How do you invest your portfolio?
Recently, I shared with you some straightforward investing beliefs at Fortrove. As a result, there have been a lot of questions around portfolio management. I’d like to delve a little deeper into this topic and chat with you about this intriguing matter.
All Cash Portfolios
When I start working with clients they usually have an existing portfolio. Frequently, I do get to work with someone who is a blank slate – they have a lot of cash!
The all-cash clients are straightforward. Together we design a portfolio that meets their needs, wants, and concerns. We follow the investment beliefs and the clients begin their way to prosperity.
When a client comes with an existing portfolio, it’s a much different approach. For example, these clients could have been working with a different financial planner. Perhaps they were investing on their own, or they’ve inherited some investments from loved ones and still have them.
Remember, the most important part is to understand your opportunities, needs, and wants.
Then some analysis follows:
- What is the composition of the portfolio?
- Do the investments have a gain or loss?
- How much, on a percentage basis, does each investment represent?
The composition of the portfolio is first. How many investments and what type are there? Sometimes, clients come with complex portfolios that have numerous investments.
Other clients have portfolios with 90% allocated to their employer stock. Although not as complicated, this is a very risky position.
Gains and Losses
Since you purchased the investment or received it from your company (option exercise or vested RSU), has it gained or lost value?
When you have a loss and it’s not a suitable investment, typically we sell it. Because there is a loss, there is no tax bill and we have cash to deploy to ideal investments. If the money-losing investment is appropriate, then we think about selling some to offset capital gains taxes owed on other investments.
If there’s a gain, the decisions are tricky because there will be taxes. And this leads me to my next point.
Single name investments (stocks) that make up more than 10% – 15% of your portfolio have a large impact on the money gained and lost.
When it comes to company stock, managing these positions is difficult. There are black out periods and other restrictions on when you can buy and sell so it’s challenging to invest your portfolio appropriately. Additionally, your company stock position is likely to increase as you are continually compensated with RSUs and stock options.
These positions need to be handled with care and well-planned as you move to a more broadly diversified portfolio.
Invest Your Portfolio Like a Professional
Preferably, an ideal portfolio has assorted investments in instruments like ETFs, stocks, bonds, and Treasuries. The choices depend on your situation. This sounds a little too simple, but remember that your portfolio is a means to an end. It is there to serve you and your financial wants and desires. A portfolio doesn’t have to be exciting for you to live the life you want.
If you want to change your portfolio, it’s a process. It doesn’t happen overnight. It’s an ever changing and ongoing activity. Companies, taxes, and economies evolve. Your circumstances, financial dreams, and life change too. Why not work with a professional to help you?