Do the Monster Mash
“Welcome 2 my nightmare, I think you’re gonna like it” will be heard on the radio this fall as the stations play their Halloween mixes, this line of course coming from the great Alice Cooper. Building a portfolio of investments can be a very real nightmare for a lot of people. One portfolio I see often is what I call, the Frankenstein Portfolio.
Frankenstein, the misunderstood monster, was an amalgamation of body parts stitched together. The story has undergone many adaptations since Mary Shelley’s original, but no matter the interpretation, Frankenstein is always a mismatch of body parts. When new investors come to work with us, we often see this Frankenstein portfolio.
It is not uncommon that a person will have a retirement plan at work, their spouse may have one as well, they may have a plan from an old employer floating out there, mom and dad opened a Roth IRA after college which is somewhere else, Grandma set up a secret college fund (so secret no one knew about it when tuition bills were coming in), and on and on. It’s great that a person has these accounts and has been saving, but the portfolio as a whole looks like a stitched together monster.
All of these types of accounts have different benefits which are typically related to taxes. They all will be able to hold similar types of investments. Having different accounts at different institutions does not mean you are diversified though and you may still be exposed to significant risk. Some investments carry their own tax benefits which can be negated if held in a tax advantaged account. Accounts will also typically have service, maintenance, and reporting fees which can add up and negatively impact your returns. All of these little idiosyncrasies can have a significant impact on your investing success.
When building a portfolio, it is important to know what you have, where you hold it, and how it connects to your other investments. Risk mitigation is done through diversifying* assets. Taxes on gains can erode your returns. Not maximizing investments with deferred income (such as IRAs, 401(k)s, and other retirement account types) reduces the amount you can invest. Working with a CERTIFIED FINANCIAL PLANNERTM Professional can help optimize your portfolio and avoid these pitfalls.
Take a little time to make sure your portfolio isn’t a horror movie this year and enjoy Halloween season.
*Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.