The first serious question I ask new or potential customers is “Do you know what you own and why do you own it?” Most people are surprised by my question; unfortunately, hardly anyone can answer accurately. As a financial advisor, I am referring specifically to the actual holdings in your investment portfolios. What specific investments do you own? Do you own individual bonds or bond funds? Individual stocks or stocks in mutual funds, ETFs, ITU, or closed funds? How are these assets proportionally allocated? Just as important, if not more so, do you know why you own them? Did your previous advisor do a decent job of explaining why you owned it?
But it is important to go back to the beginning. I mean, the very beginning of your adult life. Before even owning securities. It has been said that you can judge a person’s heart by looking at their check register. If you observe that a large percentage of money flows to charitable organizations, you can feel a merciful soul who wishes to help the less fortunate. If, on the other hand, each check is made with things that elevate the check writer, it could form a different impression of your heart. Look around. It is likely to reveal your preferences for where you put your money, as well as clues to your personality. Let’s face it: each and every thing you own is material. It is a possession. Unless it was gifted to you, it was necessary for you to part with your own money to acquire it.
So let’s take an honest inventory:
• Is your home well furnished and decorated? Do you like it aesthetically? Do you give a high priority to the design and decoration of your home? I confess to being in this category; Having each room in my house well furnished is important to me. We host frequently and I enjoy knowing that I can practice hospitality at any time, that we have beautifully decorated beds for both family and guests, a comfortable environment for our children and their friends, and a well-stocked pantry for the teens who regularly come by. and help themselves to our purchases. If this resonates with you, you are likely to similarly spend more money on home renovations, furniture, fabrics, appliances, fixtures, and accessories than your minimalist friends. Your investment portfolio probably contains other hard assets, such as art and antiques. Perhaps you prefer to own art because you understand art. You follow that market and are confident to put your money there. These hard assets are as significant to you as the intangibles in a portfolio of stocks and bonds. When you consider what you own and why you own it, take an inventory of these assets and assign them a dollar value; they will be an important item on your personal balance sheet.
• Is your home your only real asset? Have you disproportionately aligned all of your money toward this single asset class? Do you own a real estate property because you feel more comfortable owning it? Do you intend to complete your portfolio in a few years by adding intangible assets to it? Do you own it directly or do you own it jointly with the bank? Is your mortgage an amount that stays in your comfort zone? Remember that with all classes of assets, tangible or intangible, cycles play a role. Your real estate asset will ebb and flow as the markets change. The real estate crisis of recent years has caused even the most staunch of the real estate sector to lose conviction and diversify into other asset classes.
• Is your greatest asset in your garage? Do you have a fondness for luxury cars? Did you pay in cash or are you making payments? Do you rent your cars? Are you aware of the resale value? Are you driving a luxury car at the expense of meeting your family’s most immediate needs or meeting your future needs? If you own a luxury car, you should add it to your portfolio as a true hard asset, as long as an uninterested party can assign a dollar value to it.
• Do you prefer other hard assets? Jewelry, gold, art, sports memorabilia, wine, stamps, and antiques all have a place in the overall investment portfolio. Is the percentage you have allocated to these hard assets appropriate, given your projected income and budget constraints? Are you a serious collector? Do you charge to satisfy a deep-seated emotional need, or do you charge with your bottom line in mind? Do you intend to pass on your valuable collection to your heirs, or to a museum or foundation?
• Do you prefer to invest in experiences? Would you rather spend your money on food and go out to dinner? Do you have season tickets to the theater? Or to sporting events? Does “world traveler” count among your titles? At the end of your life, would you rather die having seen the world, celebrated the joys of life with those you love the most, or have an accumulation of valuable possessions?
Once you’ve accurately assessed the assets that are visible in your everyday environment, take a moment for introspection. Behavioral finance is a real area of study in economic theory. We all make purchasing decisions based on our gender, personality type, emotional needs, psychology, and cultural context. There is no judgment here by financial professionals, or at least there shouldn’t be. We all own things. And we need to understand why we own what we own before we can look at the intangible assets in our lives.
Now, let’s turn our attention to your portfolio of intangibles, that is, your portfolio of stocks and bonds. In the name of “financial literacy for all,” it is vital that you understand your portfolio. There is not enough space in this article to delve into portfolio theory; however, you can start by simply opening your monthly investment statement and spending a few hours with a notepad and pen, or on the computer.
First: look at the breakdown of your holdings. Most investment firms divide their assets into equity and fixed income units. Write down the percentages withheld in each category. Then write down the individual positions. If you have an excessive number of individual equity positions, ask yourself or your Advisor if you are over-diversified. Conversely, if you own individual positions and own fewer than a dozen or so, you should consider increasing the diversity in your portfolio to minimize risk. This is one of the most basic starting points for understanding what you own and why you own it, yet few investors take the time to do this simple but necessary first step.
Next: draw a simple pie chart. Divide your cake according to the amount you have in each category. Look specifically for large-cap, mid-cap, small-cap, international, and emerging market stocks; Fixed Income Participations; Alternative investments and cash. Assign percentages to each slice of your “pie.” Do these percentages make sense to you, given your general knowledge of the markets, your time horizon for investing, and your tolerance for risk? If you can effectively visualize your intangible possessions, these possessions that you cannot touch or see, in the form of a pie chart, or by organizing them in columns, connecting them to your iPhone, or placing them in an Excel spreadsheet, then by all means do it. Most people are very visual and I have found that my clients can better control their portfolios if they can translate the intangible into the tangible in a way that is most comfortable or familiar to them.
Once your holdings are visually presented, look at the historical performance of your holdings. Remember the analogy that one should never look in the rear view mirror while driving forward to determine the best way to reach their destination. However, we use history as a guide to performance and should be used as a data point to judge whether the share should remain in your portfolio.
After spending time thoroughly and thoroughly analyzing your possessions, both tangible and intangible, you will know for sure what it is you own and why you own it. And not only will you better understand exactly where you fit in the broader investment universe. You will be empowered and equipped to make smart decisions in the future.