How Thorough Is the Management of Your Investment Portfolio?

Written by: Sean P. Smith

A thoughtful approach to long-term investing can require a long list of consequential decisions, ranging from broad (determining a strategic asset allocation) to narrow (determining what specific investments to hold within that allocation).

Beyond the principles of sound investment management, however, lay a set of unique customization decisions that have the potential to have a significant long-term impact on your portfolio’s overall asset value – including how much you can sustainably spend or gift from your portfolio through your lifetime.

These decisions are essential components of an integrated approach to managing your wealth in a manner that is personally relevant to you.

The relevance of any given customization factor below will depend entirely on your personal circumstances and whether the technique is appropriate for your situation. Examples of portfolio considerations that go beyond the basics of investment management can include:

Asset Location: The process of evaluating not only the specific investments within your portfolio but within which type of account they should be held. Why? Managing where assets are held can significantly reduce your overall tax burden over time, by managing the type of account in which interest, dividend, or capital gain income is realized through your portfolio.

Private Investment Integration: Incorporating an opportunistic mix of private/illiquid investment options into a portfolio predominantly comprised of traditional securities. Why? In relatively smaller proportions, private investments can sometimes offer investment characteristics that differ – in return potential, diversification benefits, or both – from traditional public market securities.

Tax Loss Harvesting: Proactively selling positions at a taxable loss while redeploying the proceeds into a similar investment within the same asset class. Why? These tax-planning trades can secure taxable losses that may be used to offset capital gains elsewhere, without substantially changing the overall composition of a portfolio.

Direct Indexing: An alternative structure to owning a traditional index fund that allows for advanced tax management and investor-driven customizations. Why? A direct index approach can take advantage of tax loss harvesting opportunities within the individual stocks that comprise an index – something not possible when utilizing an index fund.

Bond ladders: An alternative structure to owning a municipal bond fund, consisting of individual municipal bonds, managed for credit quality and constructed with staggered maturities. Why? As bonds mature, they may benefit from higher yields in periods of rising interest rates – in contrast to traditional bond funds.

Cash investment planning: Setting a strategy to gradually deploy cash into a portfolio using a set of calendar-based and market-based triggers, as opposed to all at once. Why? For relatively larger proportions of a portfolio, using a dual-track approach to investing cash can guard against the risk of waiting for a market pullback that may not materialize, while still benefiting from lower overall average purchase prices if the market declines.

The list of portfolio customization factors goes on, ranging from planning around concentrated stock positions – including the implementation of hedging or diversification strategies – to the optimization of yield on safe cash reserves held outside the invested portfolio. But when it comes to integrating investments into an overall wealth management plan, these personalized details have the potential to be very consequential and can build over time.

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