A bullish stock market hides a lot of sins. With the Dow Jones Industrial Average, Standard & Poor’s 500 and other barometers hitting new highs lately, there’s plenty of opportunity to enjoy the profits while overlooking problems in your investment mix.
In other words, you’re doing well and making money. But could you be faring even better? Here are some potential areas to address:
Consider portfolio pruning
If you have been investing for many years, you might have dozens of stocks, mutual funds and exchange-traded funds, so a little weeding and trimming could be in order.
With individual stocks or bonds, you likely need to hold at least a dozen issues, from different industries, to achieve a minimal amount of diversification. With funds it’s a different story — you already might have more diversification than you need.
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“The number of funds you own is less relevant than how they work together to manage your overall risk,” noted Mark Riepe, a senior vice president at the Schwab Center for Financial Research, in a blog. “If you own multiple funds with overlapping holdings, you could be less diversified than if you owned a single fund with broad market exposure.”
There isn’t a magic number of funds above which it makes no sense to keep piling on more. One or a few highly diversified stock and bond funds could be sufficient, especially one like Vanguard’s Total Stock Market index fund.
Conversely, a dozen or more funds might not be too much if you think they all add value, their costs are reasonable and you don’t mind monitoring all that stuff.
“But if you have more than maybe 15, it might be a sign you have become a collector,” said David Fernandez, a certified financial planner at Wealth Engineering in Scottsdale.
Do some year-end tax planning
If your investments are held in taxable accounts, year-end selling strategies could help. The usual advice, if you hold investments showing a paper loss, is to sell them before year-end to reap a deduction. In general, if your losses exceed your gains, up to $3,000 of the excess could be deductible, while the rest can be carried forward to future years.
But if you fall in a low tax bracket, where the 0% capital-gains rate applies, it might make sense to do the reverse and harvest gains on which you could avoid taxes altogether.
In 2019, singles with taxable income below $39,375 and married couples below $78,750 fall in the two lowest federal income brackets, where they qualify to avoid taxes on long-term gains held more than one year, according to Baird Private Wealth Management.
“While that doesn’t mean low-income taxpayers can have an unlimited amount of tax-free gains (as the gains themselves can push a person into a higher bracket), it does provide a planning opportunity,” Baird noted.
If you hold actively managed funds in taxable accounts, beware year-end capital gains distributions, too. These payments reflect internal selling by the portfolio manager, which means you can get stuck with a tax bill even if you held tight. After a bull market spanning 10-plus years, “Some funds have big gains built up,” Fernandez said.
Streamline investment categories
It’s not just a question of holding too many stocks or funds. You might own types of investments that just don’t make much sense anymore. John Rekenthaler, a Morningstar vice president of research, cited emerging-markets stock funds as a prime example of a category that might be worth discarding.
“In the early 1990s, emerging-markets stock funds were the rage,” he wrote in the fall issue of Morningstar magazine. “Their subsequent results have been weaker than even the skeptics believed.”
Emerging markets funds are a “failed experiment” where the results haven’t lived up to expectations, he continued. The expectations were that fast economic growth in developing nations such as China and India would translate to hefty returns for investors. Economic growth indeed has been brisk, but the returns often are squandered in ways ranging from local corruption to corporate expansion in unprofitable ventures.
Rekenthaler’s suggestion: Hold a broad international stock fund rather than one focused on developed foreign markets plus a second for emerging markets.
“What matters in today’s globally connected marketplace is not where corporations are headquartered,” he wrote. “More significant is where corporations conduct their businesses and how they are affected by currency movements.”
Prepare for political turmoil
The presidential election is less than a year off, and political news increasingly will dominate the headlines. All this noise could buffet your portfolio.
Brian Andrew, chief investment officer at Johnson Financial Group, said it’s important for investors to keep matters in perspective. Plenty of significant, even potentially threatening, proposals could surface from candidates in the months ahead, but it’s not necessarily likely that these ideas ever will become law.
Andrew cited Elizabeth Warren’s Medicare-for-all proposal, which has made investors nervous about the future of health care stocks, especially insurance companies, which could face elimination. But this radical plan would require congressional approval, assuming Warren even wins the election.
“It’s a long way from being implemented,” Andrew said.
Meanwhile, the aging population implies more revenue for many medical companies. “I don’t worry about her proposals because we will keep spending more on health care,” Andrew said.
Over the long haul, the stock market has risen regardless of whether Democrats or Republicans occupy the White House. This argues against overreacting to election results, let alone proposals.
Look to cut costs
Transaction costs have been coming down drastically in a lot of investment areas. Companies including Charles Schwab and Fidelity now will let you trade many types of stocks, mutual funds or exchange-traded funds for free, or close to it.
Internal fund expenses also have been dropping. These include outlays incurred by investment companies, and passed along to shareholders, for portfolio management, administration and so on.
The typical annual expense charged by mutual funds and exchanged-traded funds eased to 0.48% last year, according to Morningstar, which made the calculation on a weighted-average basis (meaning larger funds exerted greater influence). That’s equal to $4.80 for every $1,000 a person has invested. But you can do even better — some funds charge less than $1 per $1,000.
Overall, weighted-average expenses have dropped from 0.93% or $9.30 per $1,000 in 2000, with most of the decline coming over the past five years, Morningstar added.
International stock funds (0.82%) usually charge more than funds holding U.S. stocks (0.70%). Bond funds (about 0.50%) charge less than stock portfolios. The key point: If you’re paying much more than these numbers, it’s time to look for alternatives.
Reach Wiles at email@example.com or 602-444-8616.