Kaizen in your Portfolio

I was reading an article in the New Yorker about Toyota (The Open Secret of Success, May 12, 2007 by James Surowiecki), which is considered to be the most profitable and innovative auto maker in the world. Don’t worry--this is not one of those articles about how we should emulate the Japanese approach to business – a very eighties notion. But the interesting nugget that I took away from reading about Toyota’s success is defined in a single Japanese word, kaizen, or continuous improvement.

Of course from a personal vantage point, we all want to improve who we are as spouses, parents, children and professionals, but that’s far too lofty a goal for today. I thought it would be great to apply the concept of kaizen to your financial life. According to Surowiecki, Toyota views innovation “as an incremental process, in which the goal is not to make huge, sudden leaps but, rather, to make things better on a daily basis.”

Let’s start with overall ways that you may be able to improve your financial life: the big three, which I consider: (1) Pay down your consumer debt (2) Establish an emergency reserve fund (3) Maximize your retirement plan contributions. Assuming you mastered these three “starter steps,” I would add another three: establish a retirement plan, implement your portfolio to reach your delineated goals and monitor your progress.

I know that these are often considered the “boring” step-sisters to the sexier and more exciting process of selecting investments. But remember that we are going for incremental improvement. This reminds me of how Rudy Giuliani’s top cop, William J. Bratton, approached the daunting task of reducing crime. He started with small steps to increase safety for the residents of New York City—get rid of the small annoyances and have more cops patrol dangerous neighborhoods. Little by little, dealing with minor infractions actually seeped into the mind set of everyone and almost magically, crime rates in NY City plummeted.

You can apply this process in the management of your investment process. Small steps like reviewing and rebalancing your overall asset allocation on a quarterly basis, could help you gain the discipline to sell high or buy low. Replacing higher cost investments with lower cost ones may allow you to add money to your bottom line each year. And finally, if you just don’t have the emotional strength or intellectual curiosity to manage your own money, make sure that you work with a registered investment advisor who you trust and who has the expertise necessary to help you reach your goals and objectives.