5 Steps to Spring-Cleaning Your Investment Portfolio

Christine Benz: Hi, I’m Christine Benz. I’m director of personal finance and retirement planning for Morningstar. I’m here today to discuss with you five steps to spring-cleaning your investment portfolio. You don’t have to do this in spring. You can do it any time of the year. But the idea is to try to reduce some clutter in your portfolio to streamline. And that can be valuable because accounts and investment providers and investments inside those accounts can really stack up. The typical worker has 12 jobs in his or her lifetime. Younger workers seem to have even more jobs than that. And many of you I know are investment collectors. And you end up with portfolios that seemed pleasing to you along the way, but over time they can get a little bit unwieldy.

So, I’ll talk about how to do this with your own portfolio. I will say that my husband and I went through this process about five years ago where we really culled the holdings in our portfolio. And it has been something that we really are happy we did. It has saved us a lot of time in terms of oversight. It’s saved us time at tax time.

I’m just going to start by discussing what we’ll talk about in the course of this presentation. First, I’ll hit on the benefits of reducing the moving parts in your portfolio, of streamlining your portfolio. And I would throw those benefits into two key buckets. One would be financial or investment considerations, and the other would be personal considerations. Then I’ll get into five steps to take to streamline your portfolio. So, we’ll talk about reducing your number of investment providers as well as your number of investment accounts that you hold with those providers. Then we’ll get on into reducing the number of holdings within those accounts. And one thing you’ll hear from me, and this won’t be any surprise if you’ve followed me over the years, I’m just a big believer in using broad building blocks to give your portfolio a lot of diversification with as few holdings as possible.

I’ll also share with you some ideas about things that you can throw overboard when you’re going through this process and you’re trying to reduce the number of holdings in your portfolio. We have been doing some research on diversification at Morningstar. Especially over the past few years, we’ve been doing this landscape report where we take a closer look at categories that diversify those core holdings in your portfolio and those that really don’t diversify, that kind of duplicate those holdings. So, I’ll share some of that research with you, and you may be able to find areas where you can trim in your portfolio based on that.

As we talk about this, we’ll be talking about things that you’ll be selling potentially, so you’ll want to bear tax considerations in mind, and that gets into the fourth step, where we’ll talk about how to do this streamlining process but also make sure that you don’t inadvertently trigger any tax bills that you weren’t aware of or that you don’t want to be on the hook for right now. So, we’ll talk about how to streamline your portfolio in a tax-efficient way and also how to be thoughtful so that that portfolio will be tax-efficient going forward.

And finally, we’ll talk about how to keep this whole thing on track. I am a huge enthusiast for investment policy statements, which really articulate how you will be selecting your holdings and also how you’ll be monitoring them on an ongoing basis. So, the idea is, just like when you clean your house, you want to keep it in shipshape going forward. That’s the goal of having an investment policy statement and having a retirement policy statement. And you can find links to both of those documents, templates for both of those things, in the transcript that accompanies this video.

Key Benefits of Streamlining Your Portfolio: Investment Considerations

Now let’s talk about the key benefits of streamlining for your portfolio. The first major consideration relates to investment considerations. The basic idea is that if you do go through some streamlining if you reduce your number of investment providers, your number of investment accounts, your number of investments within them, you’ll simply have fewer moving parts to oversee. And that will simplify things from the standpoint of monitoring your asset allocation on an ongoing basis, figuring out where to rebalance your portfolio. So, you might have your holdings all set up on Morningstar.com, for example, and you might use our X-Ray functionality on the website. You may have determined that you want to trim back on your US equity exposure and perhaps add to non-US. Well, if you have fewer holdings within your portfolio, it’s quite simple to identify how to do that rebalancing. On the other hand, if you have 100 holdings in your portfolio, that’s just going to be a more complicated job to figure out where to peel back and figure out where to add. That’s the main investment rationale, that overseeing your portfolio and staying on top of asset-allocation decisions is just so much simpler when you have fewer holdings.

It also simplifies things from the standpoint of reviewing that portfolio. If you have just maybe 10 or 12 holdings to monitor, that’s certainly a lot simpler than doing a full review process from a performance standpoint and a fundamental standpoint than is the case with many, many holdings. And the other thing—and this is tax season here as I’m taping this in March 2024—having fewer holdings really makes tax season so much simpler. This is the main area where in my own life I really appreciated the efforts that we put into streamlining our portfolio. When we pull those 1099s off our investment provider’s website, we’re just getting a couple of them versus having to go here, there, and everywhere for those 1099s.

It’s also, I think, a savings from the standpoint of cost-basis recordings. Now, of course, investment providers since the early 2010s have been on the hook for collecting those cost-basis records for us. But if you have investments from the pre-2010 period, you’ve probably had to track a lot of cost basis. If you have fewer holdings in your portfolio, you’ll free yourself from having to keep all those records. So that’s another consideration.

And then finally, one thing that I think probably doesn’t get enough attention is that if you’re able to reduce the number of investment providers, the number of relationships you have with investment providers, that really can help lower your expenses. So, you may be able to qualify for lower-share-class funds than you otherwise could if you had little pots of money with many different investment providers. You may also qualify for some discounted fees on advice, for example. That’s another consideration and I think another important reason to consider having your investments reduced down to just one or two or three providers rather than having a lot of different financial relationships. So those are the investment reasons why you’d want to consider such a streamlining.

Key Benefits of Streamlining Your Portfolio: Personal Considerations

Then I would say the personal considerations are just as important. If you’re saving yourself time in terms of oversight, in terms of performance monitoring and portfolio monitoring, that’s just time that you’ll have to spend on other things, which is a big consideration. And then another factor, a less happy factor, relates to cognitive decline. If you experience cognitive decline later in your life, you will be less susceptible to financial fraud if you have fewer investment accounts, fewer investment providers. It’s also just much simpler as we age to have fewer accounts to keep track of. I often share the story of how I was my dad’s investment buddy throughout his life and my dad experienced cognitive decline, and I was so happy that I was there to help see his investments through during that period. But many dads and moms and people do not have an investment buddy to help oversee their financial affairs. So, simpler is better from that standpoint.

And finally, when it comes to your loved ones, if you care about them, which you undoubtedly do, you really want to leave them with fewer accounts to worry about, fewer things to track down if something happens to you if you become incapacitated or die. You don’t want to put them on a paper chase at the time that they’re dealing with other very stressful and sad things. So, these are some other considerations that I think are truly important and a good reason to consider streamlining your portfolio.

Step 1: Streamline Your Investment Accounts

The first step in this process in terms of streamlining your portfolio is to take a hard look at all of your investment providers as well as your investment accounts. So, the advantages of doing so again get back to reducing oversight, reducing your recordkeeping responsibilities. One is purely logistical, that you’ll have fewer passwords and portals to have to keep track of. That gets to be a pain if you have a lot of different investment providers and a lot of different accounts. Keeping those passwords safe and making sure that you have access to them gets to be a bit of a pain in the neck. So, it’s helpful to reduce the number of investment providers. And it simplifies tax season, as I said.

And then one factor that I think probably doesn’t get enough play is that if you are able to have accounts sitting side by side, it really expedites the transfer process. An example would be I’m someone who is still in accumulation mode for retirement, so I have my taxable account sitting right alongside my IRA accounts. When the calendar page turns, and I’m able to make an IRA contribution for the new tax year, it’s as simple as just a couple of mouse clicks and I’m able to transfer money from our taxable account right into those IRAs. So, it helps when you’re in the accumulation mode, and it also helps when you’re in the decumulation mode. If you’re drawing down your portfolio during retirement, and you want to periodically transfer from your tax-deferred accounts or perhaps you’re on the hook for required minimum distributions, it’s helpful to have those accounts sitting side by side where your tax-deferred account is sitting right alongside your taxable account, and you can periodically do those transfers. Just a logistical advantage to having fewer providers and fewer investment accounts and to the extent that you have multiple investment accounts, having them siloed with a single provider.

How Low Can You Go?

The question is how low can you go in terms of reducing the number of investment providers and the number of accounts? Well, in terms of investment providers, you can go quite low. You could go all the way down to one, especially if you’re retired. If you are talking about investment accounts, there’s only so far you can go with this streamlining process. And the key reason is the tax code, that we all have multiple accounts that need to be kept distinct for tax reasons. If you have traditional tax-deferred accounts that consist of pretax dollars that you’ve put in and investment earnings, these are funds that you’ve never paid taxes on, so they need to be kept separate. And you might have Roth IRAs. Increasingly, younger investors have more dollar amounts in Roth accounts, but those Roth accounts need to remain distinct from your traditional tax-deferred accounts. And then if you’re part of a married couple, well, those accounts that you each own in your own names for your own retirement, they need to remain distinct as well. So, some of those retirement accounts have to remain distinct due to the tax code.

The same goes for single-purpose tax-sheltered accounts. College savings plans, 529 assets, for example, can’t be rolled into your IRA. Health savings accounts need to remain distinct. And the same goes for taxable accounts. So, there’s only so much consolidation that you can do at the account level, but you can still do some consolidation.

You Can Still Do a Bit of Cleanup

One of the key opportunities if you’re looking to streamline is to look at all of the traditional tax-deferred accounts that you hold. And I mentioned that the typical worker has 12 jobs, so many people have leftover 401(k)s perhaps left behind at the old company, or they have rollover IRAs at various firms. These accounts together represent a major consolidation opportunity, where oftentimes the best strategy from the standpoint of streamlining is to consider merging all of those accounts together into a single mega IRA. And that makes it super simple to keep tabs on that account, which in many households is the largest account and allows you to silo that account with a single investment provider. So, at the top of the list, I would take a look at all of the various traditional tax-deferred accounts, make sure that you don’t leave any behind because there are oftentimes smaller accounts that people forget about. Really think back to your employment history and make sure that you’re accounting for all of those traditional tax-deferred holdings.

Consolidate Roth and Taxable Accounts With the Same Provider

You can do the same with Roth accounts, where if you have multiple Roth IRAs, you can consolidate them together, collapse them into a single Roth IRA, ideally with the same firm, where you’re holding your traditional tax-deferred assets. And the same goes for various taxable accounts. Maybe you have smaller onesie holdings here and there. That’s a great opportunity to consider merging those together. As a side note, I would just say that if you’re doing a direct transfer of holdings into another provider, you wouldn’t typically trigger any tax implications. So, you just want to have those providers do a direct transfer to one another. You don’t want to take possession of a check, for example. You’d want to just have that transition be fairly seamless. So, this shouldn’t entail any tax consequences at this point.

I do want to make a note. I mentioned that oftentimes, especially with those company retirement plan assets, the old rollover IRAs often creating a supersize IRA is a great course of action. But there are a couple of reasons why you’d want to think twice about this. Ideally, you would get some advice from a financial advisor before proceeding.

But a couple of reasons to consider leaving assets behind in a company retirement plan and potentially even rolling assets into that company retirement plan: One would be if for whatever reason you need extra creditor protections. Oftentimes company retirement plans are covered by better creditor protections than is the case for IRAs. And this depends on the state where you live and the laws in place in the state where you live. But check that if creditor protections are a concern. Another consideration would be if for whatever reason you have a gold-plated 401(k). Maybe it’s ultralow cost where you have very few administrative expenses. You have super cheap funds in the plan. Maybe you even have some custom funds that you really like. Those are considerations to potentially leaving assets behind in the company retirement plan or even rolling assets into the plan.

One other consideration would be if there are investment types that you just can’t find in the context of an IRA. So, a really big category would be what are called stable-value funds, which typically offer higher yields than you can earn on a money market mutual fund or on a high-yield savings account. But they have some insurance coverage that essentially stabilizes their net asset values. Those can be attractive investment types for people to bring into retirement, especially.

Another fund type that is specific to people who are covered by the Thrift Savings Plan for U.S. government workers would be what’s called the G Fund, which is kind of a cashlike account. So, it guarantees stability of principal, but it offers a bondlike yield. The G Fund is really a gem in the Thrift Savings Plan lineup, and the Thrift Savings Plan is great overall. So, if you are a government worker and you are looking for safety but a higher yield than what is available on a cash account, oftentimes it’s a potential reason to think about staying in the TSP, rather than pulling the money out and moving it into an IRA. So just some considerations to bear in mind before you really take this mega IRA idea to heart.

Step 2: Embrace a Simple Portfolio Strategy

The next step is to stick with simple portfolio building blocks. So, look through your portfolio and just make sure that you aren’t using many holdings when one or two holdings would do the job just as well. On this slide, we’ve got the number of holdings in total market index funds, which are one of the best things you can do for your portfolio if you want to be a minimalist and you want to reduce your ongoing oversight obligations. Index funds are very low-cost. They provide a ton of diversification in a single shot. So, the specific constituents will vary by investment provider, but the basic idea is that if you’re buying a total market index, you are getting a lot of diversification. So, in Vanguard Total Stock Market, for example, 3,700 holdings, 8,500 holdings in a non-US portfolio, and roughly 18,000 holdings in Vanguard Total Bond Market. So, I often come back to index funds again and again when I’m talking to investor groups. The idea is, I’m not sure when I’ll see them again. So, I want to recommend something that they can hold for many years that won’t cause them a lot of ongoing oversight. I think index funds are really it.

For Larger Accounts, Seek Broad Diversification

If you are holding actively managed funds in your portfolio, you can certainly find funds that are broadly diversified, that provide some broad asset-class exposure, but they typically will entail some ongoing oversight, which is one reason why I tend not to be as big a fan of them as portfolios that just give you that asset-class exposure at a very low expense. So, if you’re looking for ideas about how to streamline a portfolio, I think you could start and end at using total market index funds or exchange-traded funds for your portfolio.

Consider Multi-Asset Funds for Smaller Accounts

If you have smaller accounts, an idea there is to use some sort of a multi-asset fund. An example would be maybe you funded a Roth IRA while you were still working, but you never really got critical mass in that account. So, it’s still maybe sub $50,000 or something like that. You could use some sort of a one-stop fund there. You could use a simple balanced fund or an allocation fund, as we call it, a fund that splits its exposure between stocks and bonds. You could use a static allocation fund that maybe shades a little bit more toward stocks but maintains that static stock-bond exposure. Or you could truly be hands-off and look to a target-date fund. But I think these one-stop funds can be super solutions if you’re looking to streamline the number of holdings within smaller accounts. The same goes if you have 529 college savings plans for your children or grandchildren. Those age-based 529 options can be a great hands-off option where you can have all of the asset-class exposure that you need and want but under the hood of a single investment account.

Sample Minimalist In-Retirement Portfolio: Tax-Sheltered

These are some sample minimalist portfolios. We’ve got these on Morningstar.com that you can refer to. This one is built on the Bucket approach that I so often talk about. So, we’re assuming a 4% annual spending rate. And if you’re familiar with the Bucket approach, you know that that typically entails holding one to two years’ worth of desired portfolio withdrawals in cash instruments and then stepping out on the risk spectrum with the rest of the portfolio. So, I’ve got 8%, or two years’ worth, of my anticipated portfolio withdrawals in cash. Then for the next eight years’ worth of my anticipated portfolio spending, I’m holding just a high-quality intermediate-term bond fund. In this case, again, a total bond market index fund that’s covering me for another eight years’ worth of portfolio withdrawals. And then I’ve got the remainder of the portfolio in equities in a globally diversified equity portfolio: 40% in total US, another 20% in total international. So, this is a way to streamline the number of holdings if you’re someone who is actively in drawdown mode, a way to get away with having fewer moving parts in the portfolio.

I have model portfolios that are slightly more complicated that might include some short-term bond exposure as well as some Treasury Inflation-Protected Securities exposure, but the complexion of a Bucket portfolio is reflected here, and I think this is an example of how you can be quite minimalist when setting up your own portfolio.

Sample Minimalist In-Retirement Portfolio: Taxable

Incidentally, this is a tax-sheltered portfolio. So, we’re assuming you’re holding it within the confines of an IRA. So, we’re not managing it with regard to tax efficiency, and that total bond market index, as well as the cash holdings, will tend to kick off some taxable income, which is going to be taxed at your ordinary income tax rate, which is why I’ve also created some taxable portfolios with basically the same contours as those tax-sheltered portfolios. So again, we’ve got two years’ worth of expenditures in cash and maybe we’re holding it in a municipal money market or something where we won’t take that full ordinary income tax haircut each year. And then we’ve got a good sturdy municipal-bond fund for that eight years’ worth of portfolio withdrawals beyond the cash withdrawals.

And then the equity portfolio you’ll see is basically the same—total stock market, total US, total international. Well, those are pretty tax-efficient holdings right there. So, we don’t need to change them up, even though we’re investing in the confines of a taxable account. This is just a simple look at how minimalist you could go with your portfolios, with your taxable and tax-sheltered portfolios, if you’re someone who is in retirement.

Sample Minimalist Accumulator Portfolio: Tax-Sheltered

If you’re someone who is still accumulating for retirement, if you’re still working and saving for retirement, well, you’d probably want to be a little bit more aggressive with that portfolio. You probably don’t need that ongoing drag of cash. You might certainly want some cash to cover you for emergency expenses. But assuming you have a tax-sheltered portfolio, you could just have 20% in a total bond market index and then the remainder of your portfolio in a globally diversified equity portfolio, again, just consisting of those two total market funds. Again, another idea that could come into play here would be just to use a target-date vehicle. That would be a super simple way to streamline a portfolio further still if you were comfortable going that route and you have access to a good target-date fund. So, again, this is a tax-sheltered portfolio. We’re assuming that you are holding that total bond market index inside of an IRA or a 401(k), so you’re not having to pay the full freight in terms of your tax bill on those annual income distributions.

Sample Minimalist Accumulator Portfolio: Taxable

If you are building an account in a taxable account and you’re in accumulation mode, you’d want to be majority equity with this portion of the portfolio, assuming that this is a retirement portfolio. So, you’d hold that globally diversified equity portfolio, again, just consisting of the total-market trackers. And here you might use some sort of a tax-efficient municipal-bond fund in lieu of that total bond market index.

So, just some food for thought. We have crafted a lot of different model portfolios on Morningstar.com that you can refer to. These are not one-size-fits-all. You’d certainly want to think about your own risk capacity, your own anticipated spending from that portfolio, your risk tolerance as well when deciding what asset class exposures make sense for you. But these are some ideas for populating your portfolio with a super minimalist investment mix.

Step 3: Prune ‘Faux’ Diversifiers and Other Clutter

The next step is to take a hard look at your existing holdings and figure out what you’re going to cut. So, we’ve just talked about some things to maybe land on when you’re thinking about this super minimalist portfolio but what will you throw overboard potentially? And I’ll just describe what we’re looking at here. This is part of some forthcoming research that Amy Arnott, Karen Zaya, and I have been working on. And we’ve been revisiting correlations among asset classes annually. And the idea is to help investors figure out what elements of their portfolios, what asset classes actually add value and help provide diversification, and which don’t. And I’ll describe what we’re looking at on this slide.

At the very top is the Morningstar US Market Index, which is just a broad market index that’s meant to encompass the whole US market. And we think of that as kind of the baseline holding that many people use when they’re in accumulation mode or in decumulation mode. So, that’s the starting point for this research. And then we look at how closely all of these other assets can have correlated with that US market index over various time periods. This particular time period shown here is over the past 20 years. On down below that 1.0 would be the extent to which these other asset classes have been correlated or not correlated with the US market. And if you see a number that is positive and that is close to 1.0, and so it would be represented by a darker blue box on this slide, that means that it’s not doing a lot for us in providing diversification. There might be reasons to hold it. There might be valuation reasons or fundamental reasons. But from a diversification standpoint alone, it’s not necessarily adding anything for us.

On the other hand, if you look at things that are in that orange range where you start to see a negative number, you are cooking with gas in terms of diversification. It’s a really good thing to see those negative numbers because you see that those asset types actually diversify that US stock exposure. So, if it’s close to 1.0 in terms of its correlation, that means that it has been closely correlated with the US market. If it’s a lower number or maybe even better yet a negative number, that means that it kind of zigs when the US market zags. So, one thing that probably jumps out at you as you look at this, if you’re looking for those negative numbers, US Treasuries over the past 20 years have historically been a really good diversifier for US equities, and cash has increasingly been a pretty good diversifier as well. So, the good news here is that those are plain-vanilla assets that can be obtained very cheaply. They don’t require you to have more-specialized holdings. So arguably, if you’re thinking about US equities, you’d want to have that fixed-income exposure, some cash exposure, and then with some of these other asset classes, you might want to a harder line because at least from a diversification standpoint, they’re really not adding that much value.

If you’re looking at the other parts of this chart, that just shows you what sort of relationship these assets have had with each other. So, you might be curious to see how correlated have small caps been with bonds, for example, or how correlated has gold been with fixed income, or whatever the case might be. That’s what the rest of the chart tells you. But if you’re doing that basic job of just trying to build a portfolio that’s diversified, if you look down that first column, cash and Treasuries will probably jump out. Gold also looks halfway decent on this chart. So, the correlation has been very slightly positive with the US market, but that is not a strong correlation at all. Commodities are also a little bit compelling. The Morningstar US Core Bond Index, which would be kind of a total bond market index portfolio, has a higher correlation with US equities than Treasuries, but nonetheless, a somewhat muted correlation there as well. So, just some food for thought for you as you’re thinking about building a portfolio that’s diversified and thinking about categories that potentially you could cut from that portfolio.

In terms of things that you might cut, I would highlight potentially real estate. Its correlation with the US market has been increasing pretty significantly over the past decade. This is a 20-year snapshot. When we look at more recent snapshots, its correlation has been increasing. High-yield bonds are another category. There might be investment considerations. There might be fundamental considerations or yield considerations. You might want to hold high yield as a component of your fixed-income portfolio. But what we see from this slide with its fairly high correlation with that top box is that from a diversification standpoint, that high-yield bond exposure is going to give you something that behaves a lot like equities, in March 2020, for example. When US equities are going down, high-yield bonds will typically be going down as well. So, some food for thought as you think about what you can potentially cull from your portfolio and how few holdings you can get by with.

Cash and High-Quality Bonds Have Diversified US Stock the Best

This is just a slide that amplifies what we were just looking at. This also is from our forthcoming research paper. This examines rolling three-year correlations of various fixed-income categories and cash relative to the Morningstar US Market Index. That flat line at the 0.0 line, the horizontal axis there, that’s the Morningstar US Market Index, and you can see that these other assets, well, their correlations with the US Market Index have kind of ebbed and flowed over the past several decades. You can see that at this ending point, cash appears to be the best diversifier. That’s partly because of the 2022 experience, which I think is fresh in many of our minds. And you may remember that stocks and bonds both fell simultaneously because interest rates were on the way up. Cash, on the other hand, actually benefited during that period because cash yields improved during that period. And cash, of course, doesn’t suffer from volatility in principle.

These things can be a little bit ephemeral. I think that the relationship of Treasuries as being a good diversifier for US equities is still one that you can bank on, not necessarily over every single time period, and certainly in a rising-rate environment, that’s why you hold cash, so you won’t be buffeted around. But nonetheless, that relationship has been a pretty strong one. That specifically in a declining US equity market, in some sort of a recessionary period, Treasuries have worked really well to diversify US equity exposure, and they’ve even gained ground during those periods. So, I think the key takeaway from this slide is that cash and high-quality bonds are your friends if you’re looking to build a portfolio that’s truly diversified.

To Streamline Holdings, Consider Cutting

To streamline holdings, I would highlight a few categories to consider cutting. I mentioned that real estate would be one to consider cutting. For one thing, if you have a total market index, you at least have some real estate exposure. Right there in the fund, you have some REIT exposure. Sector funds as a group—this is a section that I work on in our research paper—tend to be just duplicative of what is in your equity index funds or whatever equity exposure you have in your portfolio. A couple of sector categories look a little better from the standpoint of diversification. One would be energy. It has recently looked a little bit better in terms of diversifying US equity exposure. Utilities also at various points in time have looked somewhat decent as diversifying US equity exposure, but I don’t think most investors need sector funds. I personally have no sector funds in my portfolio, and I’ve been just fine. Region-specific funds also are often duplicative of what is in the broad market funds, whether index or active. I think that those are easy candidates to consider cutting.

Another idea would be if you’re thinking about consolidating the number of holdings in your account, if you have funds that are geared toward individual styles, you might consider cutting them as well. So, I know some investors maintain a separate large-value fund and a separate large-growth fund and throughout the style box, the total stock market gives you a lot of exposure in a single shot, and certainly total US and total non-US give you broad geographic exposure as well as broad sector and style exposure.

Another broad category to consider cutting—and I know many of you are individual stock enthusiasts, but if you’re someone who has not found a lot of time to oversee an individual stock portfolio, you might consider cutting there as well and throwing the money behind a broad market index fund or an exchange-traded fund. If you’re an enthusiast, by all means, continue, keep going. But potentially reduce your number of individual stock holdings into your higher-conviction positions. Commodities and gold, as we showed on the previous slide, they actually look better than a lot of other categories when it comes to adding diversification to a portfolio. But at the end of the day, they don’t look better than plain-vanilla cash and Treasuries. So, if you’re reducing the number of moving parts in your portfolio, those would potentially be candidates to consider as well.

Step 4: If Making Changes, Bear Taxes in Mind

The next step is to be tax-conscious as you go about making changes to your portfolio. If your overall goal is to do some streamlining, if you’re cutting some holdings from your portfolio, you absolutely want to bear tax consequences in mind. Get some tax advice if you’re not super comfortable with tax matters, but the bottom line, especially if you have taxable holdings, is to move slowly and deliberately. Start your streamlining efforts with those tax-sheltered accounts because as long as the funds remain inside the tax-sheltered account, whether traditional, tax-deferred, or Roth, you won’t trigger any tax consequences to do that repositioning. So, start there, you may be able to really move the needle in terms of streamlining your portfolio holdings.

Get Some Tax Advice and Watch Out for Capital Gains Taxes

If you are moving on to your taxable accounts, that’s where I think you need to be more careful. We’ve come through a tremendous run for US stocks over the past 15 years, really coming out of that great financial crisis. We’ve had double-digit annualized gains. So, you want to be careful that you’re not triggering a tax bill to make changes. If on the other hand, you have holdings that have been kicking off big capital gains distributions along the way, if you have actively managed funds, for example, it may be that you’ve effectively been prepaying your tax bills by paying the taxes on those distributions. So, do some work on your cost basis, see what any changes would cost you in terms of capital gains tax. The last thing you want to do is to trigger unintended tax consequences, and you certainly don’t want to be on the hook for short-term capital gains, which are taxed at your ordinary income tax rate. So, if you have newly purchased positions, you want to be especially careful there. Get some tax advice.

Cut Holdings in Taxable Accounts That Have Losses

If you have holdings in your account that have losses for whatever reason—my guess is that most investors don’t have a lot of losses in your portfolio—but by all means, if you want to do some culling, cut away there because you can use those losses to offset gains that you might be realizing elsewhere in your portfolio. And then a key thing to bear in mind here as well is just to focus on making that portfolio more tax-efficient going forward. So, not only are you streamlining, but you’re trying to reduce the tax drag on it going forward, and that’s another feather in the cap of some sort of a broad market index fund that is going to be quite tax-efficient relative to other options going forward.

You May Be Able to Tie in Charitable Gifts

One thought here is if you’re doing some sort of culling in your portfolio, if you’ve identified holdings that you are going to part with, one thing to think about in this context is just whether charitable giving might come into play. Those holdings that you’re culling can make terrific charitable gifts for a couple of reasons. One is that you’re making a charitable gift, and that’s probably the main reason to do this, or it is the main reason to do this. But in terms of tax reasons, one is that if you have appreciation in that holding, if you give those funds to charity, or give that security to charity, or give it to a donor-advised fund, well, you won’t owe taxes on that appreciation that you’ve experienced over your holding period. And the charity won’t owe taxes on that appreciation, either. So, it’s a win for the charity as well. And then you may be able to deduct that contribution of appreciated securities, assuming you’re over the standard deduction. So, if you’re making a very large charitable gift of appreciated securities, here’s a good spot to get some tax advice. One strategy that can come into play is to bunch together deductions into a single year so that you’re making maybe a large charitable gift, you’re having other deductible expenses that year, and with those various activities, you’ve gotten yourself over the standard deduction threshold, which is higher today. So, get some tax advice here. A donor-advised fund can be really attractive in this context as well because the donor-advised fund, in turn, can make that gift to the charity. A smaller charity may not be well-equipped to handle your donation of some tiny company, whereas the donor-advised fund is able to deal with that. So, food for thought if you’re charitable inclined and you’re going through this culling process.

Step 5: Document and Stick With a Once-Annual Portfolio Review

The final part of this process is just to make sure that going forward, you are as organized and thoughtful about adding individual holdings and really articulating your overall portfolio plan as you can possibly be. So, we’ve prepared an investment policy statement template that you can download using the link in the transcript here to fill out your specific rationale for your portfolio—what your asset allocation is going to be, what criteria you will use for identifying holdings that will make the cut into your portfolio, and also what factors you’ll monitor on an ongoing basis. I’m a big enthusiast of the idea of just having a once-annual portfolio review where you check up on your portfolio’s performance, you check up on your asset allocation to see whether you’ve veered from your target asset allocation, and you do a little bit of due diligence on those individual holdings. An IPS, whether you use ours or your kind of custom craft your own IPS using an Excel spreadsheet or some other document, whatever it is, I think that the benefit is that it can help keep you focused, and it can help keep your plan on track. So, that’s time well spent to create an IPS. Also take the step of sharing it with your spouse or partner or your adult child. Let them know what your plan is so that they have a sense of how you are thinking about and monitoring your investments on an ongoing basis.

Use an Investment Policy Statement or a Retirement Policy Statement to Stay on Track

We’ve also created a retirement policy statement template. Here too, you can find the link in the transcript. The basic idea here is that if you are about to retire or you’re already retired, here you’re articulating what sort of approach you’re taking toward taking portfolio withdrawals, and what sort of asset allocation you’re maintaining, and what sequence you’re using for those portfolio withdrawals. So where are you pulling your withdrawals from first? Are they coming from your taxable account or your tax-deferred account? What’s your approach to Social Security and on down the line? So that RPS I think can be a valuable tool to hold alongside your IPS if you’re someone who is retired or thinking about retirement.

My hope is that today’s presentation has given you good food for thought as you think about streamlining your portfolio or spring cleaning your portfolio. Here’s some information about how to reach me. As you know, I’m a regular on Morningstar.com, you can always find me there, but I have a few other activities as well.

Thank you so much for your time and attention today.