Would you in­vest dif­fer­ently given the chance?

The Globe and Mail (Atlantic Edition) - - GLOBE INVESTOR - SCOTT BARLOW sbar­low@globe­and­mail.com

It’s a bit dis­qui­et­ing that he used the rise of Nazi Germany as a metaphor, but au­thor and ven­ture cap­i­tal­ist Mor­gan Housel’s col­umn The Full Re­set pro­vides a use­ful in­vest­ment strat­egy as the new year ap­proaches.

Mr. Housel writes that the rea­son the Ger­man mil­i­tary be­came so quickly and dan­ger­ously pow­er­ful in the 1930s was that it was built from scratch. Stripped of mil­i­tary ca­pa­bil­ity af­ter the First World War, the Ger­mans built their armed forces with the most mod­ern weapons and train­ing, hav­ing no legacy or­ga­ni­za­tional or equip­ment sup­plier is­sues to over­come.

Mr. Housel ap­plied this idea to port­fo­lios: “How many of us, if given a blank slate, would cre­ate an iden­ti­cal port­fo­lio to the one we have now? Some would. Many of us would do some­thing ut­terly dif­fer­ent. But we don’t, be­cause we’re bur­dened by past de­ci­sions and, like the mil­i­tary with an aging fleet, are un­sure if up­dat­ing our equip­ment is worth the high cost.”

As­sess­ing your ex­ist­ing in­vest­ments with a “would I buy this to­day?” is an im­por­tant ex­er­cise and the be­gin­ning of a new year is a good time for it. There are, how­ever, sig­nif­i­cant hur­dles to ex­ten­sive port­fo­lio reshuf­fling, the most im­por­tant of which is the po­ten­tial cost.

In­vestors who pay com­mis­sion for each trans­ac­tion could find it pro­hib­i­tively ex­pen­sive to sell nu­mer­ous po­si­tions and buy oth­ers. It’s also the case that re­search shows an in­verse cor­re­la­tion be­tween the num­ber of port­fo­lio trans­ac­tions and in­vest­ment re­turns – the more trades you make, the lower the per­for­mance tends to be­come.

The other ma­jor hur­dle to big in­vest­ment shifts is a psy­cho­log­i­cal one – ego – and that is some­thing that’s bet­ter to ig­nore. Sell­ing an un­der­per­form­ing stock of­ten car­ries with it an ad­mis­sion of fail­ure, that an in­vest­ment idea we were once ex­cited by has turned out poorly. Maybe if we just wait a bit longer, we think, it will turn out we were right the whole time.

It’s a fine line to walk. Too many changes risk fu­ture per­for­mance, but fall­ing in love with an in­vest­ment and hold­ing it even though the mar­ket’s clearly in­di­cat­ing it’s a piece of garbage is also a ter­ri­ble idea. It can be un­com­fort­able to con­duct a crit­i­cal re­view of your port­fo­lio hold­ings, but it’s an im­por­tant ex­er­cise and a great way to start 2018.

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