How to Avoid Portfolio Clutter
Tidiness is attractive. Consider the success of Marie Kondo and The Home Edit.
And how often do we think about "simplifying" and "getting rid of stuff" – heck, questioning why do we buy so much crap in the first place?
These folks are selling an organized, decluttered dream.
Structurally, it's easily attainable. Just buy the floating shelves and the earth-tone couch. Splurge for the fluffy cloud pillows, the matte pastel boxes, and transparent containers to separate your pen colors, cereals, and rice.
These purchases are parts of the toolkit for being tidy and organized.
And it's beautiful, why don't more of us live this way?
I felt like so many others when first exposed to this extreme organizational tidiness.
I want to live like that!
So I convinced Emily to let me spend $60 on transparent plastic units to better organize our fridge. For a couple days, we were tidy.
But outcomes are not driven by structure alone.
The entire business ecosystem of getting better organized, from The Container Store to Bed Bath & Beyond, makes massive profits off consumers pursuing an intangible idea of tidiness, through purchasing the tangible parts of the toolkit.
Yet so many of us aren't successful. Buying the containers isn't sufficient.
Outcome = Structure + Implementation
For the whole thing to work, we have to implement. We have to stay tidy.
This is my fridge just a few weeks later:
God help us. Look at the back right corner.
Without implementation, it's just a stupid, overpriced plastic container.
What kind of idiot would pay $60 for that?
When it comes to investing, portfolio design can also be tidy or untidy.
What belongs here?
How we should organize it?
Similar to other forms of design or architecture, there is a foundational integrity that is built upon. There are investment philosophies and belief systems that should weave the intricate tapestry of a thoughtful investment strategy to meet your goals.
But it's all shit if you can't implement.
As frequent readers know, I encourage investors to take a global perspective, and invest in thousands of stocks across the world (disclosure: my firm recommends funds from Vanguard, Dimensional Fund Advisors, and Avantis Investors, to do so).
And I encourage investors to not pick individual stocks (or at least limit how much you goof around doing so).
In today's world, you can design an elegant, low cost, globally diversified stock portfolio with just 1-3 funds. Said another way, intelligent fund companies have done the hard work for us. They've packaged diversification up, and created simplicity on our behalf.
These funds are the toolkit for tidy portfolios. The hard part is keeping it tidy.
It's alluring to want to start picking individual stocks – especially right now in a market downturn, when companies with familiar names, many with fabulous products, may be down 50% or more. It's tempting to go shopping, find deals, start cluttering.
Investment history is littered with reasons not to clutter your portfolio.
Here are just some of the successful companies that eventually crashed, and ruined investors who put too many eggs in one basket: Sears, Kodak, Nokia, Pets.com, Blockbuster, AOL, JC Penney, IBM, Xerox, Enron, Polaroid, Yahoo, MySpace, RadioShack, Borders, etc...
At some point, all of these companies also looked like great deals. Until they weren't.
There is no reliable evidence that any individual stock will ever recover from a downturn. So many of them never do. Since 1927, during each rolling 10-year period, nearly 15% of stocks are de-listed, and kicked off the stock exchange, due to poor financial health.
It is within reason that any individual stock you buy might eventually be de-listed.
And yes, it's also within reason that it will survive, maybe even make you a lot of money. But you can't know which one of these outcomes it will be ahead of time.
People once used Nokia phones as ubiquitously as we now use Apple phones. MySpace once played a similar role as Facebook, Sears & Roebuck to Amazon, Blockbuster to Netflix, etc....the parallels aren't hard to make.
There's just a vast sea of possible outcomes when you pick individual stocks.
But investing in broad human ingenuity has a tremendous track record.
$1 invested 52 years ago would be worth $124 today.
$1,000,000 invested 52 years ago would be worth $124,000,000 today.
This visual represents all the individual stocks together. It is the global market.
It's in spite of all the de-listings. Its performance is carried by the fact that while some stocks didn't work out, others overcompensated. That at the same time that Sears and Blockbuster began to struggle, your portfolio had started to pick up shares of newcomers Amazon and Netflix. It's the uncluttered portfolio. It's essentially decision-less. It owns everything with limited bias.
Structuring this is easy, but implementing is hard.
In 1995, Fortune Magazine named Enron "America's Most Innovative Company."
That was interesting to people. One can imagine thinking...maybe I'm willing to own more of that innovative company, at the expense of owning less of other companies.
Enron was bankrupt 6 years later. Stock went to $0.
I understand the allure of picking stocks, but I am telling you – uncluttered portfolios are an unparalleled source of investor pleasure.
If history is any clue, hundreds of stocks in my portfolio will go bankrupt in the next decade. I don't care, because while I don't know which ones yet, thousands of others will pick up the slack.
I'm certain about investing in human ingenuity, but uncertain how my investment thesis will ultimately play out.
So I keep it tidy.