Your investment portfolio can become a bit like that catchall closet in your house. Over the years it gets cluttered with duplicate holdings, impulse buys that didn’t work out, and items that were useful—10 years ago.
While a cluttered closet doesn’t typically have negative consequences, an unwieldy portfolio can put a drag on your financial plan. By streamlining your investments, you can gain a clearer picture of your overall financial situation and help ensure that you’re on track to meet your goals.
“Reducing overlap in your investments can also help lower your fees and make your portfolio more efficient,” says Mark Riepe, senior vice president at the Schwab Center for Financial Research.
With that in mind, here are three common ways that portfolios can become too complex—and what you can do about it.
1. You own too many funds
Many people invest in multiple mutual funds or exchange-traded funds (ETFs) in order to diversify. But the number of funds you own is less important than what’s in them. If your portfolio contains myriad funds with holdings that overlap, you may be less diversified than you think. “And the more funds you own, the harder it is to keep track of them all,” Mark says, “and then the odds of having a negative surprise go up.”
Another hazard: Let’s say you bought several actively managed funds that represent different market segments. The trouble here could be that your portfolio ends up mirroring the overall market at an unnecessarily high cost. “Instead of getting market exposure with the low costs of an index fund, you get the market at the cost of actively managed funds,” Mark says.
Solution: Use the Schwab mutual fund comparison tool to help you identify funds that are similar in their holdings or investment styles. You can then choose the one that better meets your goals and reduce duplication.
To see if you are paying too much for funds that mirror market performance, “compare the performance of your portfolio to benchmark indexes or combinations of those indexes,” says Mark. “If they track closely, then see if you can re-create your portfolio at a lower cost using index funds or ETFs.”
You can also weed out small investments that don’t have much impact on your overall portfolio—or no longer have a role in your plan. Keep in mind, however, that you shouldn’t dump an investment just because it isn’t performing well right now. If it’s a well-managed fund that fits your overall strategy, it might be worth keeping.
2. You’re juggling multiple accounts
Over the years, you may have bought a fund directly from one company, started an IRA at another and left a 401(k) behind at a former employer. Keeping tabs on all of your accounts, especially if they are sprinkled among different firms, is a hassle.
- You have the added chore of making sure that your investments in one account complement those in another account, and that you aren’t duplicating your exposure to certain market segments (the same problem as owning too many funds, with an added layer of complexity).
- Owning multiple accounts can also add to your investment costs, since financial firms often set balance limits before offering price breaks.
Solution: “Ask yourself why an account exists. Is it for a specific goal that is unique from the rest of the portfolio?” says Mark. If not, see if you can consolidate it. For instance, if you have one or more 401(k) plans with former employers, consider rolling them over into your current employer’s plan or into a new or existing IRA. To avoid triggering any taxes, make sure you complete the forms required by both your 401(k) plan administrator and your IRA provider to roll the money directly into the account.
And of course you’ll want to weigh the investment choices available within accounts, plus all associated costs, when deciding exactly how to consolidate.
3. You’re working with different advisors
The notion that two heads are better than one may lead you to seek guidance from professionals at different firms. The trouble here is that these advisors may work at cross-purposes. “Let’s say that one advisor is overweight in stocks and another advisor is underweight in stocks at the same time,” Mark says. “One offsets the other, and you end up where you started.”
In other words, having more than one advisor puts you in the tricky position of playing general contractor, making sure that your advisors are coordinating their investment strategies and taking taxes into consideration.
Solution: “If you’re going to have multiple advisors, make sure they’re working on distinct goals or distinct investing strategies,” Mark says. For example, you might want one advisor to oversee your retirement funds and another to manage your donor-advised charitable fund.
But if you place two or more advisors in charge of the same goal, you could end up with a portfolio that’s as jumbled as that catchall closet at home.
What you can do next
If you think your portfolio could benefit from simplification, a good first step is to identify any overlapping holdings and consider the portfolio’s overall alignment with your goals.
Talk to a Schwab Financial Consultant at your local branch, or call us at 800-355-2162.