Our daughter Alyssa has discovered gardening. She loves putting on her little work gloves and helping us clean up the yard and plant flowers and admire her handiwork. Besides, what six-year-old doesn’t love to play in the dirt, with permission?
Watching her blossom like this got me thinking about the similarities between tending your family spread and applying household portfolio management to your family wealth. In your yard, you carefully place your plants according to light exposure and soil composition. You tend to your lawn in one manner and your garden in another. My wife is more patient at weeding, while I get to haul out the chainsaw after a winter storm. We each have our roles to play.
Your family’s money should be managed similarly, with household portfolio management.
The Parts and the Whole of Your Household Portfolio
Every family’s portfolio consists of similar parts:
- Multiple taxable and tax-favored accounts (“regular” taxable, Roth IRA, Traditional IRA, 401(k), etc.)
- Multiple holdings (stocks, bonds, mutual funds, ETFs, etc.)
- Multiple account holders (yours, mine and ours)
With household portfolio management, rather than treat each account as a silo of its own, we manage them together, for maximum effect within your family’s total portfolio. Pictures are powerful, so let’s begin with a simple visual of what a household portfolio might look like.
As this illustration depicts, each account contains different holdings that, combined, contribute to the family’s total portfolio make-up. Two powerful benefits to the approach include:
- Improved tax efficiency. We concentrate high-tax holdings in tax-sheltered accounts. For example, you’ll notice in our illustration above, REITs are in an IRA account, because they generate a high level of taxable income, making them unsuitable for taxable accounts.
- Decreased trading costs. By avoiding duplication of identical holdings across multiple accounts, fewer trades are required when rebalancing or reallocating the portfolio to keep it on track toward a family’s goals.
Now, contrast household portfolio management to the less-optimized arrangement we often see, where each account is managed in relative isolation, with routinely copied mixes of stocks, bonds, cash and alternatives in each account.
This approach may appeal to the neat-freak in us. It also eliminates the frequently asked question: “Why is Susie’s account doing so much better than mine?” But the trade-offs are tax-inefficiencies and burdensome costs in separately managing and maintaining each account with duplicate holdings. It’s a lot like laying out your garden without any regard to where your sun-loving, shade tolerant, moisture-seeking and dry-footed plants are best expected to thrive.
Returning to Simplicity
Life is often imperfect once reality gets in the way. In this case, a disadvantage of household portfolio management is, well, it’s harder to manage. Besides planning for global diversification across an appropriate mix of holdings, we’re adding an extra dimension of complexity if we also want to ensure that the mix is optimized across a family’s multiple accounts.
As you know from past posts, I’m a big fan of simplicity. Complexity tends to detract investors from staying on track over the long haul. Fortunately, when it comes to household portfolio management, we can have our cake and eat it too by applying the latest technology tools to simplify what would traditionally have been an onerous and complex task. Our firm uses sophisticated account aggregation and rebalancing software to automate and simplify our ability to maintain optimized household portfolios, just as described.
Now if only I could find something like that for weeding the garden.
For more information or to set up a consultation, contact Pathway Financial Planning at 248-567-2160 or email email@example.com.