The Purpose of a Portfolio

It’s More Than Just a Goal

by David G. Sparks, CFA
President, Heartwood Investments

This article begins a series we call, “The Heart of our Tree,” in which we plan to describe our firm’s investment philosophy. We will share some thoughts we keep coming back to when we sit down to help people manage their portfolios. This first article covers perhaps the most fundamental thought of all because it involves a principle that should never go out of style: faithful stewardship.

Every portfolio exists to afford a benefit to someone, someday.

Click here for an audio podcast of this article.

People save for a reason – a real need, something felt more deeply and strongly than mere desire. It goes to the level of core values that make a person who they are. Something so strong it can make a person say “No” to spending the money today. We know this has to be true, because otherwise the money could surely satisfy needs and desires today and would get spent.

It stays true as savings accumulate and investing begins. It stays true as investments accumulate and become a portfolio. It stays true as long as the portfolio exists. A portfolio has a purpose: to afford a benefit for someone, some day. We believe that investment action should begin with the portfolio’s purpose in mind, be directed toward it, and evaluated by its light.

This is so important that we say, “Write it down.” The purpose of the portfolio belongs on Page One of the Investment Plan for that portfolio. And then we say, as your portfolio manager, “Your Portfolio Is Our Purpose®.”

It might be there to pay for college. Or to supply retirement income. Or as a legacy for grandchildren. But notice how these different purposes imply different time horizons? That’s an important thing to get right.

Keeping long-term dollars in short-term positions for very long can stunt the growth of a portfolio. But keeping short-term dollars exposed to risks that may be suitable only for long-term investments can lead to permanent losses if you have to sell under pressure. Knowing the purpose of a portfolio can help to steer savings toward investments that may better fit the time horizon.

The purpose matters. Write it down.

David Sparks
David Sparks
I am a journalist by first profession. My first full-time job was in radio and television news back in the 1970s. Naturally, I think of writing the purpose of a portfolio as being like reporting a news story on it. So I imagine Dean Frein, my old assignments editor in that newsroom long ago, handing me a clipping from the afternoon paper and growling, “Sparks, there is a new portfolio in town. Go get the story for our Six O’Clock News.”

Here is how I would go about it. I would start with the Six Questions Every Reporter Knows To Ask. In most cases, these six questions will uncover nearly everything it takes to tell any story. There is a trick to remembering these six questions. Five of the questions start with words that begin with the letter “W”, and the sixth question starts with the letter “H”. American journalism students learn these questions as “The Five Ws and the H.”

Rudyard Kipling, the English poet, made the questions easy to remember. He listed them in a short poem while he worked as a reporter for a daily newspaper in India.

I have six, faithful serving men,
They taught me all I knew.
Their names are What, and Where, and When,
And How, and Why, and Who.

To write down the purpose of a portfolio, to tell its story if you will, we need to answer questions like the following:

  • Who is this money intended to benefit?
  • In What way is the portfolio intended to provide the benefit?
  • When will money need to come out of the portfolio to afford the benefit?
  • Why is this benefit important to the people responsible for the portfolio today, especially if they are not the ones who will actually receive benefits from it?

These first four questions that start with W can tell us a lot about the job the portfolio has to do in the future. Who, What, When and Why. The remaining two questions, Where and How, can shed light on something equally important that should not go overlooked: the background and history of the portfolio. This is where you discover the values and principles that motivated the origination of the portfolio in the first place.

  • Where did this money come from? Who accumulated it? When did they start? (There is no rule in journalism against using a W more than once!)
  • How did the person or people who built this portfolio go about accumulating it?

As portfolio managers we think it is really important to know this background because, basically, we see ourselves as partners in stewardship right along with the founders of the portfolio. When they hire us, our job is to hear their voice, honor their principles, and pursue their purposes even as we take responsibility for the day-to-day investment decisions.

Let me give an example.

A friend of mine was telling me about her family’s investments over lunch one day, a few years ago. The portfolio was worth a lot at the time. She was not looking to hire a manager. In fact our firm did not seek a relationship with this portfolio so we don’t know any details. But I would be willing to bet that she has grown it to be worth a lot more today, not only because security market prices were generally rising over the past few years but also because I believe she was so clear about the Purpose of her Portfolio. I used the Six Questions to get the story.

First, the Who-What-When-and-Why. Her portfolio was intended to provide financial security for her parents during their old age, then herself and her husband, then her children. A secondary objective was to teach her children to manage serious money responsibly. She was prepared to distribute money as-needed, but hoped it would be rare. This meant that the portfolio could stay more or less fully invested, with little need to hold cash. Long-term growth was her goal, but with an end in view. She saw it as her way to take care of not only her family but also her community, through philanthropy.

Those facts give a good foundation for managing the portfolio. But the Where and How questions really tell the story and inform the process going forward.

Where did it come from? That is, who put the portfolio together? Her father did, with her sitting by his knee. It became their joint project. She told me how sitting down to work on the portfolio would reconnect her with him in his better days and those happy memories. Watching him study investments and learning from him awakened her to her life’s calling.

How did they do it? Almost literally buying five or ten shares of stock at a time at first, starting with nothing a long time ago and staying disciplined to save, analyze, invest, and monitor progress. Wow! This woman might not see a need to hire professional investment managers today. However, if she ever does, that manager had better understand how her dad and she thought about things, and keep true to those principles.

The same Six Questions can help you even if you are not prepared to hire professional portfolio management, yet. Next time you think about your portfolio, consider asking yourself the Six Questions and write down your answers.

  1. Who is it for?
  2. What is it for?
  3. When does that happen?
  4. Why is it important?
  5. Where did this money come from?
  6. How did we get it to where it is today?

Your answers can be like a map in your hand. Knowing the purpose of your portfolio may help keep you from feeling lost the next time the market goes through a turbulent phase or the road ahead gets hard to see.

P.S. By the way, to all the grammar experts who noticed the misplaced subjective in the first question: yes, we know it should read, “Whom is the money to benefit?” We exercised a bit of license there in keeping with Kipling’s verse and contemporary usage. The important idea comes through anyway, right?

Investing involves risk including the chance of losing money. Past performance gives no assurance of future results. Writing a Portfolio Purpose cannot ensure gains or guard against losses. Accumulating shares over time does not guarantee positive outcomes and might not be right for everyone. See the Disclosures link located nearby for more information and to download a brochure (Form ADV Part 2A) fully describing Heartwood Investments, including fees and risks.

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