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Investing Discipline

Your Investments: Why Neatness Counts

It’s not a perfect science, but when it comes to investing, neatness counts. Or perhaps more accurately, neatness adds up to real dollars that compound over time.

Articles by sherrillstgermain

By Sherrill St. Germain
Financial Columnist, Betterment  |  Published: April 24, 2019

The pace, complexity, and distractions of modern life can often lead to messy investment accounts.

Having your money scattered across multiple financial institutions may add up to higher costs with few benefits.

A streamlined portfolio of investments is the foundation for an effective, cohesive financial plan.

It’s six a.m. Do you know where your investments are?

Avid readers may recognize this line as a takeoff on an oft-quoted blurb from Jay McInerney’s seminal work Bright Lights, Big City. You likely won’t find this book in the Personal Finance aisle, but most investors could benefit from asking themselves this question.

If your answer is no, it may be because you have accounts at so many financial institutions that you can’t keep track. But hey, at least you get the side benefit of diversification, right? Maybe not. A scattershot approach often ensures only quantity, not quality, in your investment mix.

Let’s explore – and bust – the myths and misgivings standing between you and a streamlined set of investment portfolios that seek to fulfill on your financial goals.

Entropy Happens in Your Investment Accounts

According to the laws of thermodynamics, the total entropy (lack of order or predictability) of the universe is always increasing. How does that apply to your investments? Left unchecked, your investment accounts may undergo a similar decline into disorder. Often, it starts as a single 401k that never got rolled over.  Fast forward a few years, and the problem has multiplied into a hot mess of old accounts at a laundry list of financial institutions.

Sometimes it’s easy to blame the torrid pace and frequent job changes typical in today’s workplace for the proliferation of accounts and portfolios gone wild.

  • You get caught up in other urgent tasks associated with switching jobs.
  • Your old 401k administrator introduces errors and delays.
  • You don’t love your new 401k plan, but don’t know where else to go.
  • You rolled over your last 401k, but you’re not happy with where it ended up.
  • You’ve heard there are good reasons not to do a rollover, but haven’t had time to investigate.

Old retirement plans aren’t the only driver of entropy across your investments. If you are fortunate enough to have brokerage accounts, IRAs, 529 plans, inherited assets, etc., these work to compound the effect. The resulting predicament can make it difficult to see the big picture, and it almost guarantees you aren’t making the most of your hard-earned money.

So don’t wait—Consolidate. It can literally pay to stay on top of things (as we’ll explain below), combining duplicate accounts as they crop up rather than waiting. In the battle against financial chaos, an ounce of prevention is worth a pound of cure.

The Myth That Reinforces Mess in Investing

“Consolidate early and often” can be the best course of action, but that’s easier said than done. Besides the stumbling blocks above, there’s often something else getting in the way: the persistent (but pernicious) belief that “dispersed assets = diversified assets = lower risk.”

Don’t be fooled. A few carefully chosen investments can be equally or more diversified than a mishmash of legacy accounts. The simple fact that you’re working with a known quantity means it’s easier to ensure your overall portfolio of investments adds up to the right mix of assets for you. And it’s more likely to stay that way, especially for investors with automatic rebalancing. That means portfolio drift, changes to management, costs, or objectives of component funds, and other risks don’t go unnoticed for years on end.

A scattershot approach costs you.

  1. Mistakes: It’s easy to forget about accounts when they number well into the double digits. “In New York State alone, there is more than $15.5 billion in unclaimed funds,” per CNBC. Never mind the risk of errors at tax time when you’ve got forms coming at you from a multitude of brokers. Retirees who withdraw less than their Required Minimum Deduction face a stiff 50% tax rate on the amount not withdrawn.
  2. Opportunity Costs: As a general rule, the more you hold with any particular financial institution, the higher the service level and the lower the fees. The exact thresholds vary, but it’s true at all levels: Total assets, account, fund. For example, investing more in any given fund may mean you are eligible for a share class with a lower expense ratio. Higher balances may mean account fees are waived. Further, as your total assets under a firm’s management grow, the cost of advice may fall, and you may be eligible for valuable perks, such as access to tax specialists and invitations to special events.
  3. Effort: You and/or your financial advisor may end up wasting effort on low value tasks like chasing down statements and forms, fixing mistakes (e.g. over contributions), and evaluating essentially duplicate funds. This diverts attention from important activities like rebalancing, tax planning, and specifying proper beneficiaries. Speaking of beneficiaries, keep in mind that if something happens to you, leaving behind a bloated portfolio makes life hard for loved ones.

For greater benefits at a lower cost, the choice is clear: It’s time to let go of the misconception that “quantity = quality” and start reaping the rewards that can come with a lean, well-managed set of investments aligned to your financial goals.

Consolidate or Aggregate Your Accounts

It can be hard to implement and maintain a cohesive financial plan when your money is all over the place. Your mission then is to hold the fewest investments in the fewest accounts with the fewest providers needed to achieve your goals. Of course, the exact number of “moving parts” varies with the circumstances of each investor.

A millennial targeting all of their investments towards retiring? A single 401k or IRA might be all you need for now. Conversely, for a high income, mid-life couple with college-bound kids, the benefits of holding targeted assets in 529, Roth, or other accounts might outweigh the costs.

An important benefit of Betterment is that your accounts can be grouped within your financial goals. It’s both a visual aid and the way Betterment provides financial advice. You can even align accounts held outside the platform, like 401(k) plans or 529s, to your preferred financial goals. From there, Betterment offers a recommended portfolio for the goal based on the holdings held elsewhere. So for example, if you have a brokerage account heavy on stocks, Betterment might suggest you hold more bonds, depending on your goals.

That being said, you may have good reason to keep old accounts.

There are good reasons to hold off on consolidating certain accounts, however. While these “gotchas” may not matter to one investor, they can be deal breakers for another. Examples include:

  1. Transferring an old account to a new provider might require liquidating some investments. This move could result in undesirable fees or tax consequences.
  2. Similar account types may boast different features. For example, although 401k’s and IRA’s are substantially interchangeable, the two are subject to a few important distinctions.

If a 100% streamlined portfolio isn’t practical for you, do the next best thing: Fake it. Using account aggregation can help you see a complete view of your investment assets even if they don’t all live under the same roof. If your favorite financial institution doesn’t offer this, consider using a tool like Betterment or Mint to sync accounts.

Less is More

It’s not a perfect science, but when it comes to investing, neatness counts. Or perhaps more accurately, neatness adds up to real dollars that compound over time. So if your portfolio has gotten a bit messy as of late, don’t wait to whip it back into shape. The sooner you tighten your assets, the sooner you can reap the benefits of well-managed money.

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