Guest Post Written by Susan Hirshman of “My Fat Assets“I love to watch Downton Abbey. The clothes, the jewelry, the hats; all I can say is fabulous. In fact, many designers have been inspired by this fabulousness and are currently offering collections that have a vintage feel. It is remarkable how a TV show can have such influence over our desires and actions. However, I hope and pray that Downton Abbey’s Earl of Grantham financial style does not shape our investment decisions and behaviors. Why? The concentrated positions, the herd behavior, the lack of planning; all I can say is dreadful.
Concentrated positions occur when a large percentage of an investor’s portfolio is made of up one thing (e.g., a stock, a bond, a sector, etc.). A large percentage in this context is often considered 10% or more of your portfolio, although it can vary depending on various factors. Why is this an issue? Well, if you recall the Earl invested practically all of Lady Grantham’s inheritance in a Canadian Railroad company that was a sure thing (as told to him by his friends) and then subsequently went bankrupt. In other words, he put all his “eggs in one basket” and that basket’s bottom fell out. He was fraught with distress on the train ride home as he should have been. He bet his family’s livelihood on the possibility of one outcome. Instead, a more prudent action would have been to invest in a well allocated and diversified portfolio. This way if one of the companies went bankrupt it would have less of an impact on his family rather than putting them in harm’s way.
Herd behavior is defined as the tendency for individuals to mimic the actions (rational or irrational) of a larger group. As mentioned above, the Earl of Grantham invested in the railroad because his friends were invested and they all said that he couldn’t lose. He did not do his homework and in fact disregarded the advice of his advisors. The lesson for you is to understand what you are investing in – be aware of the risk and return characteristics and how they fit within your overall portfolio. Don’t just follow your friends or headlines. And most importantly always keep in mind the old adage “if it sounds too be good to be true – it is.”
Lack of Planning
In season three we also find out that Downton Abbey has been mismanaged for years. The Earl neglected to have a well-thought-out written plan, which was reviewed and monitored annually. Instead he ran the property by the seat of his pants (which he always needs a valet to help him into). In other words, he did not maximize the value of his assets. Are you guilty of this as well? Too often, investors do not have a well-thought-out investment plan and instead put a little here and a little there – and thus do not have a well-allocated and diversified portfolio that is customized to their specific goals and needs. Also, a lot of people never really think about their portfolio until a life change is about to take place – e.g. retirement, marriage, etc. and at that point it may be too late to fix mistakes or make effective changes. Remember – most people don’t plan to fail, they fail to plan. Up until now, I have been focused on the lack of the Earl of Grantham’s investment savvy – but what about Lady Grantham? Where was she when the Earl was making all these bad decisions? She left herself in the dark, chose to not engage in financial matters and left her family at risk. Yes, it was 1920 – but too many women today do the same thing. So please, in the year 2013 empower yourself, your family and your friends to be an engaged participant in your and their wealth plans. Who says you can’t learn anything by watching TV.