Five Steps to Control Financial Hoarding (aka Over Diversification)Submitted by Concierge Financial Planning, LLC on November 4th, 2015
“And then I read about this East Asian microcap fund in Forbes,” said Kate, barely taking a breath between sentences. I had asked her to tell me about her investments and she was on her 139th holding! There were still at least twenty more to go. Hoarding comes in many different packages. Some people excessively collect piles of useless household items while others buy and hold a multitude of investments, which was the case with Kate. Diversification is important, but too much of a good thing comes full circle back to bad.
The whole point of diversification is to reduce portfolio risk by holding low correlating securities and asset classes. However, while mitigated, risk is never completely eliminated no matter how many securities are held. Risk is not proportionally reduced with every security you buy. Evidence suggests that you can only reduce your risk to a particular level; further diversification beyond this point does not help. Similarly, if the hoarder down the street purchases too many knives, they are just going to clutter her drawers. How many knives can one person use?
Both the household hoarder and portfolio hoarder suffer from experiencing high expenses. By purchasing too many securities the portfolio hoarder will have to pay additional brokerage fees and mutual fund expenses. Fees are a huge albatross around an over-diversified portfolio’s neck! They eat into returns causing the portfolio to consistently underperform. What’s more, the portfolio hoarder has to spend additional time researching and tracking all their many investments. Don’t even get me started on the hours it takes to rebalance a portfolio with over one hundred holdings.
Fortunately, hoarding is something that can be controlled in five simple steps:
- Acknowledge the problem. According to Terrence Daryl Shulman, JD, LMSW, ACSW, CAAC, CPC, “Just cleaning out the stuff does not address the underlying issues. It’s not a clutter problem; it’s a perception problem.”
- Education is the answer. It’s important for portfolio hoarders to clarify their investment objectives and to understand the purpose of diversification. They need to realize that too many securities are hurting their bottom line and that that great East-Asian microcap fund isn’t going to help, especially since it’s only .05% of the portfolio.
- Get the family involved. Both husband and wife, partner, or friend should be familiar with the situation and should help support the de-cluttering effort.
- Pace yourself. Rome wasn’t built in a day. Start slowly and work over several years to consolidate the portfolio and get it back into shape. Set aside regular time to focus on your investments. Be mindful of tax ramifications.
- Consider getting professional help. Even if you don’t want to use an advisor on an ongoing basis consider hiring a financial professional to help you gain control of your portfolio.
I went through all these steps with Kate, and now she and her husband are well on their way to an efficient, manageable portfolio. Kate no longer loses sleep worrying about keeping track of all her investments. On her last visit, she even eyed my tall stack of back issues of The Journal of Financial Planning and asked me if I really need all of them!