Is your Portfolio Overly Complicated?

I was scrolling through Twitter on a Saturday in January, as I’m wont to do, and nestled between tweets about college basketball and NHL hockey was a tweet from one of my favorite FinTwit (Finance Twitter) follows, Brian Portnoy:

The tweet brought additional context to a post from a financial planner criticizing “another needlessly complex advisor-managed portfolio.” Portnoy, who specializes in behavioral finance, pointed out how common these types of portfolios are.

And it’s true. Part of the reason we are offering complimentary portfolio reviews as we kick off 2023 is because we see these types of portfolios from prospective clients all the time. In the past month, we’ve analyzed a portfolio with 80+ mutual fund holdings and two separate portfolios with more than 300 individual securities. 

Yes, we are advocates for diversification but when you consider a typical mutual fund or ETF holds hundreds or thousands of individual positions, there is limited upside in holding more than just a handful of funds and multiple downsides.

It is important to understand what you own but the ability to track and monitor investments gets harder as the number of holdings grow. Making sure your 80 mutual funds or 300 stocks are performing as expected could be a full-time job all in itself.

And beyond just monitoring the individual investments, holding too many positions makes it difficult to track the overall asset allocation of a portfolio. An investor should have a targeted asset allocation balancing risk and return with the aim of achieving their financial goals, and care should be taken to make sure the investment portfolio stays consistent with their asset allocation. This process of monitoring drift can be easily accomplished with eight positions but becomes much more complicated with 80.

But even if an investor has the time and technical expertise to stay on top of a complex portfolio, there is the question of whether holding a bunch of overlapping funds adds value.  

Above is a sample portfolio representative of portfolios we routinely see. How different really is the Fidelity Large Cap Growth Index Fund from the American Funds AMCAP Fund? Both are classified as Large Growth funds. They both own stocks like Netflix, Facebook, Microsoft, and Google in their top 10 holdings. They both have a mandate to buy Growth stocks. There is a lot of duplication between these funds, so there are limited diversification benefits and they both carry different levels of fees. Why pay additional fees for two investment products that aren’t adding different return streams to the portfolio?

I recently hosted a webinar titled Portfolio Diversification Missteps (& What To Do Instead) and if the misstep I am talking about here in this blog post is over complication of a portfolio, the action to do instead is to take a look at your portfolio and ask why you own each of your investments. Organize your portfolio by asset class and review each holding in the asset class. 

• Do you need multiple US Equity/International/Fixed Income funds? 
• Are there any asset classes missing? 
• Are there opportunities to simplify your holdings without sacrificing diversification? 

A good rule of thumb is you likely don’t need more than 8-10 funds to achieve your portfolio goals. 

It is normal for investors to accumulate multiple financial accounts between employer sponsored retirement accounts like 401(k)s, investment accounts for children like UTMAs or 529 accounts, regular brokerage accounts, trusts, IRAs, and Roth IRAs. And as a result, it is all too easy for a well-intentioned investor to end up with a portfolio that is more complex than it needs to be and maybe even more complex than they realized. 

If you want help getting organized to gain a better understanding of your portfolio’s strengths, weaknesses, and opportunities for improvement, reach out today to set up a complimentary portfolio review with a Burney Wealth Advisor.