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Discover the Freedom of a Tidy Portfolio

Posted On: Tuesday, January 3, 2023

Discover the Freedom of a Tidy Portfolio

“I'd like to tidy up the entire planet. I would go anywhere if there were something that needs tidying.” (Marie Kondo)

There’s nothing better than ripping out a bunch of weeds and revealing a flourishing garden in the process! While most of us are able to maintain a relatively neat garden, the same cannot be said for all of our investment portfolios

As time goes by it’s easy to end up with a fairly messy portfolio. But fortunately, tidying up by combining and realigning investments can be relatively easily achieved.
Either way, the benefits of tidying up far outweigh the trouble and cost.

What is an untidy portfolio?

An untidy portfolio is one comprised of a mix of assets accumulated over the years, which in total do not have the correct asset allocation based on your investment objectives and risk profile. You may have had an excellent reason to purchase the investment but haven’t used ongoing due diligence to determine whether you should keep the asset in the long-term.

A typical portfolio may include your home, a rental property, your business, a couple of RAs and a selection of other unit trusts and shares that have appealed to you along the way. When it comes to insurance, you may have group life cover through your employer and a couple of personal policies you believe you need for more comprehensive protection.

Investors often have portfolios that are overexposed to property as they place too much value on their primary residence. There’s also a tendency for young entrepreneurs to rely on the sale of their business for retirement capital and to have insufficient unrelated investments to complement their long-term plan. 

Many investors have a combination of old-fashioned (insurance-based) RAs and new ones (investment linked), which have been set up when they change jobs and choose to transfer their pension funds into RAs. Retirees can also have a hodgepodge mix of Life Annuities and Living Annuities that don’t fall into any masterplan.

Why do people get into a mess? 

Many folks fancy themselves to be investment experts. Such investors often base each decision on the hope of generating a maximum return, as opposed to purchasing an asset with a specific objective and timeframe in mind.

Another common error is liaising with several advisors along the way – with the belief that this is a diversification strategy in itself! It’s essential to have a well-diversified investment portfolio, but ‘advice diversification’ almost always gets in the way of an intended goal.

Things can also get a bit untidy when people don’t reveal all their financial details to their advisor. You may want to avoid fees on some of your investments – understandable, but not wise.

Also, there’s a simple fear factor! Some investors avoid a thorough financial needs analysis because they fear the truth and the cost of change.

What can go wrong?

The obvious and most significant risk is an inappropriate asset allocation which could threaten your primary investment objectives, not least having enough funds for retirement. A wise asset allocation balances risk against potential returns and considers the amount of time you have until retirement.

If you haven’t tidied up your portfolio under the management of one trusted advisor, there’s the risk that you could be paying more for the management of your portfolio than you ought to. Advisors usually have a sliding fee scale which works in favour of larger portfolios. The long-term cost of unnecessary fees is significant. Just as compound growth works in investors’ favour regarding capital growth, it works very hard against them when it comes to costs as the loss compounds over time.

Additional advantages of tidying up 

Tidying your portfolio and having a single, comprehensive overview of all your assets makes it far easier to manage. As your circumstances and the markets change, you may need to modify your asset allocation. This is difficult to achieve if your assets are in disarray. And even if you do get it right, it will cost you precious time. What’s more, a tidy portfolio will be of great benefit to your executor and heirs as it saves them having to track down assets.

The costs of change  

Some people are put off by the costs of change – and yes there are most likely to be some. These could include Capital Gains Tax as you may be advised to sell some assets. That said, the sale of assets can be phased in over-time, to make the most of the R40 000 annual CGT exemption. Your advisor may also need to be compensated for all the additional hours it requires to do a thorough financial needs analysis, prepare the plan and implement the change.

Very significantly, if there’s a reason to consolidate RAs, there may be high penalties, which could amount to up to 30% of the fund value. Despite these high costs it may still be advisable to make the change, to ensure your hard-earned savings are invested in funds that perform consistently.

The long and the short

Depending on how long you’ve put it off, tidying up your portfolio can be a daunting and expensive prospect. But the short-term hassle and expense are nothing compared to the potential long-term trauma that an untidy portfolio can create. There’s much to be said for delegating all important processes to professionals and focusing on using your own set of professional skills to maximise your income. This invariably gives you peace of mind, a sense of freedom and – very significantly – a better overall risk-adjusted return. Our door is always open…speak to a financial adviser.

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