Clean Your Room, Hunny
If you have been a Thoughts On Money reader for some time, you’ve become familiar with my personality, background, and my quirks. As you might imagine, I was a tough kid to raise. Sorry, mom. Always equipped with a rebuttal and always wanted to know why – why this, why that, why, why, why. I was/am one exhausting individual. I am sure my wife can attest to this 😊
Here is a simple example. My mom really valued cleanliness – this is her love language. Let me give you an example of some of my childhood chores. I had to “comb the fringe.” Yes, we had a living room that no one was really allowed in, which had a nice rug that had a fringe, and I had to use a soft brush to comb the rug fringe straight. I had to put the rocks from the gutter back into the rock bed. We lived on a slow, quiet little street, and sometimes the rocks (two-inch smooth stones) would get knocked into the street, so I would walk the gutter and pick them up to put them back in the little decorative rock beds. Cleanliness is next to godliness, right?
With this background in mind, I am sure you know that I was, of course, responsible for all of the other reasonable cleaning duties like making my bed. “But why, Mom?” I would ask, “I am just going to sleep in it again tonight and no one comes in my room except me – why do I need to make my bed every day?” Oh, the silly debates this simple chore would cause in our house.
Now, some 30 years later, I am having to nudge my kids to clean up after themselves. Yet, now I have a bit more perspective, I understand the why. There are the aesthetic benefits of cleanliness but there are also some real practical benefits. I have a simple motivation for my 5-year-old who recently had to have two cavities filled, “Son, would you like to go back to the dentist for another filling?” Even something as simple as making the bed has its benefits. I can’t tell you how many times I have searched our house far and wide for that special blanky or stuffie just to eventually find it wrapped up underneath the covers of an unmade bed.
The truth is simple: cleanliness can be avoided, but it doesn’t come without consequence.
A Messy Garage
When reviewing a potential client’s current portfolio, I often use the “messy garage” analogy. Think about how many stories and memories one garage can hold—everything from old trophies to broken sleds. Each item has a story of how it got there but not always a defense of why it should remain there. Nothing better than a little spring cleaning—am I right?
A messy garage portfolio is no different. There are accounts still held with old employers. There is that orphaned cryptocurrency position that your cousin Jimmy helped you buy during Thanksgiving dinner two years back. There is that stock that you bought after you heard a compelling pitch from Jim Crammer. And these garage tales go on and on.
Often, my first piece of advice is to organize and simplify things. Why? Because when cleanliness is avoided, certain consequences will surface. Just ask someone who is the executor of their parent’s estate; they are chasing down documents near and far to access a security deposit box held out-of-state. Again, some basic organization and simplification can go a long way.
I am sure you are grasping the general idea and topic here, but let’s dive a bit deeper into some specifics.
Trinkets & Attribution
A common enemy of simplicity is portfolio trinkets. These are small and inconsequential investments that take up space in your portfolio (and mind) but have little impact on the outcome of your financial plan. Here’s a simple recommendation: when you categorize your portfolio by allocations (e.g., stocks, bonds, etc.), just avoid having any allocation that represents less than 5% of the portfolio. Keep in mind that this is a rule of thumb, which means the rule can be broken if a greater reason necessitates so. Think about the math here: let’s say you have a 1.5% position in gold, and let’s say that your entire portfolio has a 0% return on the year, while your gold position enjoys a 30% return on the year – what’s your total return? 98.5% * 0% + 1.5% * 30% = 0.45%. The differences between those two returns were wide and varied, yet the bottom-line outcome was nearly unnoticeable. Each position should be placed with a purpose and conviction, which means the allocation should be 5% or greater.
Don’t get me started with my kids and trinkets. This is often a frustrating topic for me. My son will get a nearly worthless trinket at a birthday party and then become undone if it gets lost or broken. The tiny insignificant trinket will consume so much real estate of his thought life. Investors are no different. I’ve had countless conversations with frustrated clients regarding this or that small allocation that wasn’t performing to expectation – a losing the forest for the trees type moment.
This is where a basic framework and understanding of attribution can help. In financial planning, what deserves the most of your attention are those items that are most impactful—the items that carry a high attribution to the bottom line. Prioritize your energy and thought life towards the things that matter most. Trinkets are shiny and eye-catching but don’t trust the mirage.
False Diversification
I am not a handyman by any measure, but I do have some tools around the house. The funny thing is that between my junk drawer and my garage, I probably have 12 different Phillips head screwdrivers. It can be quite irritating when I am shuffling through this plethora of screwdrivers looking for another tool. Simply put, more screwdrivers doesn’t really mean more tools, it means more of the same tool.
This unneeded redundancy creeps its way into personal finance, too. Investors with accounts at 10 different institutions isn’t a surprise to me, I have seen this quite often. Accounts are accumulated over time, just like screwdrivers. Yet, the consequences cut a bit deeper when it comes to your finances. Everything from the headache of being locked out of accounts where passwords have been forgotten to having to settle an estate where many legacy accounts were mistitled. This is no small thing.
Lots of accounts at lots of different places, or even lots of the same investments in the same account, can build this false sense of diversification. Diversification makes us feel safe and protected, as it should, but a false diversification should breed a false sense of security. I remember many moons ago moving from an older rundown apartment to a newer-looking apartment and the excitement I had about those new digs. The molding on the exterior of the building was constructed to look like a classic Spanish villa. I thought it was beautiful until a piece of luggage bumped into it, breaking the paint foam molding right off the wall. Things aren’t always as they seem, right?
A diversification façade does you no good. True diversification should help you generate differing returns (and volatility) investment by investment; we are looking for a diverse collection of investments that don’t perfectly correlate with one another. A complete toolbox isn’t a bunch of screwdrivers, it’s a collection of different tools that are appropriate for different jobs and tasks. Don’t be fooled by false diversification.
No Common Thread
The items I store in my garage tell a story, but not a connected one. I guess it is a book of random, unrelated short stories. Reading this “garage” story would probably feel like it was written by someone with a personality disorder. Your portfolio shouldn’t feel this way; there should be a common thread that connects everything together. You should be able to recite the story of your strategy, you should be able to explain how all the pieces stitch together. How those pieces make that perfect mosaic that was crafted to satiate the needs of your financial plan. This is strategy, and this is personal finance 101.
There are way too many garage portfolios out there. They are a storage unit of investments as opposed to a single book that tells the story of your financial life. As we often say, the investment portfolio and your financial plan – your goals, aspirations, objectives, etc. – should fit perfectly together like two puzzle pieces. They are unique in shape and purpose, reflect a different picture, but combine to paint a unified depiction of your financial life.
Everything is on purpose and with purpose. Again, your ability to describe the strategy and how everything fits together is a must.
Full Circle
My mom would be proud of me. These days, I clean up after myself and make my bed. Sure, I don’t comb the fringe, but we are all on a journey—maybe one day.
Cleanliness is next to godliness. You wouldn’t settle for living in a pigsty, so don’t settle for a portfolio that looks like a pigsty.
Financial cleanliness helps you avoid a lot of mistakes and misfortunes. Could your financial life be simplified? Is your financial life well organized? Where do you see opportunities for improvement? These are the types of questions that should provoke some impactful dialogue between you and your advisor.
Trevor Cummings
PWA Group Director, Partner
tcummings@thebahnsengroup.com
