I’M A BIG BELIEVER in transparency, so I’d like to tell you a little about my personal investments. As you might guess, the overwhelming majority of my money is allocated to simple, low-cost index funds—the same things I recommend in my writing and for my clients. That is true almost without exception. But today, I would like to describe one of those exceptions.
Many years ago, before I entered the investment industry, I purchased shares in a small mutual fund called the Mairs & Power Growth Fund. Though it was a while ago, I still remember the reasons I chose it: First, I liked the strategy of the fund’s managers. They were based in the Midwest and focused most of their investments locally, buying well-known companies like 3M and other household names. That seemed to make a lot of sense. Second, I liked the conservative approach of the firm’s management. They had been in business since 1931 but, unlike most of their competitors, they had limited themselves to just two mutual funds, adding a third in 2011. In short, they seemed like the kind of people who would stick to their knitting. And they did.
As it turns out, Mairs & Power has been among a minority of mutual funds that has delivered good performance over the years, so this investment turned out well. Nonetheless, in hindsight, I don’t believe my purchase made a whole lot of sense and I wouldn’t do it again. Why not? There was no particular logic to the decision. I was early in my career and bought it because it seemed like a good fund run by good people. In making that judgment, I was right, but my mistake was this: I didn’t consider how it would fit with my overall financial goals.
What do I mean by that? I’ll try to relate it to something that we’ve all experienced: furnishing a house or apartment. Setting up a new home is a lot of work, but it isn’t terribly complicated: In the kitchen you’d want a table and chairs. In the family room, a couch, an easy chair and probably a TV. And so on. It’s intuitive and obvious. So obvious, in fact, that you’d never make the mistake of buying two kitchen tables or, alternatively, neglecting to buy a bed for your bedroom.
But that’s exactly what I did when I bought that randomly selected fund. It were as if I needed to furnish an entire house but ended up buying just an umbrella stand for the front hall, and nothing else.
The lesson: You should think about outfitting your investment portfolio in the same way that you think about outfitting your home. The first step is to spend time thinking through your needs. For example, are you saving for a tuition bill in three months, for a new car in three years or for retirement in three decades? The answer to this question will tell you how to “furnish” your portfolio—that is, how to choose individual investments—so that you don’t end up with the equivalent of one lonely umbrella stand and nowhere to sleep.
Adam M. Grossman’s previous articles include Growing Up (V) and By the Book. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.