Spring Cleaning Your Portfolio

Friday, February 1st

Have you see the latest Netflix show that everybody’s talking about?  It’s called Tidying Up and features a Japanese woman named Marie Kondo who is an expert at decluttering and organization.  A few years ago she wrote a book under the same title and it became a bestseller.

The basic premise that Marie Kondo advocates is that we no longer even see the stuff we have. It’s just getting in our way and taking up space.  She encourages her readers and her clients to take the opportunity to pick up and handle each item in a room or in your home and decide if it “sparks joy.”  It doesn’t matter where you got the item, how much it cost, or if you have had it “forever,” if it no longer brings you joy, then you should promptly get rid of it.

In our industry, we find that many of our clients’ portfolios suffer from the same lack of examination as the long-forgotten items tucked away in our closets.  Some of them have the same accounts, with the same amount of risk and the same amount of fees and the same amount of diversification that they’ve had forever.

I think it can be very helpful for people to make a careful examination of all their investments, hold them up one-by-one, and see if they are still serving you the way you need them to.

As time passes and we get closer and closer to retirement, adjustments need to be made.  It’s always good to reexamine, reevaluate, and reorganize your portfolios according to your current priorities.  As you look at each of your investments individually, we recommend that you assess them by risk, diversification, and fees.

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Risk: As you near and enter retirement you need to carefully manage the amount of risk you have in your portfolio. If you have chosen an aggressive strategy that is mostly focused on stocks, for example, and the market experiences a correction, it can delay or postpone your retirement.

As you evaluate the amount of risk in your investments, you can ask yourself the following questions: How much risk am I taking?  What returns did I receive by taking that risk?  Does the value proposition of this investment make sense?  In other words, is the risk you are taking worth the return you are getting.

For example, if you are getting 8% returns in a high-risk investment but can get 6% returns on a low-risk investment, you need to decide if the extra 2% return is worth the risk of loss.  Much of this will be based on your time table for retirement.  The shorter your time horizon until retirement, the less risk you will want to have.

Keep in mind that everything in your portfolio should not be invested to have the same level of risk.  By diversifying the amount of risk you have across your investments, you can still pursue growth while keeping a close eye on preservation and protecting your portfolio from significant losses.

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Diversification: Especially if you are invested in funds that are made up of multiple stocks, it can be very important to occasionally reexamine the amount of diversification in your portfolio.

Even though you may have money invested in many different funds, if those funds move up and down together in tandem in the market, they are highly correlated.  When investments are highly correlated it means they perform similarly.  When you have unique funds that behave in the same way in both good and bad markets, you are essentially invested in one fund and not diversified as much as you think you are.

The goal of diversification is to build a portfolio made up of holdings with a low correlation to each other to protect you from market fluctuations.  This means that when one declines the other rises, and vice versa.  The reason it is important to reevaluate this from time to time is that, because of the global economy, investments are becoming more and more correlated all the time.  And, many large funds are made up the same stocks.

If you find that all your investments are behaving in the same way, you will need to reorganize some things so that you can protect yourself by being more diversified.

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Fees: It is not uncommon for a client to come with us and have no idea what kind of fees they are paying. Most of the time, people assume that there isn’t much they can do to avoid fees and that most funds have similar fees.  Neither of these assumptions are true.  Investment fees vary greatly from fund to fund and they can make an enormous impact on your returns.

First, find out exactly what you are paying in fees in every fund.  Assume that every investment has fees and take the time and effort to discover exactly what those are.

Then armed with that information you can decide if it’s worth the cost.  Again, this goes back to the value proposition.  What are you paying to produce your returns?  In some cases it can be worth it to pay more if it improves investment performance or reduces risk, but you need to evaluate this based on actual numbers.  What are you really getting for those extra fees?  If returns and risk are comparable to cheaper vehicles, don’t pay more than you have to.  Remember saving 2% in fees, is as good as a 2% increase in returns.

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While Marie Kondo would argue that nothing feels quite as good as carrying bags of unnecessary, accumulated possessions out of your house, I think that doing regular financial tidying of our investments can be even more valuable.  Take the time to really examine the things you haven’t looked at for a while and evaluate if they are still working for you in your current retirement strategy.  There may be some things that are holding your portfolio back and it’s a good time to clean them up.

At Acute Wealth Advisors we are happy to help you evaluate and understand the amount of risk, diversification, and fees in your current portfolio, and see if there are adjustments that can be made to get you closer to your retirement.  Helping you understand and personalize every aspect of your retirement plan in order to meet your needs and reach your goals is what we do best.  Contact us today for a free portfolio evaluation.

Damon Roberts