There is so much to learn about the nuances of different investment accounts, asset classes, and savings techniques. But once you know the basics, is it worth implementing more complex strategies, or is it better to keep your personal finances simple?

Clinical trial results are often boiled down to a single number, the p-value. If p < 0.05, then the result is statistically significant. I plan to eventually write about the dangers of p-hacking and how it applies not just to medical studies but also to investing strategies. But let’s just say that a study is positive, and p < 0.05. Are there scenarios when positive clinical trial results should not be applied to routine clinical practice?

The Difference between Statistical and Clinical Significance

Consider this scenario: a randomized clinical trial was just published where Drug A was compared to placebo in the treatment of metastatic lung cancer. After randomizing thousands of patients between the study drug and placebo arms, the results showed that patients who received Drug A lived 123 days on average, compared to 118 days for the placebo (p = 0.02). With just a 5 day improvement in overall survival, should this drug now become part of the standard of care for lung cancer? I would argue that not all patients should take this drug, because the five-day increase in overall survival may not be worth the side effects and costs of the drugs. The improvement in overall survival is statistically significant, but clinically insignificant for most patients.

There are similar examples of statistical significance but clinical insignificance in investing and personal finance. There are some financial decisions that may save or earn you some extra money, but are not worth the effort and potential headaches. Here are just a few examples where I think the effort is not worth it:

1. Slice-and-dice portfolios

As most readers know, I am a strong proponent of the three-fund portfolio for most investors, particularly residents and young attendings. The increase in diversification by adding additional asset classes such as emerging markets, real estate, or commodities is not worth the hassle (and increased expense ratios).

2. Vanguard vs. Fidelity

Fidelity recently cut expense ratios below its Vanguard counterpart for many of its index funds, and aggressively advertised this fact in the Wall Street Journal and elsewhere. Should investors switch their portfolios from Vanguard to Fidelity? Of course not. For example, you would save only $5 per year on a $100,000 investment by choosing Fidelity Total Stock Market Premium Shares (ER = 0.045%) over Vanguard Total Stock Market Admiral Shares (ER = 0.05%). Not to mention the tax consequences if you made the switch in a taxable account.

3. Grocery Shopping at Multiple Stores

There was a time in medical school when I would go to 4 grocery stores on a Saturday morning. I did this because the store circulars said I could save a dollar per pound on ground beef at one store and 20 cents for bananas at another store. Looking back, I realize that the extra driving time and hassle was not worth the couple dollars I saved on my weekly grocery bill.

4. Health Savings Account (HSA) Reimbursement

Patients with HSAs can pay for health care expenses directly from the HSA, or withdraw those health care expenses in the future without penalty. By withdrawing the health care expenses from the HSA later, this money can provide additional tax-free growth. However, I prefer to pay health care expenses directly from my HSA. Saving the HSA withdrawal for the future requires careful recordkeeping, including keeping all receipts. While saving your receipts may actually be pretty valuable, the hassle of saving your receipts (even electronically) for up to 30-40 years is not worth the extra few dollars in retirement to me.

Summary

You may disagree with any of my examples of clinically insignificant personal finance decisions. My patients refuse medication or treatment all the time, for perfectly valid reasons. Like healthcare, personal finance is personal, and the values that we use for each healthcare of financial decision is individual to us. What do you think? What are some examples of statistically significant but clinically insignificant financial decisions in your life?

10 COMMENTS

  1. Great examples. I’m also a fan of keeping things simple, although I have a five-fund portfolio – total stock market, international, bonds, small cap value, and REITs. I think you can reach a point of diminishing returns if you hold too many asset classes. Not to mention the hassle of keeping track of what goes where and all of the different expense ratios. I can see a scenario where something might slip through the cracks and you end up holding an expensive investment that will add a drag to your investment returns.

  2. Great thoughts, WaSP!

    Once you reach a certain net worth, and / or an adequate level of sophistication or simplification with your investments, further fine tuning of what you’ve got will bring diminishing returns.

    Over on my site today, I’m talking about front-loading. If I front-load my 401(k) completely, I’ll have to wait until the following year to get most of my match. So the plan now is to partially front-load it, then trickle in a bit over the rest of the year to receive the match throughout the year. In the end, the difference in outcome will be measured in dozens of dollars. Not enough to move the needle significantly. Still, it’s kind of a fun exercise.

    Cheers!
    -PoF

  3. Great post! Love the examples. I remember being dragged around to multiple grocery stores by mom just to save a fews cents/pound on bananas. Definitely not worth it.

    Also generally agree on keeping investment portfolios simple. Although what’s “simple” for me may not be for someone else. Personally, I have a one-fund portfolio in the S&P500…

    • I have no problems at all with the one-fund S&P 500 portfolio. It’s an alternative to a target-date fund, and it doesn’t get any more straightforward than that. You’ll never lose to the “market”, given that most laypeople and the media define the market as the S&P 500, not the Total Stock Market index.

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