories. I understand what active investors and people who invest in more complicated ways seek. But I keep coming back to the factors above as being most important for success.

So, I have two choices. One is to seek out and pursue the more complicated with greater associated risk and maybe minimal benefit. Or, I embrace wabi sabi in my investing and go about living my life knowing I’ve covered the important parts.

I recommend the second approach for all investors.

And, yes, there are imperfections in my investing plan

You can see my full 2023 portfolio performance here. While the performance in 2023 was great, the plan is not without imperfections.

I use primarily a two fund approach including a target date fund with Vanguard. A few years ago, Vanguard target date fund owners got stuck with a huge tax bill due to a massive sell off of certain funds as they lowered the threshold to buy another fund from $100 to $5 million.

There’s a risk this could happen again. Hopefully not if Vanguard learned their lesson, but still. So I constantly get questions about why I invest this way and shouldn’t I be worried?

And my answer is no, I’m not worried. I do know it could happen. But it’s a small risk against big benefits in terms of low fees, simplicity, and broad exposure. The benefits outweigh the risks and imperfection.

Wabi sabi.

Putting this all another way…

Don’t lose the forest for the trees.

Investing is a long term game. Data consistently shows that investing passively via broadly diversified, low cost index funds outperforms active investing via stock picking and timing the market.

Do that and you will be successful.

Are there other ways to do it? Sure. But they can increase risk and may not elevate benefits significantly. In fact, they may harm returns. Some little micro factor may potentially increase returns on your stock investing. But if it increases your tax burden and has higher fees, then any benefit can easily be negated.

Don’t lose the forest for the trees.

And here are some additional posts demonstrating the do’s and don’t of successful investing:

What do you think? Do you embrace wabi sabi in your investing plan? Why or why not? Have you ever got lost in the weeds? Let me know in the comments below!