The Life-Changing Magic of Tidying Up... Your Investment Portfolio (Part I)

Simplify Your Investment PortfolioHi. My name is Andy, and I am a hoarder. Okay, perhaps not to the extent that would get me on TV. Nevertheless, I found papers on my desk from 2009. My closet had clothes in it that hadn't been worn since college more than 20 years ago. My general attitude was if something still worked, it's best to sock it away in a drawer until some future time when I might need it. You never know, if I found myself on Let's Make a Deal, that collection of conference name badges might mean real money!

Enter Japanese organizational guru Marie "Konmari" Kondo. Her best selling book The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing has sold more than 2 million copies worldwide. Her KonMari method is simple: keep the belongings that "spark joy" and get rid of those that don’t. A week into a potentially six month decluttering/organizing processes, I have thrown out a garbage can of uneeded papers every day - revealing my desk! I sorted through boxes of old toys taking a trip down memory lane with Battle Star Galactica, Buck Rogers, and Star Wars. While in this deliberate mindset of sorting whether each belonging sparks joy, you might ask yourself, "Can I KonMari my investment portfolio?" My answer is "YES" and let me tell you why.

A Simple Portfolio Should Spark Joy

What I often find when reviewing a portfolio for prospective clients would probably surprise you. In fact, looking under the hood of your investments often reveals a very messy situation. Many portfolios are made up of 8-12 mutual funds and/or exchange traded funds. On the surface, everything looks good. The portfolio is diversified, includes domestic and international, as well as is spread across large cap, small cap, and mid cap stocks. 

Sample Portfolio

  • IWV-iShares Russell 3000
  • IFDSX-VY FMR Diversified Mid Cap S
  • VISVX-Vanguard Small Cap Value Index Inv
  • DFALX-DFA Large Cap International I
  • DFISX-DFA International Small Company I
  • PASDX-PIMCO All Asset D
  • PTTDX-PIMCO Total Return D
  • FDRXX-Fidelity Cash Reserves

According to the American Association of Individual Investors, eight mutual funds (5 equity funds, 2 bond funds, 1 money market fund) is enough -- in other words, can be optimal -- to make an organized, understandable, appropriate and efficient portfolio. Sounds like a winner, right?

Is Your Portfolio A Cluttered Mess?

Not so fast. Let's run this portfolio through Morningstar and see what each fund owns.

  • IWV-iShares Russell 3000 3,023 total stocks
  • IFDSX-VY FMR Diversified Mid Cap S 267 total stocks
  • VISVX-Vanguard Small Cap Value Index Inv 821 total stocks
  • DFALX-DFA Large Cap International I 1,391 total stocks
  • DFISX-DFA International Small Company I 3,737 total stocks
  • PASDX-PIMCO All Asset D 12,087 total fixed income
  • PTTDX-PIMCO Total Return D 14,538 total fixed income
  • FDRXX-Fidelity Cash Reserves 5 total fixed income

Morningstar analysis reveals that these eight funds collectively own more than 8,000 stocks and 21,000 bonds!!!

It is like walking in to a neat, organized room but when you open the closet doors, everything falls out into the room. Those eight funds provide an illusion of simplicity but you essentially own the entire market. It's diversified, you say? Indeed. Used well, diversification reduces risk. When overdone, "diworsification" is the result. Certainly, in Marie Kondo speak, 29,000 individual stocks/bonds leaves a lot of room for discarding issues that do not speak to your heart.

"Kondo challenges you to ask yourself whether each object you have is achieving a purpose. Is it propelling you forward or holding you in the past?" -- USA Today

Next week, I will write about an approach to building a portfolio that sparks joy. Until then, happy cleaning and decluttering!

clean your portfolio clutter

What do you think about Marie Kondo's book? Do you need to declutter and organize your financial life?

 

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About the Author: Andrew Wang

Andrew Wang

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