Portfolio Mix Can Be Poorly Done

Some people have a portfolio of financial assets that serves many purposes.  Future income, unexpected costs, estate, variation in annual expenses.  That approach is possibly a little easier to manage, but it misses important opportunities.  Consider what the portfolio is for.  Meaning.

Form should follow function.  If there is a known income need, the money that supports the short to intermediate term should be invested differently than the money that will appear in the estate 35 years from now.  It makes little sense to invest the money to replace a vehicle two years from now the same way as money for a child’s education ten years from now.

Some macro portfolio distribution ideas inherently pick this up, but not specifically.  People should start with function and work back.  Most people migrate, by default, towards a mix that is too conservative.  Losing one or two percent on returns is very costly over a long time.  There are things to notice.

Investment mix should be assessed over all of the containers that you own.  It is a mistake to manage each container by itself.  If you own cash value life insurance, it may form a material part of your fixed income assets.  If you do not notice that while you balance your retirement portfolio, you will tend towards too little equity.  If you have several advisors, be cautious of this oversight.

More importantly is the valuation of future income assets like an employer pension or government benefits.  They are financial assets just as much as an ETF.  They should affect the mix decision.

Containers matter.  If my global target is 50-35-15, that does not mean each container should look like that.  Generally, the containers have different tax effects.  If I put equity investments in a tax sheltered retirement plan, I may earn a greater rate of return, but the preferential tax rate on capital gains and dividends disappears.  My future income is fully taxable regardless of the underlying asset that earned it.  Tax preferred containers should usually hold fixed income assets since they are fully taxable anyway.

As the result, someone looking only at my unregistered portfolio may say it is too equity oriented.  On a global assessment across all assets and containers, it is more likely too low.

It pays to look through any funds you may hold.  Many of them have material cash holdings, so ignoring that may tend to cause you to be too liquid.

Do not take the rule of thumb age mix guidelines too seriously.  You situation may be quite different than the macro view.  I have a client whose father died at 101 and whose grandfather died at 99 in a car accident so maybe that should be adjusted.   He believes his reasonable life span is longer than the macro model for mix implies.  He is in his 80s and walks the golf course five days a week.  We never know, but in his case a longer than normal life seems a good bet.

Mix your investments based on all your assets.  Understand your future needs.  Understand long market cycles instead of year to year variance.  Match the portfolio to your specific needs. And lastly, no one dies broke.  Some of your assets belong, in every way but title, to your children.  Consider managing some of them on their parameters instead of yours.

Inter-generational investment management is effective and often overlooked.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

One Comment on “Portfolio Mix Can Be Poorly Done

  1. We remain loyal followers of your posts and we are becoming better in our trade day by day.I share and discuss some of your posts with great success with clients and colleagues.Thank you Professor

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