Ever since the popular series Tidying up with Marie Kondo hit Netflix on 1 Jan, it sparked an avalanche of self examination among viewers and an endless supply of memes / tweets.
The awesome thing about the show is that it brought minimalism to the mainstream spotlight and sparked a decluttering revolution especially in the US.
Despite being a hoarder in many ways, watching the show didn’t actually get me thinking about my sty of a bedroom (I’m a horrible person, I know). I actually thought about whether my portfolio needed decluttering ?
The ill-disciplined investor
Let’s face it, investors can be like magpies. With so many shiny stocks and so many opportunities in the market, we are influenced into buying them and tucking them into their nests CDP accounts. Over time, we forget about them and chase the never ending stream of opportunities.
Or we might have bought a stock many years ago that has turned into a multi-bagger, but due to industry disruption it is now in decline. Or let’s say you bought a cancerous stock that does nothing but go down, but because of fear of crystalising that loss, you choose to hold on to that stinker.
Due to all these various reasons, investors sometimes end up with a lot of clutter in their portfolio.
Relationship between Clutter Diversification and Risk
We might justify this by claiming that it is for diversification purposes. Yes, diversification is important in investing as a risk mitigation tool. Having only a single stock in your portfolio is extremely risky, no matter how bullish you are on the company. If anything wrong happens to that company, you could wipe out years of hard work.
However, having too many stocks creates a different problem. Not only does it take a ridiculous amount of time and effort to keep track of all of the companies’ news, the risk mitigated by each new stock you add to your portfolio diminishes beyond a certain number of stocks. This is illustrated in a 1977 research publication by Elton & Gruber that studied risk (measured by portfolio variance) versus portfolio size:
As a general rule, most people preach 10-20 stocks as the right number for a portfolio. I would generally agree with that and add that 25-30 stocks should be the absolute maximum number in your portfolio.
Basically, if you have more single stocks in your actively managed portfolio than the STI or DJIA, maybe you should be thinking about streamlining your portfolio.
With 17 stocks / ETFs in my portfolio at the moment, my portfolio is currently at its most cluttered state since I started investing back in 2013.
Which kinda explains my reaction to the show.
Applying the KonMari method
That initial thought about decluttering my portfolio led me to think about how I would apply the KonMari method to my portfolio.
The general concept of the KonMari method (based on my interpretation) is to be acutely aware of everything that you have and having a deep understanding of each item to determine if it is something that sparks joy and is something you wish to take it along with you to your desired future.
In that sense, you can apply the method to declutter your portfolio as well. Here are the steps I adapted from the KonMari method to examine your portfolio.
Step 1: Gather all your CDP / Brokerage statements
Marie Kondo usually starts by getting her clients to pile their clothes, books and items in one location. Part of this step is to take in how much you actually have and understand how you feel about the pile of stuff.
Similarly, take all your various brokerage statements and lay them out on a table.
Think about the length of the statements. Are there 30 or more line items in your statements? How do you feel about the number of stocks you have?
Bear this feeling in mind as you move on to the other steps.
Step 2: Identify and separate your “sentimental” stocks
Marie advises her clients to tackle sentimental items last, as it is difficult to be objective with them and potentially slow down the tidying up process.
For your portfolio, these tend to be your multi-baggers, stocks you’ve held for a long time or even stocks you’ve inherited. Simply put, stocks that you have a potential bias towards.
Once you’ve identified them, tackle them last in Step 3.
Step 3: Examine each stock and determine if it sparks joy for you
In the show, Marie gets her clients to pick up each item, feel it and determine if it sparks joy for them. She describes the items that sparks joy tend to give you the chills, or make you feel warm and fuzzy. It can also be something you use often or represents you or your desired future.
Of course, you shouldn’t keep your stocks based on emotion or fond memories. This is usually what leads to your cluttered portfolio in the first place. Instead, pick up and analyse each stock and determine if the company’s future sparks joy for you.
Depending on your investing style, this can mean different things. A growth investor would love the company’s growth trajectory. A income investor would love the sustainable growing dividend stream the stock provides. Ultimately, the company’s future should speak and identify with your investment philosophy.
If a stock sparks joy, keep it in your portfolio. If not, thank your stock for all the income / capital gains / losses lessons it has taught you over the years and sell it as soon as favourably possible.
Step 4: Rinse and repeat whenever you are considering a stock
Applying this method also constantly forces you to be very thoughtful and picky about your stock picks.
In a world where many potential investment opportunities keep coming your way, you have to be conscientious in picking only the best stocks, the stock who’s future sparks joy, for your portfolio.
Just like batting in a baseball game, you should only swing when the pitch is in your switch spot, like how Warren Buffett has been doing all his life.
Final Thoughts
Having a slim and focused portfolio can mitigate risk while also maximising your potential return if you are right in your investment thesis. If you have a cluttered portfolio, maybe learn a thing or 2 from Marie Kondo to refocus your portfolio.
Personally, I feel my portfolio is not in dire need of decluttering yet, but I’ll be on the lookout in the future should I decide to add more stocks.
Happy Hunting,
KK
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