Is Your Investment Portfolio Too Cluttered?

April 8, 2024 Mark Riepe
A little bit of streamlining can lighten the load when it comes to portfolio management.

As many garage owners know, clutter can accumulate without your noticing. Unfortunately, something similar can happen in your investment portfolio. 

Duplicative holdings, impulse buys, and investments that no longer fit your strategy or your financial situation—these are just a few of the culprits that can weigh down your portfolio and confound your strategy.

So, here we'll address some common forms of clutter and include some suggestions for clearing things up.

1. Redundant accounts

It's not uncommon to acquire multiple accounts over the years—401(k)s, Individual Retirement Accounts (IRAs), and multiple brokerage accounts, often spread across various firms. Keeping track of how your holdings work together can be difficult under such conditions. 

For example, you may have a pretty good idea of how your various accounts are performing in isolation, but only a tenuous grasp on whether your overall position is delivering on your primary investment strategy. At the same time, otherwise routine forms of portfolio maintenance—such as periodically rebalancing your portfolio—become more complicated if you're trying to apply them across firms and accounts. 

Having an assortment of accounts can also make it difficult to avoid wash sales as part of your tax loss-harvesting strategy. As a reminder, a wash sale occurs when you've sold a security at a loss for the tax benefits but have bought the same or a similar security during the 30 calendar days prior to the sale and the 30 days after. In such cases, you won't be able to take a loss for that security on your current-year tax return. 

The wash-sale rule applies across all your accounts, as well as for transactions in your IRA—and extends even to your spouse's accounts. Furthermore, it's up to you keep track of what's happening across your various accounts.

Scattered accounts can also become a challenge for anyone trying to step in to help should you suddenly become incapacitated, particularly if you haven't created a map of or otherwise documented your financial holdings. 

Solution: Consolidate

Ask yourself why you opened each account in the first place. Those with a unique goal—a 529 college savings plan, for example—are worth keeping. However, it might be time to consolidate accounts with similar purposes, particularly if they're held at multiple firms. You might be better served by paring down providers to those with lower costs or better investment options.

2. Overlapping funds

Some people seek to diversify their holdings by spreading their investments across multiple mutual funds or exchange-traded funds (ETFs). However, the number of funds you own is less relevant than how they work together. If you own multiple funds with overlapping holdings, you could be less diversified than if you owned a single fund with broad market exposure.

Solution: Streamline

If you're a Schwab client, you can use Schwab's comparison tools for mutual funds and ETFs to help identify funds in your portfolio that are redundant in their holdings or investment styles. Keep an eye out for actively managed funds that mirror, rather than outperform, their benchmark indexes—you may be paying management fees for funds that offer no discernable advantage over a low-cost passive fund.

3. Competing advice

Two heads may be better than one, but not if they're taking different approaches to the same goal and canceling each other out in the process. Different advisors may not align their strategies for the greater good of your portfolio—leaving you to coordinate and guard against unnecessary fees and taxes.

It's also worth noting that many financial services companies have tiered pricing structures under which you can unlock lower fees or other benefits as you place more of your assets under management. So, if you're paying for similar forms of management at several companies, you may be paying higher fees than are necessary or foregoing other potentially valuable perks. 

Solution: Simplify

Settle on one comprehensive advisor or assign advisors discrete tasks. One might manage your short-term investments or philanthropic endeavors, for example, while another administers your retirement funds.

Just remember: Less can add up to more when it comes to managing your financial future.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

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Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

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The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

Rebalancing does not protect against losses or guarantee that an investor's goal will be met. Rebalancing may cause investors to incur transaction costs and, when a non-retirement account is rebalanced, taxable events may be created that may affect your tax liability.

Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.

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