I invite you to attend my upcoming complimentary workshop (Berkeley Heights Public Library, Weds., April 6, 7:30-8:30 pm), where we'll discuss a number of ways to "Spring Clean" your investment life. My article here summarizes part of that workshop.
For those of you who can't attend the workshop. the 2 simple concepts here help you jump-start your investment Spring Cleaning: 1) consolidate your scattered investment accounts into a smaller number of accounts and 2) weed out redundant holdings and confirm assets classes you may be missing.
Scattered holdings is like hanging your clothing in closets throughout the house (plus having some of it packed away, out of sight). Imagine dressing for a formal occasion, but running from closet to closet to piece together your outfit. It’s the same with financial accounts. If you have accounts scattered all over the place, it’s very hard (often impossible) to understand where all your money is. If you don’t know where your money is, you can’t minimize taxes (by knowing how much is taxable vs. tax-deferred). You also can’t know or remember what you have where, what should be rebalanced (positions brought back to your optimal asset allocation levels), etc. Scattered holdings are the enemy of good financial planning. Here are some guidelines for the number of places you should hold investments:
- One current 401(k) or 403(b) plan per person (take all previous employer 401(k) and 403(b) plans and roll them into an IRA).
- No more than 2 brokerage house accounts per individual or couple (e.g. TD Ameritrade, Fidelity, Vanguard). Some folks have a checking account at one brokerage house, but most or all their holdings at another. That’s OK, but preferably no more than 2 accounts.
Having money spread across several brokers to “see how each of them is doing” makes no sense. That means no single broker or advisor can see everything you’re invested in – so they invest on your behalf with blinkers on.
- No more than 2 banks for CDs, checking and savings – per individual or couple. You may have some CDs at one bank, but use another for checking/savings. That’s OK – but preferably no more than 2 banks.
- If you have annuities and no surrender penalties, these should be consolidated (rolled over, using a 1035 exchange) to low cost, no load annuities with one annuity provider.
- We haven’t discussed insurance and other financial documents, but the fewer insurers and policies you have, the better.
Let’s turn to another area that’s a perfect target for Spring Cleaning: having an excessive number of mutual funds that may be redundant in content – and end up giving you asset class concentration instead of diversification.
Everyone should have the right portfolio mix of these basic asset classes: short- and intermediate bonds (possibly municipal, corporate and global), large, mid and small cap US stocks, international developed stocks, emerging markets, commodities and REITs. The appropriate weighting of each asset class is determined by your risk tolerance, income and/or growth needs, etc.
How do you know if your mutual fund holdings overlap? You likely won’t be able to tell if they just by looking at the name alone. Here’s what I mean:
Do you know what Janus D (JANDX) invests in? How about Fidelity Contrafund (FCNTX)? (answer: they both invest in US large cap growth stocks). How about Janus Triton D (JANIX) and Catalyst Value Cl A (CTVAX)? (answer: they both invest in US small cap stocks). If you subscribe to Morningstar, Quicken or other investment programs, X-ray functions allow you to enter mutual fund holdings to determine the extent of the overlap.
These are just 2 tips – briefly described – to Spring Clean your investments. Knowledge is power, so this type of Spring Cleaning is essential and not optional.
Eve Kaplan is a Fee-Only Certified Financial Planner in BerkeleyHeights. Kaplan Financial Advisors is a Registered Investment Advisor in New Jerseyand New York. Her firm provides financial planning for individuals, and 401k/403b plans for companies. She can be reached at 908-898-0549 or firstname.lastname@example.org Visit her website at www.kaplanfinancialadvisors.com.
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