(PUB) Investing 2015

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How to Combat Portfolio Sprawl Portfolio Matters | Christine Benz

folio may well underperform a buy-and-hold portfolio consisting of simple index funds with ultralow costs. In my recent article about New Year’s financial resolu- tions, I suggested that investors put “streamlining their portfolios” on their to-do lists for this year. Here are some dos and don’ts to keep in mind. Do: Collapse Like-Minded Accounts We’re a nation of job-changers; the typical person has been on the job for just four years. Thus, it’s no wonder that many investors hold multiple 401 (k)s and IRA s that contain assets accumulated at former positions. 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. 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 admin- istrative costs and above-average fund fees that come along with some 401 (k) plans, especially those of smaller employers. Start the process by deciding which fund company or brokerage you’d like to house your IRA ; that firm can then coach you on the logistics of getting everything rolled over into a single account. Be sure to have your providers work with one another on conducting the transfer rather than receiving a check yourself. Don’t: Take It Too Far Even though combining orphan 401 (k)s and IRA s into a single IRA can be a simple way to reduce the number of moving parts in a portfolio, it’s not the right answer in every situation. 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. In addition, 401 (k)s and other defined-contribution plans may offer investment types that are unavailable to individual investors. You can’t buy a stable-value fund—a cashlike investment that typically pays a higher yield than true cash instruments—outside of a company retirement plan. Your 401 (k) may also offer ultra-low-cost institutional share classes that you couldn’t buy on your own; however, with the advent of

Americans continue to accumulate more toys, furni- ture, and knickknacks than they know what to do with. For proof, look no further than the growth in the self- storage industry. Although the pace of growth may be modulating, self-storage rentals have been one of the fastest-growing pockets of the real estate industry over the past 40 years. There are now about 50 , 000 self-storage facilities in the United States, and one in 10 Americans has resorted to storing possessions offsite. Many investors have a similar glut of “stuff” in their portfolios. For every 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. Of course, in the scheme of investor problems, overdi- versification isn’t the worst sin. Having too many holdings won’t wreak the same havoc that under- saving will, or overpaying, or performance-chasing. But portfolio sprawl can add to investors’ oversight challenges. 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 asset allocations or knowing when or how to rebalance. 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. Portfolio sprawl can also have negative repercussions for performance. If an investor amasses a lot of hold- ings, especially multiple diversified equity and bond funds, their performance within each asset class can become very indexlike very quickly. But if that same investor is paying active management fees, sales charges, or some combination thereof, the port-