Even if you’re not an investment collector—ahem, you know who you are—it’s a good bet that the number of holdings and accounts in your portfolio have grown right along with your age and net worth.
As assets grow, it’s only natural to want to diversify across investment types and perhaps even delve into investment arcana, such as commodities or private real estate. Accounts can also stack up as the years go by, especially if you add up all registered and unregistered accounts.
Thanks to all of these forces, investors can readily end up with what I think of as “portfolio sprawl”—too many accounts and too many holdings within them. Diversification is desirable, but when taken to an extreme, it can become difficult to keep tabs on what you have. That’s particularly true if you have individual stocks and actively managed mutual funds, which require at least some level of ongoing oversight. Portfolio sprawl can also make portfolio maintenance a heavier lift, since it’s harder to get your arms around your total asset allocation. Tax time may be more complicated than it needs to be, too.
The good news is that with a little bit of effort, it’s possible to arrive at a minimalist portfolio with fewer moving parts—both accounts and holdings.
Step 1: Inventory and document what you have.
The first step in the process is to conduct an inventory of your financial accounts. You can stick narrowly to your investments, but I’d recommend that you broaden the inventory process to encompass all of your financial relationships—banking, insurance, and so on. As you do so, document all of your account information—account numbers, passwords, financial professionals you deal with, and so on. You can use a spreadsheet for this job. Encrypt the document or, if it’s something that you plan to print out, keep it under lock and key. This document will help you identify streamlining opportunities and, if you keep it updated, can be a guide for your loved ones to know what you own if they need to help manage your accounts at some point.
Step 2: Consolidate like accounts.
The next step toward a minimalist portfolio is to identify opportunities to merge accounts of the same type. If you’ve been saving and investing for a while, you probably have assets in registered accounts like RRSPs and TFSAs. While it’s usually not advisable and may not even be possible to combine assets held in different types of tax silos, duplicate accounts of the same type provide prime opportunities for streamlining. By carefully following the rules for combining like account types and letting the firms deal with one another to execute the transfer of funds, you should be able to streamline without causing a taxable event.
From a practical standpoint, this part of the job can be a bit of an administrative headache. If you need assistance in executing a transfer, it’s often easiest to get help through the “receiving” firm (that is, the company that you’re transferring the assets into) rather than the one you’re exiting.
Step 3: Revisit your target asset allocation.
Once you’ve finished the account-consolidation process, it’s a good time to reconsider your portfolio’s asset allocation, particularly if you haven’t done so for a while. If you have your portfolio saved on Morningstar.ca, use the X-Ray functionality to examine your current asset-class positioning and compare it with your targets. If you don’t have targets and expect to use the assets for retirement, Morningstar’s Lifetime Allocation Indexes and/or good target-date funds can help you get in the right ballpark.
Step 4: Populate the accounts with simple building blocks.
Armed with targets for your portfolio’s asset allocation, you can then switch into an ultrasimple, minimalist portfolio mix. The goal of a minimalist portfolio is to use the fewest number of holdings to achieve diversification. Broad-market index funds and exchange-traded funds lend themselves particularly well to this effort, providing broad asset-class exposure in a single shot and with very low expenses. I’ve made them the linchpins of my four minimalist portfolio groups for investors at various life stages and for taxable and tax-deferred accounts. Each portfolio grouping below includes an aggressive, moderate, and conservative version.
Note that some of the portfolios use funds from multiple providers—for example, the tax-efficient portfolios employ Fidelity municipal-bond funds and Vanguard exchange-traded funds. You could easily stick with a single provider, though, as big firms like Fidelity and Vanguard field worthy, low-cost core funds in all the major asset classes. If you have small accounts, all-in-one funds like target-date funds can be a terrific solution, especially if you’re not yet retired. (In retirement, I like the idea of maintaining discrete exposure to asset classes, the better to pick and choose where to go for cash on an annual basis.)
Making changes to tax-sheltered portfolios won’t result in any taxes as long as the funds stay inside the account shell. However, you’ll want to take care when making changes to your taxable accounts because selling appreciated assets can result in a tax bill. If your taxable accounts require a major overhaul, be sure to get some tax advice and/or calculate the tax bill before proceeding.
Step 5: Establish a plan for keeping it up to date.
Establishing a minimalist portfolio will mean few oversight obligations on an ongoing basis. But unless you’re sticking with target-date funds or some other self-managed option, you’ll still need to keep tabs on your portfolio’s asset allocation as the years go by. I like the idea of using an investment policy statement to document the parameters of your portfolio—your asset allocation, how often you’ll monitor your portfolio, and what the catalysts will be for making changes. With a minimalist portfolio in place, a good annual checkup is all you really need, and you’ll probably have to make changes even less frequently than that.
