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Do you have a portfolio or an investment collection?


Coin Collection

One thing that I’ve seen time and again when looking at people’s investments is that they could more accurately be described as “collections” than as “portfolios.”

Often, people seem to accumulate investments rather haphazardly over the years. By the time an investor is in his 40s or 50s, he (and his spouse’s) investments might look something like this:

Taxable Accounts:

  • 100 shares of this stock
  • 100 shares of that stock
  • a $5,000 muni bond from a local government agency
  • a handful of assorted mutual funds

Retirement Accounts:

  • 3-6 different funds in his 401k
  • 3-6 more funds in his spouse’s 401k
  • 3-6 more funds in his IRA
  • 3-6 more funds in his spouse’s IRA

It’s essential to know what you own.

In my experience, when an investor has an investment collection like the one above, he can’t even tell you what his stock/bond allocation is. Naturally, it’s only made worse when the funds involved are actively-managed funds such that it’s impossible to know precisely what’s in them at any given point.

In case it’s not obvious: This is a serious problem because it can mean that the investor is exposed to more risk than he’s aware of.

Further, when you own actively-managed funds, your diversification may not be as thorough as you’d expect, as the funds’ holdings may overlap significantly.

Complexity doesn’t increase return.

Of course, if you own 20 different mutual funds, it can be hard to keep tabs on what each of them own. The solution: Simplify.

Here’s a guideline I like to use: Outside of your 401k, if you own more than 6 mutual funds, you’re making things unnecessarily complicated. 6 funds should be plenty to provide you with sufficient diversification both among and within the major asset classes.

Moving from “collection” to “portfolio.”

If the bulk of your investable assets are in tax-sheltered retirement accounts, creating a cohesive portfolio is easy:

If a significant portion of your holdings are in taxable accounts, however, things can be a bit trickier, as the “sell everything” step could result in sizable capital gains, thereby taking a significant bite out of your portfolio.

Often, a reasonable approach is to keep your taxable investments more or less in place, while adjusting the allocation in your retirement accounts around them. (Example: If your taxable account is primarily invested in domestic stock funds, consider keeping it there and using your retirement accounts to fill out the bond and international stock components of your portfolio.)

I would, however, caution strongly against putting tax considerations ahead of asset allocation considerations. (Example: If an emerging markets stock fund makes up an extremely oversized portion of your portfolio, it’s probably a good idea to sell some of it even if that means incurring capital gains.)

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  1. My retirement accounts fall into the portfolio category, allocated (80/20) into index and bond funds.
    I just started investing in a brokerage account this year. So far my personal collection of stocks looks like just that a collection. The only thing they have in common is that they all continue to pay dividends, even in this faltering economy.

  2. My 401k/IRAs are intentionally allocated heavy on bonds (70% eq/30% fixed inc) to allow for taxable equity investments that i can add to with Vanguard ETFs (50% VTI/15%VEA/20%VWO/15%VBR = total taken together comprise ~10% of the retirement portfolio). taken together, my overall asset allocation is ~80/20 which is my target (<40 years old). Does this sound okay, Mike?

  3. The point is well taken.

    The problem is that we are essentially “forced” to invest before we know as much as we would like to know to do so.

    It’s rare for someone to know as much about investing at 20 as he knows at 40. The portfolio often ends up reflecting views held at 20 and 25 and 30 and 35 and 40.

    The only way to clean it up is to make a fresh start.

    But what if you then again learn something new and important? Yikes!


  4. And I think one of the other points you might have been making, was that if that family had all of those funds in all of those IRA’s, 401(k)’s, etc. – they are probably losing a good bit of their potential returns to management fees.

  5. My portfolio has the look of a country after a long war about it, following the bear market…

  6. Hi JC.

    That portfolio looks quite similar to my own actually. (Only difference being mine is slightly more heavily allocated towards equities–specifically international ones.)

    But yes, assuming you’re somebody with a fairly high tolerance for volatility, that seems reasonable to me.

    Thanks for stopping by to comment. 🙂

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