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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-
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
How to Combat Portfolio Sprawl
Portfolio Matters
|
Christine Benz