By: George Shirley Opinions are those of George Shirley and not necessarily those of RJFS or Raymond James
I recently attended a funeral of a long-time client at Arlington National Cemetery. Even though I am a native or Arlington VA, this was the first time I had witnessed a ceremony at the cemetery. It was an extremely humbling experience to be amongst so many that had served our nation.
I started working with this client nearly 20 years ago (before I probably deserved to be offering financial advice), and sitting at the ceremony, I was thinking of some of the discussions we had over the years, and what I had learned. This client was extremely knowledgeable about aerospace and defense companies having worked in this field, and his portfolio reflected that knowledge.
Over the years, these companies became sizeable portions of his portfolio. When providing analysis of his portfolio, it clearly revealed a concentration in the areas of aerospace and defense. In addition, I would highlight the risks associated with being overly concentrated, and I would often advise to diversify away from some of his existing holdings. That conversation however, went nowhere, and the client would continue to hold the positions.
When I tried to regurgitate what I had read from our analyst about one of the companies he owned, I received a very lengthy retort and realized that convincing him to sell some of these companies was a losing battle. Over time, I would mention almost jokingly that the advisor in me needed to remind him about the need to add some different holdings, but he knew what he owned and was willing to accept the risk.
This was one of my first experiences with someone who had a portfolio that was not as diversified across sectors and asset classes that the traditional teaching of asset allocation would recommend. This client however, was much more comfortable (in a nod to Peter Lynch) in owning securities that he knew. Investing in what was familiar produced a comfort level that a more diversified portfolio would not.
My job became more about taking this client’s reality into account, and finding investment alternatives that would have a low correlation with the aerospace and defense sectors. When making any other recommendations, I needed to compliment this concentration and balance the portfolio to a more appropriate overall allocation.
This experience taught me a great deal about the psychology of investing and the feeling of tangible ownership associated with owning individual shares of stock. Much like a doctor considers medical history and medication allergies in recommending treatment for different ailments, understanding the reasoning behind someone’s investment philosophy allows for investment strategies that incorporate that philosophy in a way that will satisfy both the investor’s desire for ownership of certain areas of the market, with the advisor’s desire for appropriate diversification.
This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation, is not intended to be a solicitation to buy or sell the securities of the investment sectors referred to herein. Diversification and asset allocation do not ensure a profit or guarantee against loss. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed.