Do You Own Too Many Investments?

Christine Benz: Another pitfall that I want to cover is what I often call portfolio sprawl. This is too many accounts, too many holdings. We see why holdings have a way of stacking up, why people end up with portfolio sprawl. Many people have multiple employers over their careers. If you have two spouses with separate accounts, separate employer plans, that can further compound the number of accounts in the mix. And then, I think there’s simply a lot of investment hobbyists out there, people who really enjoy assembling portfolios, enjoy selecting and monitoring investments, and they tend to end up with a lot of individual mutual funds, ETFs, individual stocks.

So, why is this a problem? Because we know diversification is a good thing. But having too many accounts, too many holdings can be problematic because it can obscure the big picture. It can make it hard to keep track of your asset allocation, and more holdings simply require more oversight. That's especially true if you have individual stocks in your portfolio, but it's also true if you have actively managed funds. That's one reason why I tend to encourage investors to try to skinny down the number of accounts, try to skinny down the number of holdings. It just gives them less to worry about and makes it easier for them to keep an eye on the big picture.

How do we fix this? The starting point is at the account level. See if you can find a way to consolidate like accounts. So, if you have old 401(k)s, those can be consolidated into a single IRA. It's important to note that those accounts must remain with the individual taxpayer. Even if you're part of a married couple, you can't consolidate 401(k)s or IRAs together. You each must maintain your own separate accounts. But nonetheless, if you have numerous old 401(k)s or multiple rollover IRAs, it's a really great opportunity to see if you can consolidate into a single IRA. Just remember that you need to maintain traditional IRAs and Roth IRAs as distinct accounts. There may be an opportunity to convert traditional IRAs to Roth IRAs, but as long as you have separate traditional and Roth IRAs, they must maintain separate accounts. If you have multiple brokerage accounts, you can consolidate those into a single brokerage account.

And then, within those accounts, you can further reduce portfolio sprawl by using simple building blocks that give you a lot of diversification in one fell swoop. In many of my portfolio makeovers, I do use broad market index funds, broad market exchange-traded funds as a way to capture exposure to a single asset class with a single fund. That's especially important for people who are getting close to retirement where you're trying to figure out where to source your cash flows on a year-to-year basis. Rather than having so many holdings, it's much simpler to have a single fund expressing exposure to a single asset class.

I also like all-in-one funds, especially for smaller accounts. For example, in a recent portfolio makeover that I worked on, a person had a Roth IRA that she intended to leave to her heirs, to some young people in her life. We settled on a globally diversified index fund to reflect her heirs' nice long time horizon. All-in-one funds, whether balanced funds or index funds, can make a lot of sense in the context of smaller accounts, especially where someone isn't actively drawing upon those accounts.

And if you have decided that you want to make changes that involve your taxable account, ideally you would concentrate your energies if you’re addressing portfolio sprawl in your tax-sheltered accounts. But if that energy moves over to your taxable accounts, just be sure to mind the tax consequences if you’ve had long-held positions that have gains in them that would result in tax bills. Be sure to do the math on what selling them would cost in terms of taxes. Even though reducing portfolio sprawl is desirable, you just want to make sure that you aren’t inadvertently triggering a big tax bill in the process.