Sentimentality is a powerful emotion. My family laughed when I insisted we pass by the home I grew up in not once, but twice the last time I went back to my home city. I’ll also swing by old apartments, schools, campsites, and other places where I spent a significant amount of time or even a memorable evening. When I proposed to my wife, I wanted to do it on Shelter Island in San Diego at a gazebo where we had danced to music from my boombox a couple of years before. The gazebo apparently was in disrepair and had caution tape around it — it’s actually gone now — so I got down on one knee beside it.
One issue with sentimentality is that it often causes us to keep things long after we should have let them go. This can clutter up our homes, cause us to have two of many things, and sometimes cause us to use items long after their lifetime has expired when we could have a new, shiny one for a few dollars. With investing, holding on to an asset through sentimentality can be devastating.
My father once told me to never fall in love with a stock. While long-term investing is good, sometimes when we’ve owned a stock for a long time we become sentimental about the stock (or other asset). We then become blind to the fact that the company has changed and hold a large position in a company right from the peak down to the ashes. We also might become so convinced that the company is good and will turn around that we’ll continue to plow money into it even as it is going under. Despite giving me this advice, even my father fell into this trap, holding onto a company that he had seen double for years and years after a new CEO was appointed that radically changed the company and drove it into the ground.
Probably the most dangerous time where many people fall into the sentimentality trap is when there is a death. Watch an episode of Hoarders and you’ll see that many of the people who now have paths through their homes among piles of possessions started their hoarding after a death. They ended up keeping everything the person had in an effort to hold onto their memory.
While many people keep clothes and personal items out of sentimentality, which results in clutter and full closets, keeping assets out of sentimentality can cause financial damage. For example, we keep our parents home and rent it out, even though we live in another state, and end up paying all kinds of money to travel to the home and deal with the issues that require us to be at the home. We would never buy a home in another state in order to rent it, but we hold onto our parent’s home because we’re sentimental, and in doing so make a bad financial decision to have a rental property that is hard to manage and possibly a bad rental property as well.
Another thing that might happen is that a relative has a lot of shares in a stock that we end up inheriting. Because the stock reminds us of that relative, we hold onto the stock even though it is way too much money to have in one stock. If something goes wrong at the company, we risk losing the full value of that stock. If we had sold instead, we could have used the money for something useful, or even invested the money so wisely so that it would pay us income for the rest of our lives. The issue is that by having the stock, we remember that relative and we want to hold onto the stock to hold onto a part of him or her. If we sell it and spend it, or even sell it and just add the cash to our regular portfolio, we lose that connection.
Probably the best thing to do in this situation is to still keep the money together to keep the memory, but either spend it in such a way that you can preserve the memory or invest it together in a way where you still reduce the risk. One way to spend the money but still hold the memory is to buy something permanent with the money such as pay in off your home, make a home upgrade, or even buy a vacation home or other luxury. That way each time you see the item, it will remind you of the person. If you are going to invest, you could buy a less risky single asset, such as a local rental property, or a single asset that is diversified in itself such as shares of a mutual fund.
One of the best things you can do with an inheritance such as this is create a separate asset for which you use the income for a special purpose. For example, you could buy shares of a mutual fund and then sell off 10% of the mutual fund each year for a home improvement. Maybe replace a floor one year, then buy a new couch the next, and so in. In this way it is like the relative is giving you a gift each year. As long as the amount you take out each year is modest (maybe between 5-10% from a mutual fund), the relative will keep “giving you gifts” for many years.
In our case, I received money from my Uncle David from a life insurance policy. Rather than putting the money into our portfolio where it might get lost, I put it into an index mutual fund. Each year we withdraw 10% and take a special vacation we call the “Uncle David Trip.” It is not a huge amount of money, but enough for maybe a weekend at a nice hotel or even a week on the road staying in low-cost motels. By doing this, we can share time as a family and remember my uncle while doing so. This is much better than an holding onto an old shirt.
Disclaimer: This blog is not meant to give financial planning advice, it gives information on investment strategies, stock picking, and other matters relevant to the investor. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.