When is the last time your portfolio had a thorough spring cleaning? In our last few posts, we covered a few of the financial complexities and mirror tricks used to mask unnecessary costs and conflicted interests. Today, let’s extol the opposite approach of elegant simplicity. There are a number of good reasons to periodically review your accounts and holdings with an eye toward simplification: First, an efficient portfolio is an effective portfolio. Second, it feels great to have your financial affairs in order. Finally, reducing the number of investments means fewer securities to trade when it comes time to rebalance. (You do rebalance regularly, right?) Less trading means fewer trading fees.
The Joy of Simplicity
Before we turn to financial speak, let’s talk about my garage. For all my interest in helping people de-clutter their investing, the same hasn’t translated to the man cave nearly as well. For example, I keep telling myself that I might someday repair that half-broken lawn sprinkler, yet it still sits there years later, collecting dust. It seems as though my wife and I have unwittingly become pack-rats. In each move we’ve made, we’ve boxed up piles of unused items, only to tuck them into the same dark corners of our next home.
This March, we’d finally had enough. Salvation Army became our new best friend as we hauled boxes and boxes of outgrown clothing, abandoned toys, obsolete electronics and more through their open doors. We’ve donated more than 20 boxes already and there’s plenty more stuff to go.
Long story short, I hadn’t realized how overwhelming the accumulation had become until we’d shed ourselves of it. It was as if the literal weight of it had actually been lifted from my mind.
I wish this same enlightenment for you and your investments, where the stakes of achieving a tidy, organized portfolio are considerably higher than whether that deflated basketball will ever get its bounce back. Here are a few tips to help you achieve a new spring in your financial step.
Investment Gaps and Overlaps
Are there asset classes underrepresented or missing entirely from your portfolio? Many investors may think they have achieved “diversification” because they own a lot of funds or securities. But upon analysis, we often find that their many stock holdings are almost entirely in U.S. large companies. This is about as “diversified” as a house with 10 kitchens and no baths.
On the flip side, are you over-invested in the most popular asset classes? We often see this happen after an asset class has been on fire for a while, and an investor fails to rebalance his or her portfolio to bring it back in line with its originally planned allocations. This can ultimately expose investors to more risk than they intended.
Like an organized, well-managed household, a few well-structured, globally diversified funds may be the better choice for achieving your financial goals. Contrast this to the loss of control inherent in trying to manage dozens of scattered holdings across mutual funds, ETFs, stocks, bonds, CDs, REITs, and so on and so forth. Excessive holdings are more likely to generate confusion than diversification.
Similarly, many investors come to us with years of financial “boxes” piled high with the accumulated debris from former brokers, careers and circumstances. Extraneous individual and company-sponsored taxable and tax-sheltered accounts, held hither and yon. Sometimes there is good cause to maintain existing accounts and custodians. But more often than not we find opportunities to streamline the collection.
Speaking of those taxable and tax-sheltered accounts, it’s often possible to improve on tax efficiency by taking a fresh look at where your holdings are located. Is the stuff that is expected to generate high taxes held in tax-sheltered accounts whenever possible? Conversely, are your tax-sheltered accounts cluttered up with holdings that are relatively tax-efficient? Sometimes, rearranging the “furniture” in your financial home can make better use of the available space.
Above all else, have you got a plan in place, with deliberate processes to guide all of the above decisions: What should stay, what should go, what should be shifted around? In our next post, we’ll take on the importance of planning.
For more information or to set up a consultation, contact Pathway Financial Planning at 248-567-2160 or email firstname.lastname@example.org.