We take it with us. Our past experiences, the people we knew at points in our lives, and the things people told us about ourselves, all get placed in a bag. Then we carry it around as we go through life, meet new people, and have new experiences. 

But, as I was finally cleaning out my wallet, full of faded receipts, ticket stubs, and the like, I thought about how it’s helpful to periodically stop and go through that bag. And equally consider what we are carrying around that may not help us anymore. As I’ve aged, the notion that my history is not who I am has become more fully a part of me. In particular, who I am at my core is not defined by what I was told at any point in my past.

I think the same applies to portfolios. One’s personal portfolio should shift over time as they change and their circumstances change. Hanging on to stuff “just because” in a portfolio is as unadvisable as it is in life. As we head to the last quarter of the year, it's a good time to take a peek at it now. Perhaps you’ve been avoiding it. And truth be told, if you are in it for the long term, that’s not a bad strategy in a down year like this has been so far, to ensure you don’t just react.

But ignore it too long, and you might miss opportunities. 

A study* done on investors years ago identified what they formally called the disposition effect, and informally, “get-even-itis.” Simply put, they said the “original purchase price serves as a reference point in investment decisions...investors sell winners too early and hold losers too long.” Interestingly, there have been further studies confirming this, often showing that the winners in portfolios keep winning, while the losers do not always turn around. 

Intuitively, the market does not care what price a stock was purchased at, its IPO price, or anything related. In the long run, it only cares where the trajectory of a business is going relative to its current price. 

So it may be time to review your portfolio and say, would I still buy this company’s stock (or other asset) today? Or am I hanging on in the hopes of breaking even? 

The other opportunity in a year like this — depending on your personal income situation — is to harvest losses. By that, I mean review your positions and sell ones that are down, so you can match those to any you sold this year for a gain, helping to mitigate your tax bill. Even if you don’t have gains, you can offset up to $3,000 of your ordinary income and carry any additional losses into the future with you to put against future gains. 

So you don’t miss out on being invested, consider taking the sale proceeds to invest in something similar, but not exactly the same (be aware of the 30 day rule, which could prohibit taking the loss right away). While this idea is best to review against IRS rules and/or with a tax advisor, it’s something many investors have been doing for generations to prune their portfolios.

After I was done cleaning out my wallet, not only could it close more easily, it was lighter and less of a burden. I now have space to hold something important for my future self. 

Give it a try.   

*Shefrin & Statman 1985 and later work in 2000.