The tidiness trap

Summary: The urge to “tidy up” a messy portfolio is psychological, not financial. This piece explains why investors crave neatness, how control, comparison and advice culture fuel unnecessary churn, and why post-2018 taxes make cosmetic clean-ups costly. Messy but compounding still wins.

A few months ago, I wrote about what I called the costly illusion of portfolio perfection—the mistaken belief that a messy portfolio is inherently a problem portfolio. The responses were illuminating. Many readers recognised themselves in the description: the anxious glances at a list of 12 funds, the nagging feeling that something needed to be done, the temptation to “clean up” holdings accumulated over the years. But what struck me most was a recurring question: “I know I shouldn’t sell just to tidy up, but why do I still want to?”

It’s worth exploring—because the urge to tidy runs deeper than aesthetics. Understanding that impulse is the first step in resisting it. And resisting it matters more since 2018, when selling mutual funds stopped being tax-free.

Let me start with an observation from a different domain. Have you noticed how satisfying it feels to clear out a cluttered cupboard? There’s something almost visceral about the before-and-after transformation—chaos becoming order, confusion becoming clarity. Psychologists call this “completion bias”: our preference for tasks with clear endings and visible results. We’re wired to seek closure and the satisfaction of a job done.

This instinct serves us well in everyday life. A cluttered desk impedes work. An overstuffed wardrobe slows mornings. A disorganised kitchen hampers cooking. In these domains, tidying produces tangible benefits. But in investing, the rules are fundamentally different.

Here’s what makes investing peculiar: a “messy” set of good funds isn’t costing you anything. A portfolio of 12 funds performs exactly as well as a portfolio of four funds of equivalent quality. The messiness is visual. It exists on your screen, your statements, perhaps in your head—but not in your returns.

Yet the urge to tidy persists. And I think several psychological forces are at play.

The first is what I’d call “control theatre.” Markets are inherently unpredictable. We cannot control whether our funds go up or down next month, whether inflation rises or falls, or whether global events disrupt our careful plans. This uncertainty is uncomfortable, and one way we cope with it is by finding things we can control. Reorganising a portfolio feels like taking action. Never mind that the action itself may be counterproductive—the feeling of control is its own reward.

The second force is social comparison. When we read about model portfolios in magazines or see neat four-fund structures recommended by experts, our own sprawling collections can feel inadequate by comparison. There’s an implicit message that sophisticated investors have streamlined holdings, that simplicity is a sign of wisdom. This creates a kind of portfolio shame, a sense that our accumulated funds represent some failure of discipline or strategy.

The third force, perhaps the most insidious, comes from the financial industry itself. Advisors and platforms need to demonstrate value. The easiest way to show that advice is being rendered, and that expertise is being applied, is to recommend changes. “Exit this, enter that, rotate here, consolidate there”, it looks like wisdom in action. A recommendation to do nothing, to leave well enough alone, feels like non-advice, like paying for a service you didn’t receive.

All of these forces push in the same direction: toward activity, toward change, toward the satisfying feeling of a tidier portfolio. And until 2018, indulging this urge was relatively harmless. You could sell and reorganise without much tax consequence, and if the psychological benefit outweighed the transaction costs, it might even be worthwhile.

I should confess something here. In those pre-2018 days, I was a constant proponent of portfolio clean-up and compact portfolios—in my columns, in our magazines and in countless television appearances. “Consolidte your holdings,” I would say. “A good portfolio needs no more than four to six funds.” It was easy to give advice when there was no tax cost to implementing it. The recommendation was sound in principle and harmless in practice. If someone wanted to sell eight funds and buy four better ones, why not? The only friction was paperwork.

But the introduction of long-term capital gains tax for equity funds changed the situation entirely. What was once cost-free tidying has become expensive tidying. The satisfaction of a cleaner portfolio statement must now be weighed against real money leaving your corpus and going to the taxman.

This is where I believe Value Research Fund Advisor provides something genuinely valuable, not by encouraging you to act, but by helping you resist the urge to act unnecessarily. Our Portfolio Analysis tool doesn’t simply present your holdings as a list to be shortened. It evaluates each fund on its merits: Is it performing adequately? Does it serve a purpose in your overall allocation? Is there genuine overlap with other holdings, or just superficial similarity?

When the analysis identifies a fund that genuinely needs attention, it tells you so clearly, with alternatives. But when a fund is doing its job, even if your portfolio looks “messy” with it included, the system doesn’t push you toward unnecessary change. This distinction matters enormously. It’s the difference between cleaning for cause and cleaning for cosmetics.

I’ve come to believe that one of the most valuable things an investment platform can do is protect you from yourself, those well-meaning but ultimately harmful impulses that arise from our psychology rather than our financial interests. The urge to tidy is one such impulse. The desire to act during market volatility is another. The temptation to chase last year’s best performer is a third.

The Fund Advisor app, which you can carry with you and check during idle moments, is designed with this philosophy in mind. When something genuinely requires your attention, you’ll know. When it doesn’t, you won’t be nagged into action just to satisfy some notion of engagement or activity.

As I wrote in that earlier column, messy-but-compounding still beats tidy-but-taxed. The psychological satisfaction of a streamlined portfolio statement is real, but it’s not worth paying capital gains tax to achieve. The next time you feel the urge to “clean up” your funds, ask yourself a simple question: Is this about investment logic, or is this about making my screen look neater? If it’s the latter, perhaps the better choice is to close the app, take a walk and let compounding do its patient work undisturbed.

Your portfolio doesn’t need to spark joy. It needs to build wealth. Those are not always the same thing. 

Also read: Here’s why your emergency fund is outdated today