Some people have too many sweaters stuffed in their closets, and lots also have extra mutual funds, ETFs or stock holdings cluttering their portfolios, according to Christine Benz, director of personal finance for Morningstar.
Many investors have a “glut of ‘stuff’ in their portfolios, she says in a recent piece on the research firm’s website.
“For every single portfolio I receive that’s whippet-thin — without an excess stock, fund, or ETF to spare — I come across 10 more that have 50, 60 or even 100 individual holdings,” Benz wrote.
Though having too many holdings isn’t as bad as saving too little or chasing performance, “portfolio sprawl,” as she calls it, can give investors challenges they don’t really need.
“It can simply be difficult to keep track of the fundamentals of so many holdings, especially if those holdings include individual stocks or actively managed mutual funds. The investor with too many holdings may have trouble figuring out their asset allocations or knowing when or how to rebalance,” the finance expert said.
“Having too many stocks and funds can also compound the headaches for an investor’s successors. Widows, widowers and other loved ones may have difficulty untangling the web of the too-acquisitive investor,” she noted.
Furthermore, portfolio sprawl also can negatively affect performance.
“If an investor amasses a lot of holdings, especially multiple diversified equity and bond funds, their performance within each asset class can become very index-like very quickly,” according to Benz. “But if that same investor is paying active management fees, sales charges or some combination thereof, the portfolio may well underperform a buy-and-hold portfolio consisting of simple index funds with ultra-low costs.”
Thus, she advises investors to streamline their portfolios by following these eight do’s and don’ts:
1. Merge Similar Accounts
As people change jobs, they pick up multiple 401(k)s and IRAs.
“Rolling all of these orphan accounts into a single IRA can be a great way to clean up the mess in a hurry, giving you just one major account to monitor on an ongoing basis,” according to Benz.
“Not only will you be able to populate your IRA with nearly anything you like, but you’ll also be able to cut out the administrative costs and above-average fund fees that come along with some 401(k) plans, especially those of smaller employers,” she wrote.
The process can begin with the decision to have one fund company or brokerage house the IRA.
Ideally, the providers should roll the funds directly so the investor doesn’t need to receive any checks in the mail.
2. Watch Out
Combining 401(k)s and IRAs into a single IRA may not be the right move for every situation, Benz advises.
“In particular, assets in 401(k)s and other defined-contribution plans enjoy blanket protection from creditors. Meanwhile, the creditor protection of IRA assets will depend on the laws in your state,” she pointed out.
Plus, some 401(k)s and other defined contribution plans may offer investment types that an individual investor cannot get access to, such as stable-value funds or ultra-low-cost institutional share classes.
3. Take the Best; Leave the Rest
While many investors manage each separate 401(k), IRA and other account as a well-diversified portfolio unto itself, it’s preferable “to reduce the number of holdings in your portfolio and ensure that each is best of breed by thinking of all of your retirement accounts as a unified whole,” Benz says.
“That’s because it’s the total portfolio’s asset allocation that matters, not the allocations of the constituent portfolios,” she explained.
If a 401(k) plan has excellent equity-index funds, for instance, but weak bond options, then an investor might want to keep lots of equities in the 401(k) and more bonds in the IRA.
4. Use Caution
Diversification in accounts is especially valuable for investors approaching retirement age.