The psychology of financial clutter: why we accumulate bad investments

I'm Howie Lim, this is Money Hacks by The Business Times. We've all got that one draw in the house. It's the place where dead batteries, loose rubber bands, and keys to locks we no longer own go to live out their last days. It's a repository of might need it some day chaos. Now take a look at your financial life, our investments, insurance policies and savings accounts, a well-oiled machine, or are they just a collection of financial junk you've accumulated over the years? Welcome to Money Hacks, we are sorting through the clutter today, joining us to figure out whether or not you actually have a cohesive plan or are you just a collector of financial products is Brian Lowe, head of international wealth management at KGI Singapore, Brian's also a professor at NTU, Brian thanks for your time. No, thank you for having me Howie, what a pleasure to be here. So the accumulation trap, I think is where I want to start, why do so many of us confuse financial activity, like buy more products, opening new accounts, chasing new assets with financial strategy? I think as humans, we like to collect things and we perhaps misinterpret just like in our houses, we keep buying things and we keep buying things and we forget to throw them out. So that's a bad habit to have. But I would fall back on certain, what they call psychological fallbacks. So for example, I think one is bucketing, we tend to think of this bucket as something that we take more risk on and the bucket that we don't take risk on. But the reality is one entire bucket. Even when I was a banker, I had clients to say, you know what, this one was a wrong decision on my jacket one side and we start all over again. And over time, they just accumulate a portfolio of jacket one side of yeah, probably a jacket one side. So I guess it's kind of what we do with our clothes. We think like, okay, we can give it to a friend, we can keep it for later, I'll use it when I lose weight. But guess what? It doesn't really happen. And we just accumulate this big pile. Okay. So to what extent do you think it is the financial services industry that's at fault? Because is it designed to just sell solutions products rather than support the planning of it, the process of planning, et cetera? I can agree with that, but I would probably allude to the industry is prime to sell. Sell you things and not ask you to sell, not to ask you to take profit. So if you think about your own advisor, many a time they call you to buy, bye, bye. How many times they call you to sell the sell? So that hardly happens, and as human beings, we are more lost at version. So the pain of a loss is much larger than the thrill of a gain. So if I ask you to cut loss or something even to enter a new position, you're inherent loss at version will tell you, you know what, I'll wait for you to break even. And even against well intended advice, we tend not to take it. We just say, you know what? Wait for a while. I'll hang on it till the kingdom come. So this idea of loss at version is very inherent, no matter how wealthy or how sophisticated a client may be, I think it still happens to most of us. So two parts to this, one is the industry is prime to ask you to buy. Even when I ask you to sell, especially take loss because the idea no longer works out, I would say a large population have lost a version, and they don't take that advice. Right. Okay. Now we have to audit the draw, the financial junk draw, for the average investor though, what are some of the red flags that we should look out for in our portfolio? That's a sign that it's drifting from an actual plan into a collection of, yeah, jacket one site. Good question. I tell clients and I tell students the same thing. For a portfolio, you only try to answer two questions. Number one is the portfolios do relevant to me. So meaning the items inside, let's say for example, today AI is very relevant, but rewind about two, three years ago, the healthcare sector, GLP one and two was very, very sexy and very relevant, but that has kind of dwindled down and what is relevant and sexy today is a bit different. Two, as a portfolio, it's suitable for me. So from a volatility standpoint, is this something I can stomach? At the end of the day, I think we only to understand the price to pay for return is volatility. So is that something that is still suitable for me? So how we two points, A, is it suitable? Every item is it relevant? I often feel as though things have to be complex. The more complex, the more sophisticated, the better it is because it's all, you know, out of reach for the average investor because some fancy doodar, wealth advisor doesn't come cheap. For example, but that's not true. Is it the psychology of complexity? Maybe you could explain it for us. Hmm. I think like, can we trust a simple portfolio versus a complicated one? What is complicated? I don't know. A lot of things have to meet very often and this that and the don't know what ratio, you know? Okay. In short, I don't think so. I think 80% of the population can deal with very simple portfolio. Now the top 20%, usually they have more complicated stuff because they end up being large shareholders, their own companies, then they try to hedge it off blah, blah, blah. So that's them. But for the bulk of the population, I think we can keep it a bit very straightforward. In fact, I tell my clients, you don't really need more than 10 lines in a portfolio. First of all, decide where you want to go. Two, decide on your S allocation, three, find the best in class to check it in. And I don't think you need anything more than 10 lines to be honest. Still to come, what about the plan and what about consolidating more with Brian Lowe who is the head of international wealth management, KGI Singapore, as we try to empty out our financial junk drawers, stay with us. Market focus weekly, now hosted by Howie Lim. A sharp weekly deep dive into what's moving markets in Singapore and across the region, with analysts and market insiders to break down the forces shaping the week ahead. New episodes every Friday, powered by the journalism of the business times. Find market focus weekly wherever you get your podcast. And now back to Money Hacks from the business times. Welcome back. Brian, I want to talk about the cost of product first thinking because you said earlier that the industry is all about selling, selling, and then just want you to buy, don't sell it on your rent, so to speak. So when a portfolio is built product by product, rather than goal by goal, what's the hidden cost there? Is it fees? Is it loss of an opportunity to align yourself or get your plan aligned to your goals, etc? Hmm, those are three good points that you raised, Howie. I would say you risk deviating from your goal. So the easy way to do it is already remind yourself what is your goal and what is the asset allocation that you want for yourself? Remember my point on being suitable and relevant? The asset allocation answers to, is my portfolio suitable for me. If you think about bonds as perhaps less volatile stuff, then how old you are today is perhaps the kind of percentage that you need for bonds. Right. So it's quite easy. And then you just think about rebalancing between the two large asset classes. What does that do for you? So for example, when equities are super high today, then you just ask yourself, Look, if my allocation is 50/50, then I end up selling some equities to buy bonds. And that behavior has got nothing to do with the markets. You're just tweaking the portfolio back to what is suitable for you. So structure drives behavior. We are all emotional creatures, so we put together a structure to drive our behavior. That's the easy way to keep yourself disciplined and clutter free in your portfolio. Right. Okay, let's say you're at this stage, right? You have been a person who's impulsively buying a lot of products and now you're looking at your check at one side drawer and it's overflowing. Overflowing. Yeah. What do you think of just wiping the slate clean, you know? I take that drawer and just dump it out and start afresh. Or is that not a good idea? Because on a personal level, I recently moved house and it was so difficult to sift through all what's relevant, like you say, and what's maybe, you know, four or five years ago, it can't fit into any more if we're talking about clothes. And I would have liked to just, you know what, I'm going to toss out that entire closet and I'll start afresh at the new place. Okay. If it's your first clean, like every other move is going to be tough. You're going to need lots of boxes. So maybe I can think of a couple of guidelines that you can think of. Number one, how big is the position? If you have a hundred thousand portfolio and the position is $5,000, okay, maybe it's substantial. Anything north of 5%, but anything less, either you consolidate a position or you can chuck it. Second, when you think of consolidating chances are you have the three local banks, for example. So do you need all the three banks or one will kind of do if you have bought into Nvidia, AVG or AMD, do you really need all three, or you can consolidate into the industry leader, or even better, you can consolidate into an ETF. So that's one way, are you having the same underlying economic drivers? So you end up monitoring a lot of Gachampute for no good reason. second, the overall portfolio, is it still relevant to you. Is it still suitable for you? Each individual line, I would kind of think through. Like, for example, clean energy was very in the vault during COVID, but most of these kind of shares are languishing now, whereas the data center kind of energy is more involved today. And then the last point is simply place the stock against the SMP index. If it can't even beat the average, then I don't see how it's going to perform in the near future. So three things, think about the underlying economic drivers to consolidate, think about your own SL location, and lastly, think about who has actually managed to upperform an average. Would you say those are foundational pillars that one should adhere to when it comes to sorting out the straw, thinking about throwing things out and prioritizing? Yes, I was soliciting so, and I would just ask everybody to fall back into my simple two questions. A) is this suitable for you? Yes, and B) is this relevant? And the answer is yes and yes, keep it. But chances are, most of it is not relevant anymore. Do you think throwing stuff out could actually become a wealth-generating strategy? 100 percent. Oh, how? Clutter doesn't make you think, well, does it? So when your portfolio is clean, it has a few lines, you can watch it closely. Okay, what about those legacy sort of financial products? You know, I've had it for so long. Kind of thing. I like to tell myself, friends, clients, if markets is at all time high now, if it could have come back, it would have came back. So in this market, if it's still languishing, chances are you better off moving at least to the index. That's what I would share. Yeah. Why do you think, though, let's dive into a bit of the psychology of it, this hanging on to legacy financial products? What's it? It's a case of it's it again, the whole, I don't want to lose out the loss of version you were talking about. Yeah, it's probably a loss of version. If you're holding to a broad index like the S&P, I think fine, you know, market cycle applies. So over time, we have seen it happen. But if you're holding on to a single share or a single bond, that's tough. You need a lot of factors to happen. Good management to come in, economic wins to be behind you. So many things need to happen. There is for an index, you can't just write, you know, the world best 500 if a much better chance of coming back through the index. Do you think a person can do it on their own, clear out their financial jump draw? Because I really, during the moving process, thought about hiring an organizer. You can. You can give me a call, how we, I'll be happy to be your Marie condo. But I think when you use an advisor, you can ask them for an opinion on the relevancy question, like all these shares, all these junk, does it have a place in my home today? Maybe you are moving to a huge landed property. Fine, you have all this space. But if you are downsizing or you're moving to a small condo, then you need to revise. So similarly, if I have a long time horizon, aka a landed house, maybe I can afford to have more junk. So I have more time to sort it out. But if I'm closing into retirement, maybe not so. So I think it needs to be waited against what kind of house you are moving in as well. But junk is junk. Let's say you're holding onto a defaulted bond. What are the chances of it being re-structured and coming back to 100? How do you deal with people who say, you never know? You never know. But what is the certainty of that happening, with service, something doing well? Prof, I wish you had more time. Thank you so much for your insights today. Thank you. Thank you. Thank you. Thank you. Brian Lo, head of International Wealth Management KGI Singapore. He's also a professor at NTU. This has been Money Hacks by the Business Times. I'm Howie Lim. This is a podcast by the Business Times. Find more BT podcasts at businesstimes.com.sg/podcasts. Or wherever you get your podcasts. This podcast is meant to provide general information only. SPH Media accepts no liability for loss arising from any reliance on the podcast or use of third parties products and services. Please consult professional advisors for independent advice.