(Bonus) Does Your Portfolio Need Decluttering?

MARK RIEPE: We just finished an annual ritual in the town where I live. Each spring, the waste removal company has two special pickup days that run consecutive with each other. The day before the normal pickup day, they have what they call a "reuse day" pickup. Each home is given a list of acceptable items that can be set out on the curb, and all items need to be in reusable condition. The pickup company will then give the items to an approved charity for redistribution.

The next day is called "cleanup day." On this day, you’re allowed to put out your normal garbage, but many of the normal restrictions as to what constitutes garbage are lifted. Essentially that means you can throw out a lot of stuff that normally wouldn’t be allowed. It’s probably not a coincidence that this happens in the spring. After all, there is such a thing known as spring cleaning.

I'm Mark Riepe, and I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.

We talk a lot about human behavior on this podcast, and spring cleaning is yet another example, and it’s one with deep roots in several cultures. There may even be a biological basis for it. According to National Geographic, in colder months, we have less energy because the longer nights trigger our bodies to make more melatonin. The result is that we don't have the energy to do a big clean.[1] As the days grow longer, our melatonin ebbs, our energy rises, and we are driven to refresh our physical environment. 

The same can apply to your financial life. 

I run into people all the time who bemoan how cluttered their financial life has become. Lots of accounts, lots of holdings, and lots of priorities without a clear organizational structure. It sounds to me like a good spring cleaning or decluttering is in order.

Lucky for us, Susan Hirshman is back on the show to help us out. She's a director of wealth management for Schwab Wealth Advisory and the Schwab Center for Financial Research. She’s also a Chartered Financial Analyst, a CERTIFIED FINANCIAL PLANNER™, and has worked for many years as an advisor to high-net-worth and ultra-high-net-worth investors.

Susan Hirshman, welcome back.

SUSAN HIRSHMAN: Thanks, Mark, nice to be here.

MARK: Susan, a frequent comment I hear from older investors is that they want to simplify their lives, and that applies to their financial affairs as well. You and I were recently talking about this, and I think we were calling it the process of decluttering. 

And first of all, I'm not even sure that's actually a word, but be that as it may. You've actually though spent a lot more time than me working directly with individuals. And is this something you've heard from clients talking about this desire to kind of simplify and declutter?

SUSAN: It definitely is, but I want to take a step back and say decluttering is in fact a word. I checked with the Scrabble Dictionary, and I say if they say yes, I say yes. And by the way, it's a 16-point word. Good to know. 

But in all seriousness and to answer your question, this is something I have spoken with clients about over the years, especially as financial services technology, retirement planning, and investment philosophies have evolved over time.

MARK: Is this a topic that you find yourself kind of proactively bringing up with investors? Or do they actually have kind of an intuitive sense that things have gotten a little bit out of control, and they're actually proactively reaching out to you for help?

SUSAN: You know, it becomes like quote-unquote "intuitive" when people experience basically a life event, such as like a job change, retirement, death, or significant market volatility. At that time, people often stop and take the time to focus on their situation and really start to think about alignment and efficiency of their accounts.

And then for people who work with a wealth management advisor, an advisor that considers their clients' investments from a holistic goal-based point of view, the conversation really comes up pretty naturally and proactively because the advisor's process typically starts with a goal-based long-term financial plan that requires them to know all about a person's total assets and circumstances. And then through those conversations and discussions, then you find about if there is clutter, and you're able to have a dialogue about the what, the why, the how, and if decluttering is really appropriate or not.

MARK: Before we get into some of those specific strategies, how do people end up in this situation? I mean, I love watching the TV show Hoarders, and you know, nobody on that show started out thinking, "Hey, I want to be on Hoarders," it’s sort of something that's kind of happened to them over a period of time. It kind of snuck up on them. So from a financial standpoint, how does it happen?

SUSAN: Well first, I can't watch that TV show Hoarders because it reminds me too much of my closet. But there are five ways where people tend to have a clutter situation. The first is a leaving 401(k) plans at old employers.

The second is giving a little to an advisor who's a friend or a relative. The third is following a hot tip from your golf buddy. The fourth is thinking diversification is about using different firms. And fifth, and a lot of times most often, is just procrastination. You know you have to streamline, but you just don't make the time. So basically what happens is that you end up having a lot of different accounts at various firms.

MARK: So let's get more specific and talk about some of the different forms that this clutter can take. I think one of the most appropriate, and you kind of alluded to it before, is having lots and lots of different accounts. And hey, that can be perfectly understandable, right? If you get a 401(k) at every job you have, and the average person, I don't know, gets something like 12 jobs by the time they're retired, yeah, you're going to accumulate a lot of different accounts. So why is it a problem?

SUSAN: Well, in the old days, I used to say the problem from clutter was paper cuts. And that was really just because having to open all that mail. But now I would say it's just email overload. But the result, no matter, is that it's just really easy to get overwhelmed, be unfocused, and miss out on opportunities and/or challenges in your accounts. 

So simply put, I like to say it becomes really difficult to see the big picture. It can make it hard to keep track of your asset allocation, your beneficiary designations, your account titling, your tax considerations, your rebalancing requirements, and on and on. So often what happens is you're just not aligned as effectively as possible to meet your goals. 

And also you may not be as efficient from a tax, a cost, and an investment perspective as you could be. So here's an example. You can own multiple funds, ETFs, managed accounts, at different accounts, but they have all overlapping holdings. Or they may not work together to accomplish your long-term goals in the most efficient manner. 

And since you mentioned earlier older investors, what I see as one of the biggest issues of clutter is when someone passes and the family is left to organize everything. Having all these different accounts at different firms can lead to missed assets, to mistakes, and basically some chaos and confusion.

MARK: And even if it doesn't, it just takes a lot of time. It's just a lot more work to keep track of all those things. And you and I are in this situation. Time is our most precious resource, right? And I don't think we're unusual in that respect. So what's the fix? I mean, how do you, in a kind of a smart way, cut down on the number of accounts. This isn't like we could just go into your closet and just like throw everything out, right? I mean, there's some good stuff. There's some bad stuff. How in an intelligent way do you go about creating some order out of the chaos?

SUSAN: Yeah, it's kind of similar, the process. It's asking yourself questions. So there's five questions you should ask. The first is, why did you open each account in the first place? Was it for a particular investment, expertise, or a specified need that does not allow for consolidation?

And then question two, do those same requirements still apply? Three, are you still happy with the products, the solutions, the expertise, and services that you're receiving? Fourth, is the separation of accounts helping or hurting your overall comfort and understanding how your portfolio is aligned with your specific goals? 

And then lastly, five, are you missing out on benefits by having a little here and a little there? And this is really an important question because people may not realize, especially if they have managed portfolios, that generally speaking, fees tend to be tiered, and they start decreasing at various levels. So by having here and there, you may be paying more fees than need be. 

Or other benefits, such as credit cards, exclusive client events, specialty advice, and so on that may be available to higher-balanced clients. So if you decide that accounts are not for discrete purposes, and you may benefit from consolidating your accounts, you really need to determine which provider you want to stay with. Your advisor then at that provider can help you with the process and the forms to get those assets transferred in an easy and proficient manner.

MARK: Yeah, definitely. Coordination is easier if everything is at a single company. But that of course kind of begs the question, how do you choose which advisor or provider to stay with?

SUSAN: You know, I suggest using what I like to call the three C's in your consideration: communication, care, and counsel. So communication. Does your advisor reach out to you in a consistent and/or proactive manner? 

Second is care. Does your advisor care about you on a personal level? Meaning, do they know your goals, your challenges, your concerns, family situations, your knowledge base, and so on. And do they take that all into consideration with their communication and their portfolio and wealth management planning? 

And then lastly, counsel. Are they educators? Do you feel like that they not only talk about the what, but the why and what you should expect in a clear and concise manner that is really understandable, consistent, and applicable to your situation. And most importantly, do you feel comfortable asking questions, and do you feel like that advisor encourages and desires you to ask questions? So important. 

And another last point is really just don't think about it from a standpoint of today. But again, if something were to happen to you, which advisor would be best suited for your spouse, your partner, or your heirs? You may be comfortable with all the industry jargon, but will your spouse be?

MARK: That's a great list, and it's kind of changing directions here a little bit. Some people kind of use a mental accounting trick where they're creating a separate account really because they want all that money to be focused on one particular goal or one particular purpose. 

And of course, in some cases, the law encourages that. For example, a 529 plan is connected to education expenses. Retirement accounts, of course, connected to retirement. But in other cases, people are doing it on their own. And have you seen people do that? And probably more importantly, does it tend to be successful?

SUSAN: You know, I have, and I think for short-term goals, it can be really useful. So for example, you're trying to save for a down payment on a house within the next couple of years, and you want to make sure you just don't touch those assets. And so you put it in a CD or a separate account. 

Or another example is if you have an irrevocable trust, and it has very specific goals and needs and specialized advice. Really, if you're thinking about your overall longer-term goals where a more holistic, aligned view is needed, it really makes sense to consolidate. 

But again, always ensure that the products, the solutions, the expertise, and the services of the company fits all your specific needs.

MARK: A couple of different forms of clutter. One is just having a lot of accounts. We've been mostly talking about that. But sometimes people can have a lot of clutter within an account. 

This is a little bit tricky, though, because we tell people that they should be diversified. And so some people hear that and they interpret that to mean, "Well, I need to own lots of different securities, and that's what you're supposed to be when you're getting diversified. Don't put all your eggs in one basket." So how do you do that? Well, get a lot of eggs, right?

So what are people are missing? Why is it a little bit more complicated than that?

SUSAN: You know, it's a little bit more complicated because there's such a thing as diminishing returns, so to speak. So various studies have shown that to achieve meaningful diversification, the basic rule of thumb is around 20 to 30 stocks. Over that, like the additional securities offer, you know, marginal diversification benefits.

But I always like to remind people that to keep in mind that the stocks obviously have to be in different sectors and industries, right? Having 30 different oil stocks is not what we call diversification. 

The whole purpose of holding multiple stocks in a portfolio is that concept of diversification, meaning holding enough securities so that a big drop in one won't cause your entire portfolio to take a big hit. What you want to ensure is that you're creating a portfolio that is easy to track, easy to review, easy to monitor, and fits your risk profile and goals. In this situation, less can definitely add up to when it comes to individual stock portfolios.

MARK: So Susan, what's the fix here? How do I cut down on the number of kind of securities to kind of make my portfolio more manageable? But again, I don't want to necessarily cut down things in a way that does more harm than good. I mean, one way, if you're not a stock picker, if you're not a trader, maybe you should just own broad-based mutual funds or ETFs. That's an easy fix. But what are some other fixes that you've employed?

SUSAN: Yeah, I think there's three things to consider. The first is tax costs. If these securities are in a taxable account, what are the tax costs to diversify out of some of the securities? We always talk to our clients about being tax smart. Look to longer-term holdings if there's a gain situation, and then look for loss opportunities to harvest first. 

And then the second is the fit or the goal of the portfolio. Every portfolio should have an objective. And so ask yourself what is its purpose? Is it to maximize growth? Is it to maximize income? Or is it somewhere in between? And then how does each stock work together and fit into that overall objective and diversification that you're trying to achieve? Those that don't fit, those are targets for sale or other use. 

And that other use brings me to the third point. And the third point is, do you have other goals? Do you have gifting or charitable goals? Can you use some of these stocks for other uses? For example, instead of gifting cash to your family, would it make sense to give them some of those shares, especially if there's appreciation and they're in a lower tax bracket? 

Or perhaps you have philanthropic goals, and it makes sense to contribute shares versus cash. In both cases, what you end up doing is reducing the size of the portfolio with no tax cost. 

MARK: Yeah, exactly, solving two problems with one fix. 

A couple of months ago, you went to see a Billy Joel concert. And as I was thinking about this, kind of the questions for this interview, I remembered that. And I also remembered, it occurred to me that many, many years ago, I heard an interview with him where they asked him what kind of advice you'd give to young musicians. And he said something about, well, first of all, you need to hire some lawyers. And then you need to hire another set of lawyers to watch what the first set of lawyers are doing. And I thought that was, well, first of all, pretty funny, although I think it probably came out of personal experience from him not doing that. But I kind of appreciate the belt and suspenders approach.

And of course, it's always a good idea to get independent thinking, to get fresh eyes looking at your situation. But you certainly can kind of go overboard, and things can get kind of, again, kind of complicated and cluttered in that situation. So how do you think about that issue in terms of kind of getting advice but not going overboard and having kind of a cacophony of voices giving you advice?

SUSAN: Yeah, but I'll just take a step back and say to you, I did go to the Billy Joel concert and the Bruce Springsteen concert recently. And in fact, I actually loved it, not because of, well, because of the music, but also because I felt young in the audience. So that was a good thing. 

But going back to your question, again, it really goes back to the first question and how I mentioned changes in the financial services, technology, retirement planning, and investment philosophies. 

So when you think about retirement planning, pension plans have gone by the wayside for many, and life expectancies, as we know, have increased. And we're now responsible for saving for our own retirement and having it last a longer amount of time than in the past. So now, today, it's about long-term goals and planning versus a hot stock or just short-term performance. 

And because of this, investment philosophies have then evolved from, again, picking that hot stock to an asset allocation mindset, where now it's more about creating a portfolio that's aligned with your goals, your time horizon, your risk profile, your tax situation, your cost sensitivities, and your investment preferences versus reaching out to various companies to get their best individual stock ideas. 

And then lastly is technology. Technology has allowed for the availability of many different products and solutions on one platform that may allow you to be able to meet all of your investment objectives at one firm. So in the old days when you needed many voices, today you may only need one.

MARK: Last question, Susan, and I want to go back to where we started and how most people don't plan to end up with kind of a cluttered and overly complex financial life. It kind of sneaks up on them. So what advice do you have to avoid getting too much clutter in the first place? How do you be more intentional about every time you add something to your portfolio, you're doing it in a smart and organized way?

SUSAN: The first thing is if you do change jobs, as you said one of those 12 times, if appropriate, roll your retirement assets into your new company's retirement plan or an IRA. You know, I just saw an estimate that U.S. workers have left behind 29.2 million accounts holding a total of $1.65 trillion of assets in forgotten corporate retirement plans. 

And then the next is to really be disciplined, purposeful, and thoughtful. If you have portfolio sprawl, ensure that it's really for a specific reason, a specific product, expertise, or service that you just can't get at another firm or firms. 

And lastly, I'll say it once more, less can really add up to more when it comes to managing your financial future.

MARK: Susan Hirshman is a director of wealth management for Schwab Wealth Advisory and the Schwab Center for Financial Research. Susan, thanks for being here.

SUSAN: Thank you, Mark.

MARK: There are many aspects to our financial life. Some of them are complicated and feel esoteric or arcane. But others, like decluttering, are part of what you might call the brilliant basics. By that I mean these are the sorts of plain vanilla tasks that are foundational, and while neither sexy nor exotic, it’s important to get them right.

We’ve got a website called SchwabMoneywise.com. There’s a lot on the site, but pay particular attention to the Essentials tab. It’s a collection of short, helpful articles written in plain English on the essentials of investing and financial planning. You can go a long way on your financial journey just by mastering the basics, and in my opinion, this website does a great job helping you achieve just that.

That's it for this episode and this season of Financial Decoder. As usual, thank you for listening, and we’ll be back this summer with some more episodes. 

If you'd like to hear more from me, you can follow me on my LinkedIn page or at X @Mark Riepe: M-A-R-K-R-I-E-P-E. If you enjoyed the show, a rating or review on Apple Podcasts is a great way to convey that message.

We always like new listeners, so if you know someone who might like the show, please tell them about it and how they can follow us for free in their favorite podcasting app.

For important disclosures, see the show notes and schwab.com/FinancialDecoder.
 

[1] Mendez, Lola, "Spring Cleaning Has Ancient Origins. Here's Why We Still Do It," National Geographic, March 19, 2024, https://www.nationalgeographic.com/history/article/history-of-spring-cleaning.