Is Your Investment Portfolio Too Cluttered?

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.

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.

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.

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.