WASHINGTON — There’s a question that I love to ask my new clients when they come with their existing portfolio of investments. “If your whole portfolio was in cash, is this what you would be invested in?” If the answer is “no,” I find that they fall into one of five categories.
1: The Collector
This person doesn’t collect coins or Beanie Babies; he loves to collect investments. With any excess money, this person buys a new investment. If someone recommends a great stock or reads about a hot fund, this person is going to own it. Think of The Collector as a more sophisticated hoarder needing to acquire more investment stuff.
The problem is that The Collector thinks he has a diversified portfolio just because he owns 100 different investments. What he doesn’t realize is that he may own the same thing in many different forms. With so many investments, it’s also harder to keep track of how he’s doing.
When we review the holdings, we typically don’t find any Rembrandts, just unnecessary clutter that’s not working to The Collector’s advantage.
2: The ‘Set-It-And-Regret-It’ Investor
These folks decided on an allocation or investment strategy years ago and never looked at it again. They know there are better choices now to help them get to their goals and that they need to do something about it, but they just haven’t found the time to do the research. They’re busy living their lives which leave them little time to managing their savings.
Unfortunately, what’s really happening is that they’re letting the market determine how much they own in stocks, bonds and other assets. During the past six years, the market has risen to historical highs. During the same time, those investors have become six years older. If they haven’t reallocated, their portfolio may have become too risky given their age. When the market takes another dip, they may regret their procrastination.
3: The ‘Deer-In-Headlights’ Investor
These investors may have started with a good plan, but rather than investing their bonuses or inheritance, they’re now sitting on an enormous cash hoard. Not sure how to invest their cash or when to get back into the market, they just aren’t comfortable making the next move. So they wait and do nothing.
The “Deer-In-Headlights” portfolio doesn’t have to be tomorrow’s road kill. With good investment advice, these investors have the confidence to make that cash work for them.
4: The Lover
It’s easy to tell who The Lover is. These investors hold onto certain investments for their sentimental value as much as their market value. One client recently told me that he couldn’t sell his Wells Fargo stock because it was a gift from his grandfather. Back in the day, his grandfather bought stock in the local bank before it was acquired by a regional bank, and then eventually bought by Wells Fargo. It’s not even the stock of the original company.
It’s surprising how many clients come to us with these types of sentimental holdings. It’s okay for a holding to be an important part of a family legacy. The question is do you have to own so much of it?
Breaking up may be hard to do, but The Lover should be purposeful about not just what they own, but how much of it they have. Wells Fargo may be fine, but perhaps not if it’s 40 percent of the portfolio.
5: The Taxophobe
The Taxophobe hates to have to pay any more in taxes than they already do. This ‘fear of taxes’ prevents these investors from selling a holding because they don’t want to pay the capital gains tax that is due.
I agree that taxes are an important consideration, but they should not control how a portfolio is ultimately invested. Sometimes the better decision is to sell and pay the tax to gain a portfolio better suited to their plans for their money. It’s also not an all or nothing decision. They can always choose to sell a portion.
If any of these investors sounds like you, don’t fret. Embrace your investing personality, and then take the steps to break free of investing habits that just don’t work to your advantage.
