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Investing

When it comes to your portfolio, get the right fit

November 27th, 2016 by

What a fashion line can teach us about investing

 
 
 

In the 1980s Donna Karan created a fashion collection called “Seven Easy Pieces”. The clothes were beautiful and minimal—but their price tags weren’t. My entry-level salary meant I could only afford one easy piece. It was a catsuit, not unlike Batwoman’s, but mine was made of black cashmere instead of vinyl. Needless to say, my appearance in the catsuit made an impression on the mostly male staff at the software company where I worked at the time. “Hey, did you forget the rest of your outfit at home?” 

Despite my fashion faux pas, thirty years on, I still admire Donna Karan’s no-nonsense fashion rules. And, come to think of it, those 7 easy rules are a pretty good guide to investing too. 

7 easy pieces of advice for your portfolio

Rule #1: Make Your Life Easier

Donna Karan believes in having a system of dressing. This frees up time to do other things. This works for your wardrobe—and portfolio. It’s easy to keep buying new investments (or clothes). The key is understanding how everything will work together. For example, when I’m over-weighted in navy wool pants, I trim my holdings back to the pants that fit and feel the best. Same thing if I’m over-weighted in a certain asset class or industry. In that case, I take a hard look and find ways to trim back to a better balance. 

Rule #2: Know Yourself, Accentuate the Positive

If you can’t find something positive about your appearance, it’s impossible to get out the door. In investing, if you’re a pessimist, forget about being in the markets because the volatility will kill you. Know what your risk tolerance is—both your financial and emotional tolerance. Some wealthy people can afford the financial risk but not the emotional one. Similarly, others who shouldn’t take on a lot of risk have a strong appetite for it. Be realistic about your strengths and weaknesses and construct your portfolio accordingly.

Rule #3: It’s Not About Your Age

There are so many fashion “rules”, such as wearing our hair short as we age, or avoiding wearing black. While these suggestions may work for some, they won’t suit everyone. Likewise, there are asset allocation guidelines at different life stages. Yet everyone has different circumstances and preferences. For example, some affluent retirees with sufficient cash flow may prefer an aggressive growth strategy instead of a focus on fixed income in order to leave a larger legacy.

Rule #4: The Woman Comes First 

“When she walks into a room, the woman should always be the first thing you see, not her clothes,” says Karan. In wealth management, despite all the math and the technical charts, it’s really a people business. The whole point of creating wealth is to use it to reach our personal life goals. Having the best stock picks or asset allocation is important but we always have to remember what we’re doing it for. 

Rule #5: Discover Your Palette

Like the true New Yorker that she is, Karan can never have enough black in her wardrobe. But that’s not everyone’s favourite hue. For example, Anna Wintour, editor-in-chief of Vogue, never wears it. Likewise, a company may be a strong buy on financial metrics but if it’s not in your “palette”, it’s better to take a pass. For example, if you’re an animal lover, unless you’re a master of compartmentalizing, buying shares in Maple Leaf Foods is not a good idea. 

Rule #6: Focus on the Foundations

Karan’s Seven Easy Pieces = dress, pant, shirt, jacket, skirt, scarf, and the accessory of the season. Without a strong core your wardrobe will always flounder. Ditto with your investments. If you’re always chasing trends your “investment wardrobe” is going to be a mess. Start with a suitable asset allocation and buy quality investments, they will form your core holding. Then, if you feel like it, you can explore. 

And finally…

Rule #7: Comfort is Crucial

Karan preferred fabrics were jersey, devoré velvets, and cashmere that give the body a “liquid power”, as she called it. Her designs exposed a little leg, back, and shoulders (“the one asset for every woman is her shoulders; they never gain weight, and never get wrinkles”). Comfort is a crucial principle in both fashion and investing. Whether you’re a DIY investor or work with an advisor, create the portfolio that makes you feel empowered yet not over-exposed.

 

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