Get rid of the clutter: The art of subtraction simplifies your personal finances

Whether these are routine or special situations, our default response as humans is to add, not subtract. Adding more clothes to your wardrobe, more tasks on your to-do list, more gadgets for convenience, more company meetings to solve problems. Addition is more intuitive and simpler, while subtraction requires some effort to think and reason. This trend also extends to personal finance decisions.

A common refrain among investors is: I have invested in stocks, mutual funds, FDs, bonds, postal schemes, sovereign gold bond scheme, LIC politics, real estate. Aur naya kya hai?“(What else is new?)

The multitude of options available today, the abundance of information bombarded every second on social media, and the determination to pursue profits often make investors frenzied and curious to discover new investment products.

As a result, they often lose sight of the big picture of asset allocation, which is more important. Investors don’t understand that their money is essentially in four asset classes – debt, equity, gold and real estate – regardless of how the products are packaged.

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Frequent addition of new products to the portfolio is the result of a random approach to investment, which in the long run does not significantly affect the investor’s financial life. Such thoughtless excesses increase the risk of portfolio over-diversification and overlap.

“Less is only more when more is not good!” – this is a popular quote by Frank Lloyd.

To clarify this, here are some intriguing questions:

If you have invested in a pure large-cap, mid-cap and small-cap fund, is there a need to add a flexicap or multicap fund to your portfolio?
If you have invested in debt and equity funds and run separate buckets, do you need to add a hybrid fund?
If you have invested in a Nifty 100 index fund, do you need an active large-cap fund?
If you have invested in NPS and equity funds for retirement, do you need a retirement solutions fund?
If you have invested in an ELSS fund to get tax benefits of 80C, should you add another tax saving fund in the next financial year?

The answers lie in these questions themselves.

Moreover, if investments are too numerous and dispersed, they become cumbersome to manage and track. If there is no breadwinner in the family, it is difficult to consolidate all finances.

Apply filters and eliminate options like how a player plays in Kaun Banega Crorepati to get the right answer.

Refine and reorient

So how can you avoid arbitrarily adding new products to your portfolio? A counterintuitive approach might be to take some actions and make some personal finance decisions by subtraction.

Apply filters and eliminate options such as how the participant plays Kaun Banega Crorepati to get the right answer. Whether it’s eliminating unprofitable investments, eliminating overlaps, or investing in a new product, an investor can start by asking themselves:

Why am I investing?
What is my investment time horizon?
Do I want to take on additional risk in my existing portfolio?
How does this new investment fit into my overall portfolio?
Am I investing appropriately in a similar product or asset class?
Do I need to rebalance my portfolio?

These pertinent questions will refine and reorient investors’ priorities that really matter in their financial lives.

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With 24/7 business channels, social media, advertising, and stock market noise, internalizing how to subtract won’t be easy. It is essential to understand that subtraction is not about discarding something, but about choosing what is most important. This also means that one less action should be taken, which is to do nothing.

American author Mathew May aptly mentions this in his book The Law of Subtraction. He explains: “If you focus on what to ignore, what to skip, and what not to do, decisions will become exponentially easier!”

Read also: Be careful, a financial plan that neglects insurance can leave you high and dry

The fewer decisions or actions you take, the more focused your investment strategy will ultimately be. After all, investing is just about making a few right decisions. With the power of subtraction, investors can gradually adapt to ignoring external noise and peer pressure, face the FOMO effect, and learn to make effective financial decisions.

Roshni Nayak is a Sebi registered investment advisor and founder of GoalBridge.