The first serious question I ask new or prospective clients is “Do you know what you own and why you own it?” Most people are surprised by my question; unfortunately, almost no one is able to answer it accurately. As a Financial Advisor, I am referring specifically to the actual holdings in their investment portfolios. What specific investments do you own? Do you own individual bonds or bond funds? Individual stocks or stocks in mutual funds, ETF’s, UIT’s or closed end funds? How are these assets allocated proportionately? As importantly, if not more so, do you know why you own them? Did your previous Advisor do a decent job of explaining the rationale for owning them?
But it’s important to go back to the beginning. I mean, the very beginning of your adult life. Before you even owned securities. It has been said that you can judge a person’s heart by looking at her check register. If you note a large percentage of money flowing out to charitable organizations, one can sense a merciful soul who desires to help those less fortunate. If, on the other hand, every check is made out to things that elevate the check writer, a different impression of her heart might be formed. Look around you. It will likely reveal your preferences for where you put your money, as well as to clues into your personality. Let’s face it: each and every thing that you own is material. It’s a possession. Unless it was gifted to you, it required that you parted with your own money in order to acquire it.
So let’s take an honest inventory:
- Is your home well-furnished and decorated? Is it aesthetically pleasing to you? Do you place a high priority on the design and decoration of your home? I confess to being in this category; having each room in my home well-furnished is important to me. We entertain frequently and I enjoy knowing that I can practice hospitality at a moment’s notice, that we have beautifully-appointed beds for both family and guests, comfortable surroundings for our children and their friends, and a well-stocked pantry for the teenagers who regularly drop over and help themselves to our groceries. If this resonates with you, chances are that you similarly spend more money on home renovation, furniture, fabrics, appliances, fixtures and accessories than do your minimalist friends. Your investment portfolio probably contains other hard assets, like art and antiques. Perhaps you prefer to own art because you understand art. You follow that market and possess confidence about placing your monies there. These hard assets are every bit as meaningful to you as are the intangibles of a stock and bond portfolio. When you take account of what you own and why you own it, inventory these assets and assign a dollar value to them; they will be a significant line item on your personal balance sheet.
- Is your home your only real asset? Have you disproportionately aligned all of your money towards this one asset class? Do you own real estate because you feel most comfortable owning it? Do you intend to round out your portfolio in a few years by adding intangible assets to it? Do you own it outright or do you own it jointly with the bank? Is your mortgage an amount that remains in your comfort zone? Remember that with all asset classes, tangible or intangible, cycles play a role. Your real estate asset will ebb and flow as markets shift. The real estate crash of these past few years has made even real estate die-hards lose conviction and diversify into other asset classes.
- Is your largest asset sitting in your garage? Do you have a fondness for luxury cars? Did you pay cash for it or are you making payments? Do you lease your cars? Are you conscious of resale value? Are you driving a luxury car at the expense of meeting the more immediate needs of your family, or providing for your future needs? If you own a luxury car, it needs to be added to your portfolio as a true hard asset, provided that 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 one’s overall investment portfolio. Is the percentage you have assigned to these hard assets appropriate, given your projected income and budgetary constraints? Are you a serious collector? Do you collect in order to satisfy a deep-seated emotional need or do you collect with an eye towards your bottom line? Do you intend to pass down your valuable collection to your heirs, or to a museum or foundation?
- Would you rather invest in experiences? Do you prefer spending your money on food and dining out? Do you hold season tickets to the theater? Or to sports events? Do you count “world traveler” among your titles? At the end of your life, would you rather die having seen the world, celebrated life’s joys with those whom you most love, or have an accumulation of valued possessions?
Once you have 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 buying decisions based on our sex, personality type, emotional needs, psychology and cultural context. There is no judgment here by financial professionals, or at least there should not be. We all possess 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 shift our attention to your portfolio of intangibles, i.e. your stock and bond portfolio. In the name of “financial literacy for all,” it is vital that you understand your portfolio. There is not enough room in this article to delve deeply into portfolio theory; however, you can get started by simply opening your monthly investment account statement and spending a few hours with a pad and pen, or at the computer.
First: look at the breakdown of your holdings. Most investment firms break down your assets into fixed income and equity holdings. Jot down the percentages held in each category. Then jot down individual positions. If you hold an inordinate number of individual equity positions, ask yourself or your Advisor if you are over-diversified. Conversely, if you own individual positions and own less than a dozen or so, you will want to consider increasing the diversity in your portfolio in order to minimize risk. This is one of the most basic starting points to understanding what you own and why you own it, yet few investors take the time to do this simple, yet necessary, first step.
Next: draw a simple pie chart. Divvy up your pie according to how much you own in each category. Look specifically for Large Cap, Mid Cap, Small Cap, International and Emerging Market Equities; Fixed Income holdings; Alternative Investments and Cash. Assign percentages to each piece of your “pie.” Do these percentages make sense to you, given your overall understanding of the markets, your time horizon for investing, and your tolerance for risk? If you are able to effectively visualize your intangible holdings, these possessions which you are not able to touch or see, in pie chart form, or by organizing them into columns, plugging them into your iPhone, or putting them into an excel spreadsheet, then by all means do so. Most people are highly visual, and I have found that my clients can get a better grip on their portfolios if they can translate the intangible into the tangible in whatever form 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 in order to determine how to best get to one’s destination. However, we do use history as a guide to performance and it should be used as one data point in order to judge whether the holding should remain in your portfolio.
After you have spent time thoroughly and thoughtfully analyzing your possessions, those both tangible and intangible, you will know with certainty what you own and why you own it. And you will not only have a better understanding of exactly where you fit in to the overall universe of investing. You will be empowered and equipped to make intelligent decisions moving forward.
Carolina Fernandez works as a Registered Independent Advisor in Private Wealth Management. She holds the Series 7; Series 66 (63 and 65); Life, Accident and Health Insurance Licenses, including Long Term Care; and Alternative Investments and Guided Portfolio Management Certifications. She primarily works with Art & Entertainment Professionals and entrepreneurs in the creative communities. She holds her licenses with Source Capital Group, a boutique independent investment bank and brokerage headquartered in Westport, CT. Previously, she worked at Morgan Stanley Smith Barney, Merrill Lynch, and Dupree & Co., a municipal bond house in Lexington, Kentucky, where she cut her teeth in the industry in 1983 selling municipal bonds and government securities to institutional clients.
About Author: The author of two books, ROCKET MOM! and Country French Kitchens, she is currently working on What Color is Your Handbag? This book will be the first to explore the roles of gender, personality and neuroeconomics and hopes to explain money in language so that every woman “gets” money. A contributing writer for more than sixteen years, her articles have been syndicated by more than 60,000 unique online sites, blogs and newsletters. Her work has been quoted by Parenting, Good Housekeeping, Redbook, Nickelodeon, NewsDay, BottomLine Personal and Advertising Age and featured on dozens of radio and TV programs nationwide, including the FOX Business News program Your World with Neil Cavuto.
She is the Founder of the SHEeO Network, http://www.SheEONetwork.com; they now number more than 350 women strong. She is also a Co-Founder of Women in Power, a Connecticut-based non-profit group that is devoted to educating women in entrepreneurship.
Carolina believes in giving back and swims every year in the 1.5 mile Open Water Swim for Swim Across America in honor of her son, a leukemia survivor