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A client who came to investment adviser Adrian Mastracci looking for help had 98 different investments. ‘I have no idea how a guy with 98 investments could keep track of them,’ he said. (Fernando Morales/The Globe and Mail)
A client who came to investment adviser Adrian Mastracci looking for help had 98 different investments. ‘I have no idea how a guy with 98 investments could keep track of them,’ he said. (Fernando Morales/The Globe and Mail)

Traders

Time to declutter your investment closet Add to ...

When portfolio manager Adrian Mastracci meets new clients, looking over their accumulated investments can be a lot like opening a closet crammed with years of clutter.

Out come a jumble of funds purchased from a parade of advisers, long-forgotten retirement plans and stocks bought in yesterday’s equity booms. It all adds up to “financial clutter,” akin to the treasures and junk people tend to stockpile, says Mr. Mastracci, who is president of KCM Wealth Management Inc., a fee-only business in Vancouver.

Video: Holding similar investments can lead to flat returns, adviser says (The Globe and Mail)

One man even had 98 different investments. “There was everything under the sun,” Mr. Mastracci recalls. “I have no idea how a guy with 98 investments could keep track of them.”

Such a portfolio mountain would not only be unwieldy to manage, it could actually be detrimental to your future. You could be holding duplicate investments and you might be paying hefty management fees or overlooking tax write-offs in the bargain.

It’s time to declutter, which includes seeking objective advice, drawing up a written investment plan and consolidating your assets. This means unpacking the emotional baggage surrounding investments, confronting the fear factor that comes from change and adopting basic financial principles to keep clutter from returning.

A foundation of most portfolios is mutual funds. Indeed, according to the research group Investor Economics, Canadians held $1-trillion worth of them at the end of 2013, accounting for one third of all investments.

People with mutual funds should be aware of what each of them covers, Mr. Mastracci says. “When you look inside the different mutual funds, they’ve all got the same stuff.”

People tend to own too many funds because they or their advisers were looking for “insurance against making the wrong choice,” says Tina Tehranchian, a certified financial planner and branch manager at Assante Capital Management Ltd. in Richmond Hill, Ont. With each fund holding as many as 50 to 300 stocks, “they end up owning the entire market” and almost certainly hold overlapping investments, known as over-diversification, which unbalances the portfolio.

“You look at the holdings and there could be 80-per-cent overlap,” she says, explaining that the duplication can mean the account is heavily weighted in growth-oriented stocks, for example, or is effectively indexed to the S&P 500.

Holding multiple mutual funds can also be detrimental because the investing styles of the different managers “cancel each other out,” with one of them selling a stock while the other is buying it, she notes. “They can’t both be right.”

Another thing cluttering up many portfolios is debris from stocks that failed. People often can’t bring themselves to sell positions they took a hit on, even those they might benefit from ditching because they then can realize a loss and write it off against future gains, Ms. Tehranchian says.

The same instinct makes investors hang on to insignificant positions, which can be worth as little as $500 in a portfolio worth millions, she says. “Leave emotions out of your investing.”

Streamlining an overcomplicated portfolio means limiting the number of investments while maintaining diversity. There’s “no need for radical surgery or to do it overnight,” Mr. Mastracci says – it can take two or three years to declutter entirely. “Just get on with it.”

Some investors are afraid of the exit charges that can come with selling assets, he says. Nobody likes to lose money, but by paying a fine upfront you can save management expenses down the road. Penalties tend to be highest early on – “in year one it hurts like the dickens,” Mr. Mastracci says – but they whittle down to nothing after five or six years.

What to keep? How much? Ensure you have a mix of investments across sectors, industries, geographies, stock capitalizations, management styles and asset classes, as well as the ratio of equities to fixed-income vehicles that suits your age and needs.

“You have to have a vision for your portfolio,” Ms. Tehranchian says.

The most important way to conquer clutter is to write up, follow and periodically review an investment policy statement that articulates factors such as your investing objectives, time horizon and risk tolerance, she says. “At every point in time, you need to know what each component of your portfolio is doing for you and why you own it.”

An investment plan “puts everything in perspective” when people start to declutter, Mr. Mastracci agrees. “It’s like when you’re building a house, you have to have some kind of blueprint. It’s the same thing in finance.”

Ms. Tehranchian suggests holding one managed fund in each category of asset class, capitalization and geography. “Look for the best one, don’t get three,” she warns. “And if you like the position, make it meaningful.”

Indexed products such as exchange-traded funds (ETFs) are an option for those who are more hands-off and want to limit fees, but a degree of control over your portfolio can be beneficial.

“Portfolio management is an art and a science,” Mr. Mastracci remarks, as long as you have a basic understanding of your portfolio and what you require.

Some investors might consider all-in-one funds that include a variety of asset classes and strategies, he says, or accounts that operate on autopilot and can automatically rebalance themselves, for example through dollar-cost averaging. However, it’s important to have some degree of influence over your holdings.

Mr. Mastracci recommends that his clients invest in ETFs, which are low-cost and create “instant diversification.” At a minimum he suggests that those just starting out hold one ETF each from a Canadian, a U.S. and a global equity fund, as well as one bond fund. At most, a portfolio of eight to 12 ETFs “does the trick,” as long as they match your needs, he says.

“Ask yourself, ‘How does whatever I’ve got fit the goals I’m trying to achieve?’ If you can’t answer that question, then maybe there’s something wrong with what you’ve got.”

Decluttering isn’t only for neophyte investors, Mr. Mastracci points out.

“The clutter approach has no favourites; it finds active and passive portfolios, novice and seasoned investors,” he says, suggesting that people “look carefully into your entire investment closet,” because even a bit of clutter can cause problems in the long term.

“If you have stockpiled investing clutter, face it head on,” he says. “Take appropriate steps now to sort things out.”

Top 10 signs of clutter

Is it time for a purge of your investment closet? Portfolio manager Adrian Mastracci identifies the top 10 signs of cluttered investing:

1.) You lack a written investment plan.

2.) You have no established asset-mix targets.

3.) Your retirement projections are out of date, or non-existent.

4.) You own too many investments.

5.) You don’t understand the portfolio risks you have incurred.

6.) Your allocation to equities is too high for your comfort.

7.) You are not receiving objective advice.

8.) Your portfolio diversification is not suitable to you.

9.) You are unclear on mutual fund costs and exit charges.

10.) You own duplicate securities inside mutual funds.

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