Neatness Doesn't Count
Years ago I learned that neatness doesn’t count in managing an
investment portfolio. But recently I’ve seen lots of portfolios that are a
haphazard mess. Most people make investments one at a time and don’t consider
the whole. Sometimes I feel like an archaeologist studying layers of a site
inhabited by many different peoples. I see shifting themes and investments
accumulated while that theme was in force. The problem with investing this way
is that major drivers of investment performance – such as asset allocation,
diversification, geography and style – operate on a unified portfolio. Many
people rely too heavily on a single stock. In a bull market such as the stealth
one we’ve had for two years, it’s harder to see the flaws in your portfolio. An
overly cautious asset allocation means you are making less money, not losing.
But the seeds of destruction are planted in good times and reaped when the
investment skies darken. Too many people spend too much of their time worrying
about money and not mitigating the risks or planning for prosperity. If you
know what to look for, it’s not hard. If you don’t, these flaws are invisible
until trouble suddenly appears.