A Second Opinion on Your Portfolio

Ask a friend (or yourself) what do you own? No really. What exactly do you own?

Here's a quick exercise: Sit down and write a balance sheet for yourself. You may notice yourself writing the basics first: homes, cars, cash, then "stocks $X, bonds $Y." You may not even differentiate between the two, and if you're a more extraverted person or open-hearted investor, you may even find yourself listing many "$10,000 here, $5,000 there" in different private companies, supporting friends, family or simply hoping for a pop. If you notice that it is thin and vague, or just a plain mess, then it is time to get organized.

Once you understand what it is that you own, it is time to ask why do you own it?

Why do you own this stock? Why this bond? Why this manager? Why this private investment? Why this much cash? Why this much risk? What goals are we supporting?

This is where the balance sheet becomes more interesting. Money is not the goal. It is the thing that flows through you and allows you to accomplish the goal. You may have $5 million, $10 million, $20 million sitting across brokerage accounts, private investments, real estate, cash and everything else. But what is all of it for?

Retirement is an obvious answer, but it is rarely the whole answer and furthermore, it is often overkill. I have met some, but very few, whose goals dictate that they would need $30 million to ‘retire’.

Maybe you want to create a legacy. Have your wealth to stretch across generations or communities. Maybe you want to buy another business. Maybe you want to give a meaningful amount of money away. Maybe you want to maintain a certain lifestyle without ever having to think about whether you can afford it. Maybe you want the freedom to walk away from a career when you feel like it. Likely, it is some combination of all of those things.

The point is not to create a 40-page investment policy statement for your personal life, though at a certain level, it is reasonable to ask if you should. The point is to know what the money is for. To ask how do my assets align with those goals? Once you know what the money is for, you can start asking whether your assets actually support it. This is where I think the concept of unity becomes important.

Your investment portfolio, your cash, your private investments, your real estate, your business interests — these are not separate worlds simply because they show up on separate statements. They are all part of your balance sheet. Or, if you are a Conscious Wealth client, your One Statement. If you own $15 million of a business, $3 million of public equities, $1 million of real estate and $500,000 in cash, you don't really have four different financial lives. You have one. And yet it is surprisingly easy, or even the default, to manage them as though they have nothing to do with one another.

The business may already make up the vast majority of your economic exposure to one industry. Your public portfolio may unknowingly have significant exposure to that same industry. Your private investments may add even more illiquidity. Your cash may be sitting idle because nobody has decided what job it is supposed to have. None of these things are necessarily wrong, but they should make sense together.

That is what I mean by breadth. It is not a quantity demand, but rather a comprehension and comprehensive demand. In other words, acknowledging that the different things you own are actually doing different jobs.

This does not mean you need to understand every security in your portfolio in perfect detail. In fact, I would argue that trying to do so is probably a waste of your time. You should understand your balance sheet the way you understand your budget.

You know (I hope) that a certain amount of money goes toward groceries. You know roughly what you spend, and you probably have a reasonable understanding of what you are buying. You do not need to know the economics of every brand in your pantry, or where every tomato was grown, to understand what that part of your budget is doing. The same should be true of your wealth.

You should be able to look across your balance sheet and understand, broadly, what you own, why you own it, what role it plays, and how it relates to everything else. You do need to know that the collection of stocks, bonds, private investments, real estate, cash and other assets is working toward the same set of objectives.

Another question to ask is am I in discordance with my own money? You can be a very sophisticated investor and still have a balance sheet that disagrees with you. You might tell yourself that liquidity is important while holding a significant portion of your wealth in investments that are difficult to sell. You might tell yourself that you are conservative while carrying a large concentration in one company. You might tell yourself that you are investing for the long term while constantly making short-term decisions. You might tell yourself that your family comes first while having no clear plan for how your wealth actually gets to them.

None of those things necessarily mean that you have made a bad investment. The problem is that your investments, taken together, may no longer reflect what you actually believe is important. That is discordance.

This becomes increasingly important as wealth grows, because complexity tends to grow with it. A person with $500,000 can usually keep most of their financial life in their head. At $10 million, and especially when that $10 million is spread across a business, public markets, private investments, real estate, cash, trusts and other structures, that becomes much harder. At that point, continuity matters.

That does not mean everything needs to be optimized to the same objective. Some money can be there for growth. Some can be there for liquidity. Some can be there for opportunity. Some can be there for legacy. What matters is that you understand those distinctions and that they make sense together.

This is ultimately what I think a good portfolio review should provide: not another list of investments, but a better understanding of the whole.

You should know what you own. You should know why you own it. You should understand what each major piece is intended to accomplish, where the major risks are, and whether the pieces are working together or simply accumulating beside one another.

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