I have a confession to make. My high school-aged kids have a plastic storage container in their room full of CDs — not Certificates of Deposit, but compact discs. It’s tucked away next to the portable CD player/boom box, in the corner under the binder of my son’s old Pokémon cards. If you remove the pile of dirty laundry hiding it all, you’ll find some real bangers in there: Led Zeppelin, The Clash, Prince, Bob Dylan, The Police, David Bowie, Van Halen. It’s an Ivy League education of seminal albums right at their fingertips. I refuse to deny them this. If only they would turn off the streaming music on their iPhones long enough to immerse themselves in a full album, they would experience REAL music.
I know what needs to be done; I’m just not ready to do it yet. This is a classic example of the endowment effect in action—a psychological term suggesting we overvalue our possessions simply because they are ours. This quirky cognitive bias doesn’t only clutter our closets; it also affects our investment decisions.
We see this often at OWA when we take a deep dive into a prospective client’s portfolio – obscure, one-off stock positions that are legacy holdings from an old employer, a gift, or an inheritance. These stocks are imbued with an irrational sentimentality, assigned a value far beyond their potential future cash flows. Would you buy more of that stock? Probably not. But am I going to sell it? Definitely not. As you might guess, this stubbornness can make portfolios start to resemble my kids’ cluttered room.
To be clear, I’m not suggesting you need to sell the 10 shares of Macy’s (M) that Nana bought you 30 years ago for your birthday. However, a periodic “reality check” to clean out financial clutter and right size overweight positions is crucial for maintaining a healthy portfolio.
Now that I think about it, I know exactly what to do with those old CDs. They’ll fit perfectly on the bottom shelf of their bookcase. I just need to get rid of that encyclopedia set my parents gave me, which they’re never going to read.
