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Not long ago, a friend of mine named Janet revealed to me that her closet was a total mess.
“I just throw everything in a few drawers,” Janet confessed. “My closet is totally disorganized and I can’t find anything!”
Unfortunately, Janet was not talking about her clothes closet; it was her office closet that was in such disarray.
“I am so disorganized that I don’t even know what I own,” Janet confided, adding that her files and financial statements had been untouched for several years, “I bought some mutual funds and stocks several years ago but I don’t even know if they are any good anymore.”
In my career as a financial advisor, I’ve had numerous people admit to me that they ignore their investments, so Janet’s admission was not all that surprising. Regrettably, her concerns about the quality of her funds were correct. Her investments had lost value, partly because of the decline in the overall markets, but there were several funds that should have been cleaned out of her portfolio for other reasons.
In any economic environment it is important to have your investments organized, but in challenging economic times it is more essential than ever. Your investments need to be moni- tored and evaluated just as your clothes closet needs a regular spring-cleaning.
Your portfolio is like your closet.
Janet loves fashion. She has a fantastic wardrobe that she has painstakingly built over the years. She has a distinct style, which mixes timeless sophistication with a flair for unique but tasteful accessories. She can spend hours shopping for the perfect pair of shoes to match a particular outfit.
But Janet hates dealing with her finances. As I listened to her worry about her investments, I was struck by the similarities between a well- stocked closet and a well-diversified investment portfolio.
In many ways, your investment portfolio is much like your closet. You need to create a well-diversified wardrobe with a mix of clas- sic and trendy pieces and you must engage in regular spring cleanings in order to keep your closet in good order and up to date. When I mentioned this analogy to Janet, a light bulb went off in her head.
You need many pieces of clothing to create a diversified wardrobe.
Janet wouldn’t be caught dead with the wrong shoes for a particular outfit and has saved for months to buy classic purses and jewelry. Unfortunately, she hasn’t taken the same care in building and maintaining a portfolio that serves her well. After looking at her invest- ments, it was clear that she was taking enor- mous risk with her money without realizing it. She had several equity mutual funds which gave her the potential for growth in good times, but which exposed her to significant risk in market downturns. Most of her investments were in risky asset classes. While Janet still has more than twenty years until retirement, her investment portfolio could actually sabotage her financial goals for the future.
A well-diversified portfolio is like a first-class closet. In order to be able to build appropriate outfits for multiple occasions, you need an organized and well-stocked closet with a wide variety of clothing items. You need basics in a variety of categories: tops, bottoms, shoes, ac- cessories, underwear, and outerwear. You need all of these types of clothing for different oc- casions, including work clothing, casual wear, evening wear, various sports, or other events. Similarly, a good wardrobe should cover you for multiple seasons and should provide protec- tion for various types of inclement weather. If you have an expensive suit but no raincoat, you can end up ruining your investment.
Your portfolio needs diversification, too.
Similarly, most people need portfolios with various asset classes, including cash, stocks and bonds. Various subcategories of these asset classes may also be necessary, such as large, medium or small cap stocks; U.S., international or domestic stocks; growth and value styles of investing; as well as various types and maturi- ties of bonds. Your own particular portfolio makeup depends on a variety of factors: your age, years to retirement, your tax situation, your income needs in the future, and your tolerance for risk, among other things. Your portfolio is unique to your needs, your style, and your circumstances.
Selecting the right wardrobe pieces to create stylish outfits to fit all these circumstances and which reflect your personal style can take some time. Many of us spend more time shopping, trying on outfits, and agonizing over a specific pair of pants or shoes than we do researching and shopping for investments which will have an impact on our lives for a much longer period of time.
Spring-cleaning for your closet.
Janet likes having new clothes each season. Her closets are fairly full, so in order to buy some new things, she also has to get rid of some old clothing from time to time. She does a regular spring-cleaning, in which she takes a hard look at her wardrobe in an effort to purge some items.
As Janet looks through her closet, evaluating various pieces, she asks herself several ques- tions: Does this piece of clothing still fit? Will it ever realistically fit again? Is it out of style? Will it come back into style? Is it causing me too much discomfort? Does it work with the other pieces in my wardrobe? Did I feel like an idiot the last time I wore this? Am I hanging on to these shoes out of nostalgia for the 1980s?
It can be tough to throw out clothing items that you once loved and enjoyed, but some- times it is necessary. It they don’t fit, they’re just taking up room in your closet and not really doing you any good.
Evaluating your portfolio.
I told Janet that portfolio evaluation is much the same as spring-cleaning in her closet. Every investor should know what they are trying to accomplish with their portfolio, much as you know that you need to cover your wardrobe bases for many occasions and seasons with the items in your closet. What kind of goals do you have for your investments and what type of risk are you willing to take to achieve those goals? Once you’ve clearly identified what you want your portfolio to do, you can better evaluate whether it is, in fact, performing well in relation to your expectations and in relation to the markets.
In good times and in challenging times, it is critical to monitor your portfolio on a regular basis. Look at the portfolio as a whole and then evaluate each hold- ing. Just as you would do when cleaning out your closet, look at your individual securities, mutual funds or other investments, and ask yourself some critical questions.
Some of the questions you may want to ask include: How has this investment performed over 1, 3, 5, or more years? Is it beating its peer group or benchmark? Has it been more volatile than projected? Is the style in favor or out of favor relative to the markets? Have there been material changes to the fund or to the individual security? Does this investment still fit into my overall portfolio? Am I hanging on to this investment because it performed well in the past and I am emotionally attached to it? Or is it time to simply sell and move on? Of course, before you decide to sell a holding, you must also consider the tax consequences.
Investment ignorance is not bliss.
After looking through her investments, Janet became conscious that ignoring her portfolio was actually jeopardizing her financial future. She had not built a suitable portfolio and she had not taken the time to clean it out and keep it orga- nized. She now realizes that she needs a variety of different kinds of investments and that those holdings will likely change over time. Monitoring and adjusting her portfolio is as important as finding good investments in the first place.
Do you need a spring-cleaning in your portfolio?
Suzanna de Baca is president of Private Capital Solutions Group. Securities offered through Broker Dealer Finan- cial Services Corp. Member FINRA & SIPC. Investment Advisor Representative of Investment Advisors Corp., A Registered Investment Advisor. Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.
