Are Your Investments Too Scattered? How to Simplify Your Portfolio

“Diversify your portfolio” is a popular mantra in money management.  This refers to spreading wealth across different types of assets and investments to balance risk and reward. There is a difference between a diversified portfolio and a messy one.  It’s common for individuals to accumulate multiple investment accounts over time: 401(k)s from previous employers, IRAs, brokerage accounts, and more.  While diversification is a cornerstone of sound investing, too many scattered accounts can lead to inefficiencies, increased fees, and a lack of cohesive strategy.  An organized portfolio with consolidated assets can put your money to work and improve your financial health.  Read on to learn how to simplify a scattered portfolio and why it matters.

The Pitfalls of a Scattered Portfolio

A 2021 Capital Group study found that only a third of investors (32%) knew the investment contents of their portfolios.  This suggests that many people do not know their investments and, therefore, cannot manage them properly.  Those with cluttered portfolios may be suffering the following consequences without realizing it:

• Overlapping holdings:  Multiple accounts can lead to duplication. For example, owning several large-cap U.S. stock funds can skew a holder’s risk profile. Concentrating investments in certain sectors, asset classes, or geographies can expose a portfolio to that segment’s volatility.
• Fee drain:  Every investment account has its terms, which may include fees: advisory, account maintenance, or transaction fees. These fees of 0.25%, 0.50%, or 1% can add up across accounts, which may seem small but can mean thousands in lost growth over time.
• Lack of strategy and oversight:  Scattered investments can weaken a financial strategy. One account may be conservative while another is aggressive, making it difficult to assess a portfolio’s risk exposure or whether its investments align with the holder’s goals.

The Benefits of Simplification

Simplifying a portfolio goes beyond cleaning house, offering tangible financial and planning advantages that enhance long-term success.

• Better visibility:  Consolidating accounts allows the holder to view their portfolio holistically, including asset allocation, the mix of investments, and progress toward goals.  Simplicity improves the ability to track performance and rebalance when necessary.
• Lower costs:  By reducing redundancies, holders can qualify for lower-cost fund share classes or advisory fees.  For instance, holders who combine assets at a single institution can gain access to institutional share classes, which often carry lower expense ratios.
• Simpler retirement planning:  Managing multiple IRAs and 401(k)s can be a hassle, especially for those nearing retirement.  They can complicate the calculation of required minimum distributions (RMDs) and planning withdrawals, so streamlining can make the drawdown phase easier.

How to Simplify Your Portfolio: 3 Smart Moves

A few practical strategies can bring structure and simplicity to a portfolio without sacrificing performance or diversification.

1. Consolidate accounts thoughtfully:  Roll over 401(k)s from previous employers into the current 401(k) or IRA. Combine IRAs where possible.  Be mindful of potential tax consequences, differences in investment options, and early withdrawal penalties when making changes.  Investors who consolidate accounts are more likely to rebalance regularly and stay on track with their goals.
2. Review overlapping funds: Check your accounts for funds or strategies that may overlap in exposure. If you have funds with similar goals or objectives, consider consolidating them into fewer funds. You may be able to save on fees, further diversify your accounts, and simplify your investments. This approach may allow access to more institutional funds with higher minimums and lower fees with your consolidated funds.
3. Consider working with a financial advisor: Working with a financial advisor can help you efficiently allocate how your accounts are invested. Their understanding of your goals and expectations can lead to a better diversification of funds, lowered risk exposure, and simplifying your plan. At SHP, our financial advisors approach planning with Safety, Income, and Growth buckets.

Addressing Common Concerns

Investors who are hesitant to consolidate often share similar concerns, and here are some replies to common questions:

Question:  Will consolidating accounts reduce my diversification?

Answer:  Not necessarily, as diversification is not about how many accounts a person has, but rather, their asset allocation.  Too many accounts can create false diversification if an individual unknowingly holds overlapping assets.

Question:  Am I in danger of losing everything at one institution?

Answer:  The Securities Investor Protection Corporation (SIPC) protects brokerage accounts, covering up to $500,000 in securities per account.  Major firms also use extensive cybersecurity measures to protect assets.

Simplifying an investment portfolio gives the holder more control instead of sacrificing it. Maintaining fewer accounts and a clearer strategy reduces costs, minimizes stress, and increases confidence.  Whether you are years from retirement or already managing withdrawals, taking the time to streamline your investments can yield lasting dividends.  For assistance with consolidating your portfolio and a complimentary review of your finances, contact a financial advisor at SHP Financial today.