Thread by @breakingthemark

With talk recently about improving a portfolio by adding new assets, I want to talk about the opposite.

Can removing assets improve your portfolio?

Let’s start off with a sports analogy from one of the greatest basketball teams ever.

The 2015 Golden State Warriors were a great basketball team. But in the championship they fell behind early.

Their coach then tried something different. He removed the “center” position from his lineup and replaced him with another forward.

This line up was small. It didn’t have a “big man” as all traditional lineups do.

But removing the biggest player on the court, and playing two small forwards instead, made the team unstoppable and they easily won the remaining games to win the championship.

The new starting group was so unstoppable it garnered the nickname the “death lineup”. The next season the Warriors won more games than any other team in basketball history.

All by removing a key piece of most teams, and replacing them with “more” of an existing type of player.

Now there were trade offs to this strategy.

Rebounding might go down. The quality of interior defense might drop.

But these loses were more than overshadowed by the increases in offensive performance and in the versatility of their perimeter defense.

The Warriors improved by removing an entire skillset from their lineup in order to have more of one they already had.

Portfolio construction is similar. Most portfolios are full of “diverse” assets. But sometimes diversity drags down the portfolio instead of enhancing it.

Do you need a fund for every sector of the market?
Do you need a fund for every possible factor or risk premium?
Do you need to be exposed to every single global market?
Do you need to hold every commodity?
Do you need to hold every type of bond?

It all sounds good on paper, but so does having a 7 footer to defend the rim in basketball.

However what’s often more valuable to a basketball team is removing the 7 footer, and instead putting more outside shooting and a flexible/switchable defense on the floor.

Placing 4% of your wealth in the latest factor sounds like a good idea on paper. You need shot-blocking in your portfolio right?

But there’s only so much space on the floor just as there’s only so much wealth to invest.

That space in your portfolio probably would be better utilized by just owning more of the S&P 500. or more bonds or more gold.

Yes, in some environments, you might miss the new trendy bull market.

But in the long run, focusing on fewer positions that play well together (correlation), share the ball (rebalance), minimize turnovers (volatility), while all still providing scoring (arithmetic return) will lead to more wins (geometric return).

So take a look at your portfolio and ask yourself if you have any positions that should be removed to increase your core holdings.

Your path to an investing championship may not come from adding more investments, but from consolidating down to less.
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