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Spring Clean Your Portfolio

Wed, 24 Apr 2013

Morningstar's director of personal finance offers tips for tidying up old 401(k)s, sweeping out stray investments, and taking stock of company stock.

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Video Transcript

Portfolio Makeover Week
Are you looking for tips on improving your portfolio? As part of Morningstar.com's Portfolio Makeover Week in May, director of personal finance Christine Benz will be making over five real-life portfolios to show how investors of all stripes may streamline and upgrade their holdings.

To be considered for a makeover, submit a request to portfoliomakeover@morningstar.com. Include a general description of your situation, including portfolio size, as well as your goals for the makeover.

If you are selected, your before and after portfolios will be featured in a Morningstar.com article, but you will not be identified by your real name. (Click here to see last year's portfolio makeovers.)

We look forward to hearing from you soon!

Note: Makeovers are not intended to be individualized investment advice, but rather to illustrate portfolio strategies that investors should consider in the full context of their own financial situations.

Jason Stipp: I'm Jason Stipp for Morningstar.

The notion of spring cleaning need not just apply to your housework; it can also put a shine on your portfolio and help get your financial house in order.

Here to offer some portfolio-related spring cleaning tips is Morningstar's Christine Benz, our director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, it's great to be here.

Stipp: You've identified a few areas where you can do some cleanup work in your portfolio. The first one has to do with any old 401(k)s that you might have lying around.

Benz: That's right. And a lot of people do have these small 401(k) balances that are sitting with former employers. And so I think if you're a person in that situation, you want to think about rolling over that money into an IRA.

And there are a couple of reasons to do so. One is that you get open architecture. So you can put almost anything inside of an IRA. You can look at a full menu of funds, stocks, whatever it may be. You are not stuck with that constrained menu of funds that your 401(k) plan might offer.

The other reason is that you do not have that layer of administrative fees that exists oftentimes with 401(k) plans. So you might have a little bit of ongoing expense to keep that IRA alive, but it certainly won't be typically as large as the administrative costs related to the 401(k).

One caveat, though, someone for whom this maneuver might not make sense, would be a person who might get sued, because the legal protections for IRA assets, depending on the state in which you live, might be somewhat less than what is available in the 401(k) plan.

Stipp: Another area you mentioned is cash holdings. You might have little pools of cash here and here and here. Those could be working harder for you if you'd think about cleaning that up a little bit?

Benz: That's right. So, some areas offer notably low-yielding cash accounts. The brokerage sweep accounts, for example, oftentimes have very, very low yields. And of course, cash yields are really low across the board right now. But you may be able to pick up a slightly higher yield by taking all those little pools of cash here and there and putting them into a single higher-yielding account.

And I think one thing you have to weigh is how much you need that convenience factor. So if you're someone who likes to have cash on hand in the brokerage account for ready access, maybe it's worth keeping some money there. But if you're willing to wait a day or two to get the money transferred over, or maybe just a day, you may be better off by having the money in a single, higher-yielding alternative elsewhere.

Stipp: Something else you may find as you're spring cleaning your portfolio are some individual equity holdings, maybe you even forgot that you had them. How should I think about these kind of stray stocks that I might have collected over the years?

Benz: Well, you know, back in the '90s, late '90s, there was sort of this mania for everyone to have an individual stock portfolio, and I would say that after a decade and a half worth of reflection, a lot of people have said, you know what, I'm just not into picking individual stocks; maybe I wasn't that good at it. Maybe I benchmarked my returns versus, say, the S&P 500, and I didn't do as well as the index. Or maybe I simply don't have time or the inclination to do the kind of monitoring and due diligence I need to do to have a stock portfolio.

For people like that, I think it makes a lot of sense to roll some of those individual stock holdings into a good mutual fund or cash out of them and transfer that money into a good mutual fund in which you have a higher level of conviction and will have to do less day-to-day oversight.

Stipp: What if I come across a sector fund or a regional fund that was a great idea when I bought into it. You're saying if I find some of those I might, first of all, already have that exposure?

Benz: That's right. And that's why these are usually on my chopping block when I look at portfolios to do makeovers or whatever it might be. Oftentimes the sector funds, the regional funds, are redundant with something else in the portfolio. I can think of a very small handful of sector and regional funds where the manager is truly a specialist and puts something extra into that area--so Matthews in Asia, for example.

But those examples are few and far between. For most people, they don't need that added amplification of a given sector or a given region. They're better off just sticking with their more broadly diversified mutual funds, and they can get rid of those sector- and region-specific funds.

Stipp: And not only that, but the broader funds might actually be cheaper than some of the sector funds that you are holding, as far as expense ratios?

Benz: That's exactly right. Oftentimes, sort of perversely, because the more focused funds are arguably focusing on a single area and it should be easier to do research there and so forth, but oftentimes they are more expensive. So you might be bringing your overall cost down as well.

Stipp: Christine, what if I have employer stock in my portfolio? What should I think about that? How much should I hold? Are any guidelines there?

Benz: I think you need to be very careful about employer stock, and the key reason is, if you're working you have a lot of your livelihood staked with that company. You don't need to have your retirement portfolio staked with it as well.

I recently had a conversation with our colleague, David Blanchett, about this topic. He has run some research on optimal levels of company stock. And when I asked him about it, he said, most people should have 0%, he thinks, to optimize their portfolios. But he said if you've got to have the company stock, if you're a big believer in your company stock, at the high end, think about 10%.

So, if you're well over that level, I would consider cutting back there as well.

Stipp: Christine, some great tips for spring cleaning in your portfolio. Hopefully, it will herald some spring weather for us coming up. Thanks for joining me today.

Benz: Thank you, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

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