Even if you鈥檙e not an investment collector, it鈥檚 a good bet that the number of holdings and accounts in your portfolio have grown right along with your age and net worth.
Investors can end up with what I think of as 鈥� 鈥濃�攖oo many accounts and too many holdings within them. is desirable, but when taken to an extreme, it can become difficult to keep tabs on what you have.
The good news is that with a little bit of effort, it鈥檚 possible to arrive at a minimalist portfolio with fewer moving parts鈥攂oth accounts and holdings.
Step 1: Inventory and document what you have.
I鈥檇 recommend that you broaden the inventory process to encompass all of your financial relationships. As you do so, all of your account information鈥攁ccount numbers, passwords, financial professionals you deal with, and so on.
This will help you identify streamlining opportunities and, if you keep it updated, can be a guide for your loved ones to know what you own if they ever need to help manage your accounts.
Step 2: Consolidate like accounts.
Next, identify opportunities to merge accounts of the same type.
You might have assets in like IRAs and 401(k)s, Roth accounts, and taxable/nonretirement accounts. While it鈥檚 usually not advisable to combine assets held in different tax silos, duplicate accounts of the same type provide opportunities for streamlining. By following the rules for combining like account types and letting the firms deal with one another to execute the transfer of funds, you should be able to streamline without causing a taxable event.
Tax-deferred accounts can be particularly ripe for consolidation. Consider merging multiple 401(k)s and IRAs into a single IRA.
And if you have multiple HSAs, identify and transfer funds from the also-rans to a single mega-HSA. Finally, many households have multiple small brokerage and bank accounts that can be combined.
Step 3: Revisit your target asset allocation.
Once you鈥檝e finished the account-consolidation process, it鈥檚 a good time to reconsider your portfolio鈥檚 , particularly if you haven鈥檛 done so for a while.
If you don鈥檛 have asset allocation targets and expect to use the , good can help you get in the right ballpark.
Step 4: Populate the accounts with simple building blocks.
Armed with targets for your portfolio鈥檚 asset allocation, you can then switch into an ultrasimple, minimalist portfolio mix. The goal of a is to use the fewest number of holdings to achieve diversification. Broad-market index funds and exchange-traded funds lend themselves particularly well to this effort. If you have small accounts, all-in-one funds like target-date funds can be a terrific solution, especially if you鈥檙e not yet retired.
Making changes to tax-sheltered portfolios won鈥檛 result in any taxes as long as the funds stay inside the account shell. However, you鈥檒l want to take care when making changes to your taxable accounts because can result in a tax bill.
Step 5: Establish a plan for keeping it up to date.
Unless you鈥檙e sticking with target-date funds or some other self-managed option, you鈥檒l still need to keep tabs on your portfolio鈥檚 asset allocation as the years go by.
I like the idea of using an to document the parameters of your portfolio鈥攜our asset allocation, how often you鈥檒l monitor your portfolio, and what the catalysts will be for making changes. With a minimalist portfolio in place, a good annual checkup is all you really need.
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This article was provided to The Associated Press by Morningstar. For more personal finance content, go to鈥�
Christine Benz Of Morningstar, The Associated Press
