What are the steps to simplify your portfolio, given that it is likely spread across multiple accounts? We focus particularly on retirees, who have to weigh additional considerations like withdrawals, Roth conversions, and required minimum distributions.
We also explore which areas of the stock and bond markets are attractive right now as you seek to simplify and/or rebalance your portfolio.
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 562. It’s titled, “How to Simplify Your Portfolio.”
Over the past couple weeks, we’ve been holding a retirement live portfolio workshop to a cohort as we work with 10 individuals who are newly retired and help them structure their investment portfolios and model out retirement outcomes. We’re using AI as part of the process.
Why Portfolios Feel Unsettled
In the discussions, because we meet a couple times a week for a total of around three hours per week, it’s become clear that a lot of these individuals, and individuals that we’ve worked with in the past, they feel unsettled about their investment portfolios. It’s almost as if they’re just not satisfied with them. And as I’ve tried to dig in more, it’s almost as if they have some standard that they’re holding themselves to, that isn’t really obtainable.
And as we kind of explore, “Well, what is that standard?”, or why do they feel that their portfolio isn’t simple enough, obviously, there is the concern as they get older, if they have a partner, or even as they age, that maybe they’re not gonna be able to handle the complexity of their portfolio. But it seems to be beyond that. It’s almost as if they— if you think about outfits, they just don’t like the outfit they’re wearing.
And the problem with investment portfolios is you just can’t change the outfit, because there are constraints. And the biggest constraint is taxes. If you have— and all of us, most of us have some type of taxable portfolio. If we sell those taxable holdings, we’ve held them a long time—we’ll have to realize a gain and pay capital gains tax on that. And so it isn’t as simple as just “Well, just get rid of everything and start anew.”
We have to realize that the portfolios that we have evolved over time. They’re based on reasonable decisions that we made over the years. And so—well, in some ways, it’s just like a wardrobe. Most of us don’t go out and buy a new set of clothes, an entirely new wardrobe every year. We might add a piece or two. Well, if you’re a typical American, you might add 50. But ideally, we’re not doing that. We’re buying fewer, better quality pieces, and adding them as time goes on.
Then some pieces wear out, or they just don’t fit anymore, and we’ll get rid of them. Our investment portfolios are the same way. We don’t have to get rid of everything, all at once. And usually, from an emotional standpoint, it’s better to do it incrementally. It’s easier to do it incrementally. Make changes little by little, as opportunities arise, as risks increase. And that’s how I’ve managed over the decades, both as an institutional portfolio manager, managing my own investment assets, and also as I educate individuals, like we’re doing in these live portfolio workshops.
A Five-Step Process
So let’s take a look at kind of the process that we’re going through with these 10 individuals, and I’ll bring you up to date as to where we are. Here’s the five-step process that we’ve been using. In reality, this is the same process that I use for institutional clients of ours. We would get a new client, and the first thing we would do is we would analyze their situations. They would send us box loads of bank statements, with all of their accounts, and then we would create a performance history, but we would also do an asset allocation.
What is the current mix among all their accounts? How much in stocks, how much in bonds, how much in private capital, and all the different asset classes? And that’s what we’ve been doing with this workshop.
Many individuals haven’t really looked at everything comprehensively—all of their Roth IRAs, their regular IRAs, their taxable accounts, their own, maybe their partners. And so they put it all together, we have an asset categorization spreadsheet that we’re using. And in many cases they used AI to help them break down and list out every single holding that they have, and which of 30 different asset categories does it fit into.
For each of those asset categories, we have an expected return, we have a volatility assumption, and we have correlation assumptions using modern portfolio theory. At the end of the day, all we’re trying to get is an understanding of what are the total investable assets and what’s the expected return, and what’s the volatility, as measured by standard deviation.
And as we’ve had discussions, it turns out standard deviation is not a terribly intuitive concept. But what we’re measuring is bad things. How far could a portfolio drop? A portfolio with a higher standard deviation potentially can lose more money than one with a lower standard deviation. And so we’re going through that process, that was step one.
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