You can't spend one side of the coin without the other

By Prev Info - October 18, 2022

 Teaching children about money can open your mind to clearer thinking about your own investor behavior. While I was recently discussing the value of various coins and how they combine to purchase “goodies” with a group of 5-year-olds, a precious little girl suddenly looking puzzled and asked me, “Why can’t I spend the head and save the other side for later?” I realized there is a money lesson here for all of us.

We occasionally invest our money like it has only one side, when the process is truly multidimensional. There are two sides to each investment decision you make: With each thought each assumption you have about your portfolio, there are several questions you should ask yourself before taking action.  In the examples below, consider “heads” to be those investment statements you make or have heard others make, and “tails” the questions you should ask in response.


I’m thinking of adding a new investment to my portfolio.


Does this investment duplicate something I already own?

How does this investment fit into my overall portfolio plan?

Do I have a portfolio plan?

We have a tendency to add new investments to a portfolio without assessing the impact to the overall asset allocation. The picture becomes clearer through a written, formalized plan. It is also common to overlap investments within the same industry or asset class because we tend to gravitate toward what’s performed best in the past. The danger is that what’s done well in the past may not follow the same upward path going forward. Look forward and consider underperforming asset classes as open doors to buying opportunities.


My portfolio is underperforming.


Am I comparing this portfolio to the correct benchmarks?

How much risk am I taking to receive the return?

How do I feel about my portfolio during good and bad market days?

No single benchmark fits all portfolios. You should examine benchmarks that reflect how your portfolio is invested. We believe, the performance of an individual investment can be measured in two ways — first against an index that tracks its asset category and then against similar investments in its category. For example, you wouldn’t compare the performance of your large-company U.S. stocks to an international benchmark.

Outperforming an index is not a financial goal; if you are outperforming, it could be due to excessive risk, or quite frankly, luck. If you’re underperforming based on appropriate benchmarking, narrow down to the positions that are causing the drag and determine whether the reasons you bought those specific investments are still valid. If they are, stick with them.

Your portfolio needs to be one you live with in good and bad times. If your mood hinges on short-term market forecasts or the under or overperformance of a specific investment, then it’s time to refocus on the long-term financial goals you’re trying to reach and the overall progress you’re making towards those goals. If you’re not progressing the way you’ve hoped, yet the portfolio is allocated properly, it could be time to change your behavior such as saving more or spending less. Dramatically increasing portfolio risk is not a good option.

Changing your risk profile based on whether stocks are in the red or in the green is a common behavioral obstacle you want to avoid.  If you become aggressive or take on more risk as stocks rise and then get conservative as they come down, then your risk tolerance is a moving target. Understanding your risk tolerance level and maintaining it throughout various market cycles will help prevent you from buying high and selling low.


I’ll sell that investment when it gets back to the price I bought it.


Why do I believe the investment is going to get back to the price I bought it?

What are my reasons for selling this position, what’s changed?

How do I seek out a second opinion?

As investors, we have a tendency to mentally attach ourselves to prices we pay for investments and subsequently make decisions based solely on how far they rise or fall from that point. Set yourself free now from the anchor and scrutinize your portfolio holdings with a fresh perspective. For example, if there has been a price decrease, investigate to determine if the change was driven by short-term market sentiment or something more serious. If a fundamental problem exists, it may be a good reason to sell now and reinvest the proceeds in a better opportunity.

We’re partial to our own opinions and will actively seek validation from others to support our thinking. Thinking “tails” means searching out conflicting opinion and avoiding something called confirmation bias. It’s common to disregard or minimize evidence that conflicts with our beliefs; however, if you’re not actively listening to disconfirming information, you’re not capturing the entire story. Get a second opinion from someone who disagrees with you! Then weigh the pros and cons of your prospective sell.


I feel the need to make changes to my portfolio on a regular basis or it is not going to perform well.


What’s motivating the change?

How will I execute them?

When should I pull the trigger on the changes?

Rebalancing the portfolio on a regular basis is important; changing investments frequently, based on “gut” feeling or creating activity because you’re under the impression that frequent change leads to increased performance, will actually hurt more than help. Overall, your odds of success may decrease depending on the taxes and transaction costs.

If you try to rebalance based on a schedule or some form of discipline, then pull the trigger on all the changes at once, especially if you’re selling in an IRA or retirement account where taxes are not a concern. Don’t try to outthink the market; rebalance accordingly to manage risk. If your changes require selling in a taxable account, consider a more surgical approach by shaving down investments that would be taxed at lower capital-gain rates.

Spending the heads now and saving the tails for later would be nice, but it’s not possible (and not easy to explain to a 5-year-old.) Investing without understanding both sides of a portfolio decision is possible, but why chance it? Think multidimensional with each investment decision you make.



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