5 Common Portfolio Mistakes: Are You Making Any of Them?

Whenever our team starts working with a new client, a critical part of the initial step is to audit their investment portfolio.

If their portfolio is best suited for tax efficiency, maximizing returns given their goals, and for their legacy plan, I will let them know and tell them to keep the portfolio as is. However, more often than not, I find inefficiencies that are holding them back (sometimes very much so). If you are serious about optimizing your portfolio, avoiding these pitfalls is crucial.?

Here are five common portfolio mistakes we’ve seen over the years, especially with executives in the aerospace & defense industry—and how you can fix them:

1. Portfolio sprawl

The biggest issue I see is portfolio sprawl: too many accounts, too many holdings, too much redundancy.?

This applies to all net-worth sizes, from $500k to $20 million.

We typically recommend consolidating your accounts where possible and to consider using well-selected index funds for simplicity and diversification.?

This way, you can streamline your holdings while achieving your desired asset-class exposures. Also, the last thing you want to do is forget about an account, and when you pass away, it becomes hard for your heirs to track it down.

2. Redundant portfolio of individual stocks

Many investors double down on large-cap individual stocks like Apple, Amazon, Nvidia, and Microsoft, not realizing these are already well-represented in most US stock funds.

While it might seem like a good idea to hold these market giants separately, this approach often leads to unnecessary overlap and increased risk. While we do own individual stocks for certain clients (including the tech names listed above), the S&P 500 has about a 30% weighting in technology stocks. Next thing you know, when a market downturn occurs, your entire portfolio is moving in one direction because you have too much overlap in one sector or a few of the same individual stocks.

As much as we like technology stocks, confirming you are properly allocated and not overly concentrated is key to long-term success with investing. In other words, you want some stocks to “Zig” when others “Zag”. This is called diversification, which means there is a low correlation between positions.

Typically, it is a better idea to focus on a diversified fund that covers these stocks. This reduces your risk and management burden and allows you to benefit from the growth of these companies without the extra hassle and volatility.

3. Low-quality mutual funds

Patience is a virtue in investing, but being too hands-off can hurt your returns.?

Some investors hold onto underperforming or high-cost mutual funds for too long.?

Regularly review your portfolio to ensure each fund aligns with your goals and hasn’t suffered from manager changes, poor returns, or significant asset outflows.?

A fund that performed well a decade ago might not be the best choice today, especially if the management team has changed or the fund has consistently underperformed its benchmark.?

Keeping your portfolio updated ensures that all your investments are working as hard as possible for you. Not to mention, mutual funds pay out a capital gains distribution, so if these funds are in taxable brokerage accounts, you are not being as tax efficient. An ETF (exchange-traded fund) can help solve this problem.

4. Misaligned asset allocation

Your portfolio’s asset allocation should reflect your financial goals and timeline.?

The allocation and strategy that makes sense for someone who is planning to retire in 10 years is different from someone who is planning to retire in 10 months.

I often see soon-to-retire individuals holding too few safe assets, risking their retirement security.?And vice versa, whereby clients own too much in bonds given their financial situation when they should be taking on more risk for greater returns.

Stocks can provide excellent growth, but they also come with higher volatility.?

Align your portfolio with your spending needs by creating a mix of cash, bonds, and equities to ensure stability and growth throughout retirement.?

This approach, often referred to as the “Bucket Strategy,” helps you manage something called “sequence of returns risk”—the danger that a market downturn will deplete your portfolio just when you start needing to draw from it.?

By setting aside safer assets for short-term income needs, you can ride out market volatility without having to sell investments at a loss.

5. Tax inefficiency

Tax efficiency is key in portfolio management, and one of the most effective ways to increase your tax efficiency is to confirm your assets are located in the right types of accounts.

For example, owning tax-efficient assets like municipal bonds or treasury bonds in taxable accounts versus tax-deferred accounts makes the most sense. The income on municipal bonds is usually tax-free, so those are best in taxable accounts.

Placing high-income-producing assets in tax-deferred accounts helps shield you from an unnecessarily high tax bill.?

Evaluate your asset location strategy to minimize your tax bill and maximize your returns.?

As we talked about in #3, holding mutual funds in taxable accounts is usually not the best option. We see this too often with new potential clients. Mutual funds are typically best suited for tax-advantaged accounts, like an IRA or 401k. However, Mutual funds often come with high fees, which may not be the best move for your portfolio.

This might involve some upfront tax costs if you need to reposition assets, meaning you are realizing gains, but the long-term benefits of improved tax efficiency on an annual basis can far outweigh these initial expenses.

Are you ready for a portfolio makeover?

If these mistakes sound familiar, you’re not alone. Many investors face these issues, but the good news is that you can fix it. By addressing these common mistakes, you can significantly improve your portfolio’s performance and get closer to achieving your financial goals with less stress.

It helps to have a professional in your corner. If you’d like our team to look at your current plan and give you our thoughts, click on the link below. https://www.clarkgroupam.com/schedule-a-call

clarkgroupam.com/disclosure