Morningstar Money Challenge: Day 17

Today's Task: Streamline and combat portfolio sprawl

Ruth Saldanha 23 November, 2020 | 3:23PM
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This article is a part of a month-long Morningstar Money Challenge. You can find the details here.

We’re nearing the end of the tasks we need to do – just five more to go! And today’s task is one that is important to investors of all ages and of all life stages: combating portfolio sprawl.

Diversification is a good thing, of course, but you can also overdo it. One of my relatives proudly told me that he held 35 different mutual funds, all in one country, and all in large and mid-cap companies!

“Of course, in the scheme of investor problems, over-diversification 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 her 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,” points out Morningstar’s director of personal finance Christine Benz.

She’s right. It takes time and research to keep track of important developments at stocks and mutual funds, and that task is compounded when you have many different accounts. Not to mention the reams and reams of paperwork you’ll have to deal with, especially come company meeting time!

Additional Reading
-          Make a Master Directory
-          Don’t Overcomplicate! 

“And the more investments you have, the greater the likelihood that your portfolio will behave like the market. There's nothing inherently wrong with market-like performance, but you don't want to have to pay active management fees when an index fund would have done the job just as well,” Benz points out. It’s an important lesson my relative should have learnt!

So what are some strategies for beating back the sprawl? Index mutual funds and exchange-traded funds that track a broad market segment are a good place to start if you're trying to streamline your financial life.

“And if you're managing multiple accounts geared toward a single goal--for example, you and your spouse each have RRSPs and TFSAs, as well as taxable assets earmarked for retirement--think of them as a single entity rather than running each account as a well-diversified whole. Doing so gives you the freedom to pack a significant share of your assets into the best investments available to you within each account,” Benz says.

Also, as we discussed earlier in the challenge, make sure that your assets all line up with your goals. It wouldn’t do to have your new car fund that you need to tap in 3 months all tied up in stocks, or to have your retirement savings for 2050 sitting in cash.

And always, make sure you invest based on your financial goals, with a specific time horizon, and perhaps most importantly, an accurate picture of your risk capacity and tolerance.

Additional Reading
-          Does Your Portfolio Need a ‘Succession Plan’?
-          Dos and Don’ts of Streamlining

 

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About Author

Ruth Saldanha

Ruth Saldanha  is Senior Editor at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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