WASHINGTON — There鈥檚 a question that I love to ask my new clients when they come with their existing portfolio of investments. 鈥淚f your whole portfolio was in cash, is this what you would be invested in?鈥� If the answer is 鈥渘o,鈥� I find that they fall into one of five categories.
1: The Collector
This person doesn鈥檛 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. 聽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鈥檛 realize is that he may own the same thing in many different forms. With so many investments, it鈥檚 also harder to keep track of how he鈥檚 doing.
When we review the holdings, we typically don鈥檛 find any Rembrandts, just unnecessary clutter that鈥檚 not working to The Collector鈥檚 advantage.
2: The 鈥楽et-It-And-Regret-It鈥� 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鈥檛 found the time to do the research. They鈥檙e busy living their lives which leave them little time to managing their savings.
Unfortunately, what鈥檚 really happening is that they鈥檙e 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鈥檛 reallocated, their portfolio may have become too risky given their age.聽 When the market takes another dip, they may regret their procrastination.
3: The 鈥楧eer-In-Headlights鈥� Investor
These investors may have started with a good plan, but rather than investing their bonuses or inheritance, they鈥檙e 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鈥檛 comfortable making the next move. So they wait and do nothing.
The 鈥淒eer-In-Headlights鈥� portfolio doesn鈥檛 have to be tomorrow鈥檚 road kill. With good investment advice, these investors have the confidence to make that cash work for them.
4: The Lover
It鈥檚 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鈥檛 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鈥檚 not even the stock of the original company.
It鈥檚 surprising how many clients come to us with these types of sentimental holdings. It鈥檚 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鈥檚 40 percent of the portfolio.
5: The Taxophobe
The Taxophobe hates to have to pay any more in taxes than they already do. This 鈥榝ear of taxes鈥� prevents these investors from selling a holding because they don鈥檛 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鈥檚 also not an all or nothing decision. They can always choose to sell a portion.
If any of these investors sounds like you, don鈥檛 fret. Embrace your investing personality, and then take the steps to break free of investing habits that just don鈥檛 work to your advantage.
