• Investing & Markets

A Consolidated Investment Strategy and Your Nest Egg

May 21, 2018 | Steve Nykamp

Most people know the idiom, “don’t put all your eggs in one basket.” But like most things in the world of financial planning and investing, that sage adage may be easier said than done.

Investing into a fund (mutual funds, closed-end funds, unit investment trust, exchange traded funds [ETFs]) used to be a fairly good idea across the board. But fast forward to 2018, and there are almost double the amount of funds than there are U.S. stocks.

So, what is happening? Well, most of those funds are buying up the same stock names as each other, especially the largest companies by size (market-cap) in the U.S. market.

While most investors know that diversification is a good thing, they may not realize that when they work with multiple different managers – or put their money into a variety of different funds in the public market – they run the risk of putting more of their eggs into one basket than they intended. And that investment redundancy and overlap is a bad thing when it comes to portfolio risk and tax management.

Compounding this is the overwhelming data that funds with an active investment approach (i.e. most mutual funds) typically underperform passive investments; yet fund companies still pay significant amounts of money via 12b-1 fees and marketing arrangements to brokers and brokerage houses to make their way into customer’s portfolios.

A consolidated strategy overseen by a single holistic portfolio manager can be critical to protecting your nest egg.

Mitigate Risk With These Steps

Get organized. See and understand what you really own. Using tools like our free financial software can help you manage all of your investment accounts from one place, giving you full transparency into your portfolio – and the fees you are paying.

Work with a fee-only registered investment advisory firm (RIA) that operates as a complete fiduciary to you and think twice about working with a fee-based registered investment advisory firm or firm registered as a broker-dealer. Unlike working with representatives of broker-dealers, fee-only RIAs and their representatives are only paid by their clients directly and no other sources (like marketing arrangements, commissions, etc.) These firms and their advisors are always known as fiduciaries. The responsibilities of a fiduciary are both legal and ethical. They are required to act in the best interest of the principal, the party whose assets they’re managing. Here is a bit more on why that is such a big deal, directly from our CEO, Jay Shah.

Protect Your Eggs and Your Baskets

Now when it comes to eggs and baskets, keep in mind that your money is the eggs and the underlying investments are the baskets, and not the institution with which you work, nor the funds that buy the underlying investments. (Side note: You should ensure you have adequate SIPC insurance to avoid the brokerage custodial institution from being a basket.)

This is often where investors can go wrong. They might think their investments are diversified by owning names like APPL, MSFT, XOM, BRK, AMZN, GOOG, and GOOGL. The reality is, those stocks are owned five-to-10 times over between their various managers – and many investors often go and buy those names again directly.

The risks associated with unnecessarily heavy exposure to various sizes, styles, sectors, industries, and companies in the U.S. stock market can cause dramatic portfolio declines that can (and have) set investors back as much as a decade in their investment progress and financial plan. Those risks should not be left to the wind inside of your portfolio. Currently, most portfolios have very unintentional sector bubbles, especially to tech and financials today.

Don’t Forget Taxes

Another advantage to a consolidated strategy and single manager is that you should really have one hand knowing what the other is doing when it comes to Uncle Sam and your annual IRS tab. One manager for all of your accounts can not only eliminate knowledge gaps and unnecessary complexity but can also result in tax benefits. When it comes to portfolio management, investors can benefit most from two areas:

  1. Tax location: the practice of strategically placing investments in different accounts so you can maximize their after-tax returns. It doesn’t really require any change in your mix of assets, just attention to where you put what.
  2. Tax-loss harvesting: a technique that creates the opportunity to rebalance your portfolio back to model weight by proactively harvesting available losses to offset gains

Both of these can impact your long-term returns – and your overall net worth.

Using one manager for all of your accounts makes it possible for you to take advantage of these powerful strategies to reap tax advantages that can lead to significantly more take-home money.

Our Take

Aligning with advisors that have your best interest in mind and having a consolidated investment plan is a major step towards a better financial life. And the great news is it’s simple, and with just a little due diligence it can be fairly easy too. Having one manager and a consolidated investment strategy can go a long way in protecting your eggs and ensuring your basket is full when you hit retirement.

To learn more, contact a financial advisor.

Contact a Financial Advisor


Disclaimer: The information on this website is for informational purposes only and does not constitute a complete description of our investment services or performance. No part of this site nor the links contained therein is a solicitation or offer to sell securities or investment advisory services, except where applicable in states where we are registered, or where an exemption or exclusion from such registration exists. Third party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data’s currency, accuracy, timeliness, completeness or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

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