Maslow’s Hierarchy of Needs & The Portfolio Investment Pyramid

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Yesterday, I looked back at extending the Maslow Hierarchy of Needs to Personal Finance. The basic idea of the triangle or pyramid is that lower needs must be satisfied before the higher needs can be addressed. For example, one must first obtain food and water before worrying about protecting my property. In terms of personal finance, you need to cover your food and shelter bills before worrying about homeowner’s insurance premiums.

Now let’s explore how investment professionals have extended this concept to portfolio investing. Again, the bottom level is the most important and forms the “base” of a solid portfolio. After that, you can move on the next concern. You can see that there is debate even amongst experts as to relative importance.

Here’s Christine Benz of Morningstar in How Do Your Financial Priorities Stack Up With Our Pyramid?

pyramid_morn

Here’s Morgan Housel of Fool.com in The Hierarchy of Investor Needs:

pyramid_housel

Here’s Cullen Roche of Pragmatic Capitalism in Thoughts on the Hierarchy of Investor Needs:

pyramid_roche

The four common factors are:

  • Security Selection
  • Tax Efficiency
  • Investor Behavior
  • Asset Allocation

Two out of the three proposed pyramids above have Investor Behavior as the most important. I can see how this factor has the greatest impact on real-world returns, but it is also the hardest to really quantify ahead of time. You can write down on a piece of paper “I will not panic during the next crisis but will do XX instead” but that doesn’t mean you’ll actually do it (though it will probably help on average). In addition, it is also intertwined with asset allocation since the less your portfolio value drops in a bear market, the more likely you’ll stick with your plan. Meanwhile, you can quantify fees and transaction costs quite easily.

I think this debate makes for interesting conversation for investing geeks like myself, but in the end a good investor would address all of these factors. For example, I would never put off examining fees just because it is at the top of such a pyramid.

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Comments

  1. Love the visuals. Your savings rate and your ability to make a couple of good decisions and not change them are definitely more important than the minutiae of asset allocation or stock picking.

  2. Important graph here! Investing can be a great idea, but you have to know what you’re doing to be successful. Thanks for this informative post on investments!

  3. Investor behavior and asset allocation are definitely the most important aspects to understand. Very simple to understand, but people are emotional creatures especially when it comes to their money.

  4. Investor behavior is most likely associated with “developing a character.” it’s another way of saying, before you invest, develop your character first. Character that is suited in the world of investment, i.e. sharp analysis, ability to accept losses, adaptability and foresight. Just maybe…

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