I was watching Marie Kondo on Netflix last night (yes, being stuck at home due to the coronavirus has become that desperate already). If you haven’t heard of her, she is the author of The Life-Changing Magic of Tidying.
Anyway, it made me think of how a spot of tidying could be applied to our personal finances.
You see, if we have too many financial products, be they bank accounts, pensions, investments or insurances, it leads to us not being really sure what we have.
In turn, this leads to inertia and can stop us engaging with our finances at all.
Simplifying, then, is often the first step to mastering our money.
What we will cover in this post
Disadvantages of having too many financial products/accounts
Risk management
Let’s say you have ten (or even twenty) different investment funds that you have accumulated over the years.
Having multiple funds makes it much harder to keep track of all of the underlying assets that these funds hold.
Not being able to track the underlying assets makes managing the risk of your portfolio impossible.
Diversification
For most investors, a well-diversified investment portfolio is fundamental.
Ideally, the portfolio should be diversified across currency, asset class, geography and industry sector.
This is even more important during the current COVID-19 crisis.
In many ways, we are all part of a giant experiment when it comes to the coronavirus. No one really knows which country is going to manage it best.
At one end of the scale, we have countries like Taiwan and South Korea who, due to their experience with SARS in 2003, clamped down hard and early.
At the other end, we have Sweden where, at the time of writing, bars, restaurants and schools are still open. Who is right? Only time will tell.
The same applies to businesses, some will be hit very hard by the coronavirus, others will come out stronger.
The best way to mitigate the risk is to be extremely well-diversified.
Not being able to obtain a simple snapshot of the underlying assets across your entire portfolio makes it difficult to see whether you are well diversified or not.
Rebalancing
Rebalancing is another investment fundamental. I wrote in detail on the subject here.
Holding multiple funds increases the cost of rebalancing as you have to contend with multiple dealing fees.
Also, buying and selling units across multiple funds or accounts in order to rebalance your portfolio increases the potential for tax charges.
Finally, the more funds or accounts that you have, the more complex the exercise of rebalancing becomes and therefore the less likely you are to do it.
Duplication
Why have 4 UK equity funds or 3 emerging market funds? What is the point, when by and large they will hold the same underlying assets in similar proportions?
Cost management
In amongst all the uncertainty, one thing that we can control is cost.
However, the more funds/pensions etc that you have, the harder this becomes.
If you have one or two funds, it is relatively easy to go online and find out the management fee. If you have ten…
Also, if you are a hoarder of funds or financial products, then it is likely that you have some older style structures.
Financial products are continually evolving and as a result, fees are continually coming down. Some funds now literally have zero per cent management charges.
Hanging on to old-style products means paying more in fees than you need to.
Administration
Finally, the more accounts or funds you have, the more administration that is required.
- More account numbers
- More login details to remember
- More valuations / statements to deal with
- More relationships to manage
- More sets of anti-money laundering requirements
Enough already!
Ahh, but surely having more accounts reduces risk….
I obviously see the point that if you hold accounts with 10 companies and one fails then you are less exposed than if you had all of your assets with one company and it fails.
However, holding accounts with multiple institutions means that you have multiple requirements to do proper due diligence on those institutions.
Often this is too overwhelming so people end up not doing any proper due diligence.
It would be much better to have accounts (funds) with only one or two institutions and to have really done your homework on them so that you are confident that they are financially robust.
Conclusion
I bang on about simplicity a lot.
There is a reason for that.
Complexity leads to inertia, lack of action and all-to-often, mistakes.
While I am not convinced about the need to fold one’s pants neatly in a row a la Marie Kondo, I do firmly believe that keeping our finances as easy to manage as possible is a sound approach.
