Stock Market Wisdom From Humpty Dumpty
Humpty Dumpty sat on a wall; Humpty Dumpty had a great fall. All the King's horses And all the King's men Couldn't put Humpty together again! You know this tragic story. During the 45+ years that I have been a financial advisor, I have seen this over and over and over again. A new client comes into my office and asks me to review their old portfolio. Very often it is littered with holdings that make no sense. It might have been possible that each of those holdings was purchased for a specific reason at the time, but when put together it looks like a patchwork piece of cloth, a crazy quilt.
Investment professionals refer to this as a Humpty Dumpty portfolio. This is a portfolio that is broken beyond repair. Truly, all the king's horses and all the king's man couldn't put this portfolio together again. What's the lesson here? How can you avoid being burdened with a Humpty Dumpty portfolio? And, if this does happen to you, what's the best thing to do? The most important lesson to be learned here it is that while it is important to trust your financial advisor, it is also very important for you to pay attention to your own investments. After all, it is your money.
It is important for you to understand that your portfolio should have some coherence. It should be something that matches your long-term financial goals. Your portfolio should not be populated by the latest "stock du jour", recommended by your broker. The main way to avoid the problem is to find a financial advisor who understands your goals and has the ability and willingness to help you reach them. Lastly, if this has happened to you, I'm afraid you will have to swallow some bitter medicine. You might have to sell most or all of your holdings, and start over again. There is no sense in compounding a mistake into an even larger mistake. Conventional wisdom states that your portfolio should be built upon a very strong foundation. This strong foundation should be comprised of high quality stocks and high quality bonds. The best way to visualize the construction of your portfolio is to visualize a pyramid.
As we move up along with the slope of the pyramid, you might consider having smaller and smaller pieces of slightly higher risk investments. Conventional wisdom declares that you should have the proper amount of diversification. Conventional wisdom is never the cutting edge. You may not to double your money overnight with this philosophy but you can be relatively certain that your money will be there in the future when you need it. Conventional wisdom is generally right. Otherwise it would be called conventional stupidity. I grew up in Brooklyn, New York. When this specific event happened, I was far away, on a business trip, so I didn't see it, but I know a guy who knows a guy who did see it and he claims that Dumpty was pushed. But that's another story.
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