Do your holdings pass the decluttering test?

Aug 12, 2015

Decluttering is hot.

The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing has been perched near the top of best-sellers' lists since it was released last year, and author Marie Kondo is a celebrity in her native Japan. A search for books related to "decluttering" on yields more than 1,100 results.

Decluttering enthusiasts say that getting organised and making do with less stuff helps them think clearly and frees them up to focus on what's really important.

Many of those same virtues can be extended to decluttering a portfolio, a practice I've enthused about in the past. With fewer moving parts to oversee, it's easier to focus on the truly important aspects of your portfolio plan. Are you on track to reach your goals, whether a comfortable retirement or a home down payment? Is your asset allocation sane, given your life stage?

And like decluttering your home, reducing the number of odds and ends in your portfolio has the salutary effect of making life easier for those who have to manage your affairs when you can no longer do it yourself.

Judging from the many portfolios I review at Morningstar, many investors have a similar glut of "stuff" in their portfolios. For every single portfolio I receive that's whippet-thin--without an excess stock, fund, or ETF to spare--I come across 10 more that have 50, 60, or even 100 individual holdings.

Of course, in the scheme of investor problems, overdiversification isn't the worst sin. Having too many holdings won't wreak the same havoc that undersaving will, or overpaying, or performance-chasing. But portfolio sprawl can add to investors' oversight challenges. It can simply be difficult to keep track of the fundamentals of so many holdings, especially if those holdings include individual stocks or actively managed mutual funds. The investor with too many holdings may have trouble figuring out their asset allocations or knowing when or how to rebalance. Having too many stocks and funds can also compound the headaches for an investor's successors. Widows, widowers, and other loved ones may have difficulty untangling the web of the too-acquisitive investor.

Portfolio sprawl can also have negative repercussions for performance. If an investor amasses a lot of holdings, especially multiple diversified equity and bond funds, their performance within each asset class can become very indexlike very quickly. But if that same investor is paying active management fees, sales charges, or some combination thereof, the portfolio may well underperform a buy-and-hold portfolio consisting of simple index funds with ultralow costs.

Put your holdings to the test

Of course, decluttering is more art than science, whether you're getting rid of stuff in your coat closet or your portfolio.

Kondo's criterion is that each possession you hang on to must "spark joy," which is a bit squishy. I can't say that the down parkas in my coat closet spark any sort of joy in my heart, but they are necessary for Chicago winters.

Perhaps more straightforward and practical is the test home-declutterers have long been advised to employ when deciding what to keep and what to toss: Is it useful? Is it beautiful? An item gets bonus points if it's both, but it goes into the pile for Goodwill if it's neither. The parkas? Not beautiful, but useful. They stay.

In a similar vein, portfolio-declutterers can put each of their portfolio holdings to a straightforward test. Beauty isn't a consideration with investments, but usefulness certainly is. Thus, it's reasonable to assess each of your holdings' utility value. Have they delivered on key investment goals, whether growth, income, or stability? Or better yet, have they delivered on more than one of these goals?

Armed with an assessment of how well your holdings have performed the jobs you hired them to do, you can then start to determine what to keep and what to give the heave-ho. Of course, there may be mitigating factors--a holding in your portfolio may not have done much for you lately, but you like its bottom-up attributes. But the simple "jobs" test can help you determine which holdings merit further scrutiny, and possibly dismissal from your portfolio.

Getting the job done

To get started with decluttering your own portfolio, start by tagging each of your holdings with your goal (or goals) for them. What basic investment functions do you expect them to fulfill?

In my view, there are three main goals that investments can serve: growth, income, and stability. (Investments may also help to diversify a total portfolio--and, thus, improve that portfolio's risk/reward profile--but you'd hope that they would also deliver at least some growth, income, or stability along the way.)

Most investors look to their holdings to provide more than one of these basic attributes. For example, you might hold dividend-paying equities for a combination of current income and growth, as well as to be less volatile than your other equity holdings. You own bonds, meanwhile, to help lend stability to your portfolio; you probably also look to them to provide income.

Once you've articulated what you're expecting your holdings to do, you can then size up how well they've delivered. However, narrow peer groups can make it easy to get lost in the weeds, and short-term performance can be noisy.

Here are some simple tests for determining how well your holdings have done their jobs over long periods of time.


Equity holdings shouldn't automatically go on the chopping block if they don't beat the market benchmark. It could be that they look absolutely nothing like those benchmarks, or the trailing time periods cast them in a bad light yet they've earned their keep in other environments. But you'll want to make sure they've delivered on another goal—either income, stability, or diversification--to merit a continuing slot in your portfolio.


Setting an income hurdle is tricky. Does your fund give the dividends you require periodically? This of course depends on whether you have an income fund, an equity fund or a monthly income plan (MIP).


If you're holding an investment to stabilise the more-risky portions of your portfolio, you can go straight to a simple gut check. How did it do in market downturns such as 2008? If you're holding equities because you expect them to hold up better than the broad stock market in a downturn, it's reasonable to look for losses much less than the category average.

A version of this article appeared on Morningstar's U.S. website. It has been edited for an Indian audience.

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