Time for Spring Cleaning the Portfolio
This is the time of year to sweep out the garage, clean up the barbecue, take old clothes and unused items to the donation bins and generally organize our homes after a long winter. And, based on our conversations with many of our clients, it seems that many of us got ahead of this task early thanks to the extra time we have all had at home during the Covid-19 lockdown.
And while we’re in the mood, it’s also a great time to do some spring cleaning of our investment portfolios.
A place for everything, and everything in its place
Just like those people who keep their homes in pristine condition year round, some investors have pristine portfolios that own exactly what they need and nothing else. Others, including myself, still hold some securities that don’t really have a place in the portfolio, and are there for emotional or other reasons.
In a well-structured portfolio each security is there for a cause. For example, within the stock allocation we should have diversified exposure to stocks with certain characteristics. For broad diversification we would want to own shares of Canadian, US and international companies. We would also want to own companies with different fundamental characteristics – small companies as well as large companies, stocks whose shares are trading at low relative prices (value) as well as high (growth). And companies with higher than average expected profitability. The same diversification opportunities exist for bonds – Canadian and global, government-issued and corporate, etc. When we can answer the questions “why do we own this?” for each holding in our portfolio, we will have achieved our goal!
Get rid of the duplicates
You know when you go through the storage room and you find you have two toasters, three coffee makers and a couple of blenders you’ve been hanging on to? One of each does the trick, and the duplicates just take up space. The same is true for your portfolio.
Once we have filled the buckets described above, there is no need for duplication by adding other investments into the mix. Once the portfolio has exposure to all of the diversifying characteristics, there is little need for added clutter and complication for no additional benefit. The extra investments add not only complexity, but possibly extra cost. In our portfolios and well as our homes – simplicity works!
Don’t get emotional about things that don’t matter
We all hang on to things that have positive emotional connections for us – maybe high school yearbooks, souvenirs from trips we have taken, collectibles, etc. They make us feel good by being able to hold or look at them. On the other hand, we tend not to keep reminders of unhappy episodes or experiences. However, in our investment portfolios we hang onto stocks or other investments that did not work out, with the hope that one day they will recover, and our initial reasoning behind buying them in the first place will be justified. We are all guilty of this because it is a normal behavioral bias – it’s called loss aversion and it affects all of us. Sometimes these positions are so small they are no longer a significant portion of the portfolio. For example, a stock that is now worth $500 in a $500,000 portfolio only represents 0.1% of the total. It could quadruple in value and still have only a negligible impact on the portfolio as a whole. While its presence in the portfolio is meaningless from a future performance standpoint, it adds unnecessary complexity to the account, and it causes us stress every time we look at it. One way to look at these positions is “if I wouldn’t buy it today, why would I want to keep it?”.
Get rid of the dust bunnies
Even the cleanest of houses accumulate schmutz (technical term for dirt, dust, etc). Often this results in dust bunnies that accumulate under furniture and in corners. All we can do is clean them out and replace the furnace filter hoping that this will reduce their appearance. Some portfolios contain remnants of positions that once existed and have long since disappeared. These are defunct securities that have no value and have been delisted by the stock exchanges. Don’t let these torture you any longer – our administrative team can have these positions removed from your portfolio once and for all.
By taking a hard look at each component of our investment portfolios and ensuring we have only what we need, we reduce complexity, simplify our financial lives and reduce stress.
As always, call your advisor if you’d like help with your portfolio spring cleaning project! Afterall, its time to spring ahead!