By Dr. James M. Dahle, WCI Founder
Warren Buffett and Charlie Munger introduced the investing world to the concept of “too hard.” Charlie likes to say there are three boxes on Warren's desk: an inbox, an outbox, and a “too hard” box. What does he mean by that? Buffett and Munger are in the business of evaluating companies for sale to see if they have an easy-to-understand business model, a wide moat keeping competitors out of their profits, and a fair price for those earnings. If it takes too much effort to figure all of that out, it goes into the “too hard” box, even though it may be a perfectly good investment.
Buffett explains, “The size of your circle of competence does not really matter all that much, but knowing precisely where the boundaries are is critical.”
In investing, there are no called strikes. It's fun to pretend that just because we know a lot about one thing, we know a lot about everything. Deep down, we all know that isn't true. Since we do not have to invest in everything to be successful, some of those “pitches” that we let go right by will be good investments. Maybe there are great rewards in the “too hard” pile if you would just take the time to get into the weeds, but there is an opportunity cost to doing that and a fair chance that you'll get burned if you overestimate the size of your circle of competence.
Today, I want to give you permission to say, “Too hard,” and not feel bad about doing it. Let's talk about some things that you might very reasonably put in your “too hard” pile and simply ignore. Maybe you'll choose to do a few of the things on this list, but if you're trying to do half or more of them, you're probably way outside your circle of competence with at least some of them.
#1 Options and Other Derivatives
We had a podcast guest on earlier this year that most people call Big ERN. He is a Ph.D. who used to work in financial services. Part of his current strategy involves watching the markets for a good part of the day several days a week and spending a few minutes several times a week putting in options trades. I had a number of listeners write in or discuss it in the WCI communities looking for more details. I'm not a big fan of options, and one of the reasons is that it goes into my “too hard” pile. I'm not just talking about the time requirement either (watching the market and putting in trades every week is not my idea of fun), I'm also talking about the intellectual requirements. If you don't really get the Black-Scholes equation, maybe you should not be trading options. What are the odds that you know more than the person on the other side of the trade?
But guess what? You don't have to worry about any of that to reach all of your financial goals, especially if you already have a high income like those who read this blog.
#2 Cryptoassets
Understanding the crypto world can be difficult. While it doesn't take that long to learn the basics, you can spend a lifetime learning the nuances. And even once you have that knowledge, it doesn't make it any easier to predict the future of a given cryptocurrency. I've had a lot of “crypto bros” tell me they've spent 1,000 hours or more “going down the rabbit hole,” learning about crypto before they felt comfortable investing in it. Something I spend 1,000 hours on isn't an asset class; it's a part-time job, and I'll have to deduct the value of my time to calculate a true meaningful return. Is there anything wrong with just ignoring it and putting it in the “too hard” box? Not as far as I can tell. Some of us spend a lot of time learning about it and analyzing it, and we still don't bother investing in it.
#3 NFTs
Non-fungible tokens are another market where it takes a lot of time to wrap your head around the technological aspect of it. Many figure, why bother? Can you really blame them?
#4 Art
Art is not as hard to understand as cryptoassets or NFTs, but figuring out which pieces are likely to appreciate and which are not can be just as challenging.
#5 Wine
If you thought art was mixing business with pleasure, you haven't seen anything yet. Now you need more than one sense to understand the value. Plus, you have to resist drinking the appreciated bottles to avoid capital gains taxes. To me, that sounds particularly challenging for a wine lover.
#6 Private Real Estate
Real estate is not a particularly complicated investment: the property appreciates and the tenants pay rent. You pay all your expenses and keep what is left. Still, when faced with having to choose which managers to trust and pouring over 100+ page PPMs trying to figure out if the fee structure is fair and the proforma is accurate just to have the chance to receive a late K-1 requiring you to file in four states, it's hard to blame anyone who finds private, passive real estate “too hard.” And even that is nothing compared to going out to purchase and manage your own properties.
#7 Index Universal Life Insurance
While term life (pure insurance) is easier to understand and compare than whole life, you go to a whole new level when you start looking at IULs. There are so many moving parts that it is relatively easy to hide a bad deal for the purchaser and a particularly good deal for the issuer. I'm often asked to help someone decide if they should keep a policy they should have never bought in the first place. Who needs that kind of hassle in their life? It's “too hard.” Just move on.
#8 Trusts
A trust usually takes multiple visits with an attorney and thousands of dollars to get into place. Then, you are rewarded with spending weeks funding it and the hassle of dealing with an additional entity in your life. Add in multiple LLCs, FLPS, trusts, and more complicated asset protection and estate planning schemes, and I can now understand why I keep running into docs who are worth in the mid-eight figures who have decided to just pay 40% in estate tax rather than deal with the hassle. “Probate is an heir problem, not a me problem. My kids will still get plenty after the taxes are paid.”
#9 Stock Trading Schemes
I often run into people with elaborate (and usually proprietary) trading algorithms. While most of them are probably garbage, all of them fall into the category of “too hard” for me. Just like with options, if my investments don't let me disappear into the wilderness for weeks at a time, they're not facilitating financial freedom, which is the whole point of investing for me. They're “too hard.”
#10 Stock Picking
Some people love learning the details about all of the publicly traded companies out there. Once you find out that index funds beat 80%-90% of stock pickers in the long run (and even more after-tax, after-fee, and after the value of your time), you will probably conclude, as I have, that trying to be a successful stock picker is “too hard.”
#11 Managing Individual Munis
Some people pick muni bonds themselves or even pay someone else to do it rather than just sticking their money into a boring, old, liquid, diversified muni bond fund at Vanguard. I'm not sure if it is the exclusivity or the control that they like, but you've really got to like investing to want to pick your own bonds. It always makes me think, “You know you can pay someone like 10 basis points a year to do that for you, right?”
#12 TIPS
Some people don't even want to bother trying to understand Treasury Inflation Protected Securities (TIPS). It's only one more moving part than a treasury bond, but that still makes them “too hard” for many people to include in their portfolio.
#13 I Bonds
Investing in I bonds requires you to open a new account (or two or three) at Treasury Direct with yet another password. You also have to type in your password manually each time using an on-screen keyboard. “Too hard” for some.
#14 Backdoor Roth IRAs
Based on how many white coat investors have screwed up what I find to be a relatively simple process, the Backdoor Roth IRA should be in the “too hard” pile for a lot of folks.
#15 Tax-Loss Harvesting
A wash sale isn't too tough to understand, but the benefit is somewhat limited as well. For some people, tax-loss harvesting is only worth $1,000 a year or even less. I can't blame someone who doesn't want to deal with the process and the inevitably more complicated, less automatable portfolio it requires.
#16 Saving Receipts with an HSA
Some people don't actually spend from their Health Savings Account (HSA) each year. They let the money keep growing and save the receipts for an eventual huge tax-free withdrawal many years into the future. I have tried, but I do a terrible job of keeping track of all the receipts. It's “too hard.”
As you can see, simplicity is valuable. But even more importantly, when you opt for more complexity in your financial life for whatever benefit, make sure you stay within your circle of competence. An old investing adage says, “Don't invest in what you don't understand.” I couldn't agree more. Today, you have my permission to ignore anything on this list and leave it out of your financial life for being “too hard.”
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What do you think? Have you been burned by something you didn't really understand? What goes into your “too hard” pile and why? Comment below!
I would agree with you on many of the too hard categories. However, years ago my bank offered an HSA account. The company has a “claims vault”. Basically you just scan in all your receipts (every few months for me), they keep all the receipts and a tally of the claims. If you want money just transfer it to your bank account.
They have some limited investment mutual funds you can use, or just let the money earn a small amount of interest. Simple rainy day fund for me. I have since left that bank but have kept the HSA account. The company is Benefit Coordinators.
Amen to that, my circle of “giving a care” is very small on investments. So I let Betterment, Personal Capital and Vanguard Managed Investments handle where my money is. All I had to do was tell them what % equities I wanted and I’ve never made another investment decision over the six years of my retirement so far. I’m sure my circle of competence is larger than that but my circle of caring about the details is microscopic. Sure I pay some fees, but it’s worth it to me to not have to worry about RMD’s on inherited accounts, tax loss harvesting and rebalancing.
The backdoor Roth itself is not hard it is the tax forms….a lot of accountants don’t understand it. This year I tried to do it on Turbotax and it wasn’t letting me do it the way you explained in your tutorial….even some of the TurboTax tax professionals couldn’t figure it out.
Could you please create a new TurboTax tutorial for the backdoor Roth for the 2022 tax year?
Thansks
I suspect it won’t change much from this:
https://www.whitecoatinvestor.com/how-to-report-a-backdoor-roth-ira-on-turbotax/
It’s a little harder to do now. I would actually have to buy Turbotax! I’ll certainly do it if someone sends me a handful of their screenshots from the process, but having to go out and get it myself might fall into the “too hard” category just for a post update.
If we are using the HSA funds now to pay for medical items, do we still have to save receipts?
Yes, they should be saved, in case your HSA withdrawals are questioned by the IRS. If this happens, you need to prove that the withdrawn funds covered legitimate medical expenses. If you don’t have the receipts, you don’t have proof and penalties will be levied. If you are over age 65, you would owe the tax, plus any interest and/or underpayment penalties, if not addressed within the tax year. If you are under 65, you would also owe 20% of the disallowed amount. If intentional, the word fraud might come up in the audit. Be very careful maintaining your records. I found it easiest to save them with my tax return for that tax year.
Thanks Scott!
So should I keep the receipts forever or just for 6years back (as this is the time frame the IRS can apparently audit you)
That’s a good question M.
I’m not 100% certain … but maybe 99% certain that the statute of limitations for an IRS audit is going to be based on the timing of the return and the transaction that has a taxable impact. If you have a medical spend that is 8 years old but you date the disbursement in 2022… the IRS will view this as a 2022 taxable event, not one that is 8 years old.
So in short, keep all receipts you can because the IRS will expect you to have them on hand when you take a disbursement.
Personally I make a separate folder of digital copies of my receipts by year, plus an excel sheet showing how much I’ve accumulated. As long as I don’t lose access to my digital files I should be free to claim them whenever I wish without tracking the physical receipts.
Although I have no idea how the IRS will ensure you’re using a given receipt for a given tax year unless they audit every year. Again, our tax code is mostly on the honor system.
Great post Jim! I would add direct indexing to this list. Too hard
https://www.investopedia.com/direct-indexing-5205141
Ah…everybody wants to predict the future. No one can, not even the gurus. Put your energy into getting broad market diversification at the lowest possible price and at the lowest tax cost.
Just what I needed to hear! While some of those on your list don’t cross the “too hard” threshold for me, I feel better about saying it’s “too hard” for the things that are that way for me.
Especially valuable message for those of us with control over our income. I’d add to the list excessively researching spending decisions (whether it’s a personal expense like travel, or a business expense like a particular vendor or piece of equipment). After spending hours evaluating a decision, I frequently think that the same effort invested into my practice would have yielded far more.
Did options in the past, or rather my brother did them with our money (gave him enough to be a qualified investor). However once everyone else began doing them the dropping profits no longer justified the many extra hours of taxes I had to do.
To get around saving all my receipts, I just decided to wait until I’m 65 and use my HSA to cover Medicare premiums and OOP expenses. Like most people, I assume my medical expenses as I age will dwarf what I spend on ibuprofen and office co-pays now.
I have long considered that some items on your list are “too hard”, although I didn’t quite call it that.
My investment portfolio:
1) Max out 401k/457b (First year with a Job that offers a 457b): All Index Funds
2) Max out on catch up contributions after age 50 (This year is my first year): All in index funds
3) Contribute the max to a traditional IRA: All in Index funds
4)$100,000 in a private equity fund
5) 10 investment properties managed by property management companies (All with conventional mortgages)
6) Primary residence: Worth 450K, Paid off
Graduated residency: 2010
General internist
Salary: Variable. Between $210K-250K
Net Worth: 2.5 Million
I think I have done OK, what do you think?
Of course you’re doing great.
I’m curious how you got the ten mortgages? Who holds them? Are they agency mortgages?
I worked with Fairway Independent Mortgage for all of them, including my primary residence. I built the rental portfolio over 7 years. I just made sure I had no consumer debt. For most of those years, the only debt I had was the mortgage on my primary residence. Also, part of my rental income was added to my W2 income, which made my debt to income ratio lower. My 401K/IRA served as “reserves” (To show the bank I had money to weather the usual and unusual storms of real estate: market turn downs, big repairs etc)
Fairway Independent Mortgage has sold all those mortgages now. They are now serviced by Flagstar Bank (5 of them), New Rez LLC (1 loan), Mr Cooper (2 loans), First Federal(2 loans).
But the bank that I worked with originally was Fairway Independent Mortgage.
Thanks for sharing.
I agree with most of the list exept:
– #13 I Bonds. Additional accounts is easy when using a password manager (BitWarden, etc.). You do have to key in the password on the TreasuryDirect site after looking it up in your password manager.
– #14 Backdoor Roth IRAs: I’ve never had a problem with Backdoor Roth, nondeductible IRA contributions, or Roth conversions with TurboTax online. I do review the generated Form 8606 as a sanity check.
– #16 Saving Receipts with an HSA. Even if you claim when expense is occurred, you need to save receipt for many years in case IRS audits. I save PDF versions of receipts on computer (which is backed up) and plan to claim in old(er) age
Many of us don’t have any problem with most of the list. I do many of those things. But I can understand why someone may avoid any one of them.