Does your portfolio look a bit like your junk drawer, with all sorts of odds and ends that don’t seem to fit with anything else? Does tax season take on nightmarish qualities when you try to pull together dozens of disparate investment statements to calculate gains and losses? Then it’s time to declutter your portfolio, making it smart, simple and easy to manage.
First figure out what you have. The simplest way to do that is to pull out a notebook and make a grid to show the name of each stock, bond or fund you own and the amount you have invested in it. With funds, you’ll also want to note the fees they charge and where they fit on a style grid. That is, do they invest in the stocks of large, undervalued companies or small, fast-growing ones? Treasury bonds or “junk” bonds? Finally, note whether you’ve got a gain or loss in the holding.
An easy way to research the funds is to go to Morningstar.com. Just plug in each fund’s symbol and click on “portfolio.” That will bring up a pie chart showing the types of assets the fund owns and where those assets fit on a style grid. That will help you determine whether your portfolio is diversified or you simply have a lot of funds that own roughly the same things.
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When you’ve gone through all the funds in your portfolio, add up the assets by category. What percentage of your assets is in, say, stocks of big U.S. firms? What percentage is in foreign stocks, bonds, real estate and so on? How does this reality compare with what you want to own? (If you’re not sure, check our primer on asset allocation.)
Your final move is to consolidate and shift assets into a handful of investments that reflect your goals. Ideally, you want just a few investments that provide wide diversification without a lot of fuss.
All of this shifting will have no impact on what you owe Uncle Sam if it’s done inside a tax-deferred account. But if some of your investments are in taxable accounts, decluttering could trigger a tax bite. Selling generates capital losses or gains, so this is where you should refer back to your notations of profit and loss on each holding. The ideal move is to shift assets by matching those that have gains with those that have losses. If you have more losses than gains, you can use the excess losses to offset gains in future years. But if your investments are all in the black, you’ll want to see just how big the tax bill might be if you sell.
If the tax hit looks onerous, you have two options: Restructure slowly, over the course of a few years, so you never push yourself into a higher tax bracket or get hit with the alternative minimum tax, which can punish people in high-tax states, such as California. Or you can hold on to your most profitable investment and structure the rest of your portfolio around that, so you won’t have to sell the security that’s likely to generate the biggest taxable gain.
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