When it comes to money, more is better. But when it comes to your retirement portfolio, less might be more. With over 8,000 mutual funds and exchange-traded funds (ETFs); roughly 3,000 stocks traded on the NASDAQ, 2,800 on the NYSE, and 3,800 on the AMEX to choose from; and 401(k)s, individual retirement accounts (IRAs), and countless asset management strategies, it’s easy to see how an investment portfolio can get complicated.
And cluttering complicated investment portfolios with too many assets and vehicles can make them difficult to understand. A failure to streamline a complicated portfolio means there could be overlap, which means you could be funneling money into one asset class when it could better serve you elsewhere.
A streamlined retirement portfolio does not mean it gets gutted to the lowest common denominator; it means you know what you’re invested in, ensuring there are few or no redundancies. It also means rebalancing your portfolio’s asset allocation, which will depend on your age, desired outcome, and risk level. Here are three stress-free strategies for simplifying your portfolio while increasing its possibility for success.
Consolidate: While the U.S. Bureau of Labor Statistics doesn’t track lifetime careers, it’s fair to say most Americans have held more than a few jobs before retiring. It’s quite possible, then, that you have more than a few 401(k) accounts. Simplify things by collating all of the old plans into a current workplace plan. If that isn’t an option, roll them into a single rollover IRA.
To make life even less stressful, you could also consolidate your bank accounts, mutual funds, and bonds. Having everything in once centralized account makes it easier to understand what you have and how to allocate it all.
Bundle: Instead of diversifying your retirement portfolio with 10 or 15 individual stocks, simplify things by investing in ETFs and all-in-one funds.
ETFs are investments that (attempt to) mirror the return of a particular index, and allow investors the chance to add to their retirement portfolio a basket of equities they could not otherwise afford to purchase individually. With the health of the U.S. economy up in the air, many investors are turning to ETFs that contain a large number of defensive stocks—equities that do well regardless of where the economy is headed. The Vanguard Consumer Staples ETF (NYSEArca/VDC) is made up of companies in the consumer staples sector, including food, beverages, and tobacco, as well as nondurable household goods and personal products.
As opposed to being sector-specific, all-in-one funds are made up of high-yield dividend-paying stocks, credit bonds, Treasuries, corporate bonds, and so on. The iShares Morningstar Multi-Asset Income (NYSEArca/IYLD) ETF includes bonds, equities, and alternative income sources.
Autopilot: Sometimes, it’s better to invest periodically. You can instruct your bank or broker to transfer funds periodically to your investments. Better yet, if you’re in charge of your own retirement portfolio, investing periodically will keep you regularly involved with the process.
Often called dollar-cost averaging, this is a simple technique that allows you to invest a predetermined amount of money each month. For example, an investor who put in $600.00 up front at the beginning of the year would have purchased 60 shares at $10.00 per share. If those shares were worth $12.00 in May, their investment would be worth $720.00 midway through the year.
If the investor had dollar-cost averaged his investment, putting in $100.00 per month, the share price would have, invariably, fluctuated, meaning he purchased some at a lower price and some at a higher price. In this case, he ended up with 63 shares in June. At $12.00 per share, he would have ended up with $756.00, or $36.00 more than if he had invested a lump sum at the beginning of the year.
Thanks to compounding, every little bit helps.
In the end, a retirement portfolio needs to be simplified. Focus on finding broadly diversified offerings with reasonable costs and solid long-term risk/reward profiles that suit your investment strategy.