Saturday, January 01, 2022

Clearing The (Portfolio) Clutter

Many years ago on an episode of a sitcom, might have been Just Shoot Me or Stark Raving Mad, one of the characters was apartment sitting for a minimalist and all that was in the apartment was an orchid on a pedestal and a hairless cat and every wall was bare and white. 

For my wife and me that is front burner funny, it comes up pretty regularly. I have some interest in minimalism where possible but not to the extent of making our lives more difficult. Here is an article of a family who greatly benefitted from going minimalist purging a lot of unnecessary stuff but also uncluttering their lives. 

To the extent anyone is overwhelmed by how much stuff they have or how busy they are, reducing that baggage will be very helpful unless I suppose there's some sort of psychology underlying the problem. Throwing away clothing you haven't worn in a long time will certainly feel good but might just be a band aid for someone who needs help. I could stand to get rid of some clothing although we are not pinched for space and my wife says I have very little clothing as it is. I have long sleeve t-shirt from the Maui Invitational in 2009 that is now one size too big but I love it so I keep it. 


There's other stuff I could let go though. We have a collection of Deneen Pottery mugs from various national parks, national monuments and the like that we could thin down considerably. My wife says no and where the disagreement is so mild, and again we're not pinched for space, we still have them all. There's other stuff too, not too much, that I wouldn't mind getting rid of but we feel no stress from having it. 

One spot where we really have a lot of stuff is in our barn. We have tools, various sized screws, nails, nuts, cleaning supplies for our rental, tarps, extension cords and so on. If anything looks like a mess on our property it is this but the nature of where and how we live, these things regularly come in handy even if a little of it is junk and even if we could level up our organization. 

Last winter we had a clog in our gray line about 15 feet from where it goes out into the forest. First I tried snaking it manually but it couldn't get through the gunk. Long story short I had to replace the PVC and change the angle of the line. Having the materials we needed here made it a much smaller project for not having to go to Home Depot. Any errand into town is at least an hour round trip. Far from being a source of stress, having the stuff in the barn makes our lives easier more often than not. As a note, the gunking up of our gray line was caused by using pods of detergent in our dishwasher, the plastic covering the actual soap clogged up the line. 

Knowing what stuff you don't need, what stuff is neutral (no big either way) and know what stuff you do need is a pretty important skill. I'm not talking about junk in our houses anymore.

We've been saying for a long time here that if you put all your money into one or two funds, especially when you're young and continue to add money in while never panicking then you'll benefit from the broad market just doing what it has always done, gone up about 7-9% annualized over very long periods of time. Going forward it is very likely to do the same thing and if you own 1-2 broad market funds you'll capture that effect. This concept, I learned in the last couple of years is ergodicity. 

This uncluttered simplicity can definitely work for someone in their 20's or 30's. Maybe today that looks like a large percentage in an equity index fund, a small amount in crypto and an emergency cash reserve.

That sort of simplicity will eventually become suboptimal you accumulate more money, have to manage personal risks that could derail your plans like sequence of return risk along with changes in tolerances for risk and volatility. Someone who is 60 and wants to retire sometime between tomorrow and 10 years from now probably shouldn't be 90/10 domestic equities/crypto. 

We all come at this differently of course but I want to include diversifiers that will help smooth out the ride. I certainly want growth but I don't need every last basis point of return and volatility. If you agree with that, then the portfolio becomes a little more involved. If you want the modest asymmetric return that some stocks offer then your portfolio becomes a little more involved. If you want a few basis points of your total return to come from dividends, further smoothing out the ride (maybe) then your portfolio becomes a little more involved still. 

Examples here, I've owned Nike (NKE) for clients since 2006. Although it hasn't had the asymmetry of Bitcoin, it's been pretty good. I've owned Johnson & Johnson (JNJ) for clients since 2004. It mostly tracked the market until the start of 2020 with a much higher yield than the market. It has been a steady Eddie, and that attribute plays a role in a diversified portfolio even if you never expect it to be your top performer. What I don't think clients need, what I think would be portfolio clutter is a lottery ticket Bitcoin miner. Any of those names could certainly do well but they are sources of extreme volatility with no fundamentals to fall back on and the reality that Bitcoin, the underlying crypto could thrive without them. I feel the same way about solar stocks. I'm a fan of solar, our home is on solar but the stocks correlate to oil stocks with far more volatility. For the typical person who hires an advisor, so someone who had made most of their money, need their money to grow prudently and meet their income needs without depleting for however long they need it, adding volatility for volatility's sake becomes unnecessary portfolio junk.    

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