How to Prepare for Portfolio Moving Day

Beginner

While I know lots of people who enjoy watching house hunting shows, browsing real estate listings, and imagining life in a new home, I have yet to meet a single person who doesn’t loathe the process of moving. From finalizing the deal on the new place, unloading the old one, packing all of your stuff, arranging the move, and coordinating the timing of every step all while continuing to work your day job, moving can be really stressful. It’s enough to drive many people to reevaluate whether it’s all worth it and just be happy where they are.

Transitioning to a new portfolio can often be equally tricky. Sure, the actual move is just a matter of clicking a few buttons on a computer screen rather than loading your entire life into a truck. But that’s just one step in a long and detailed process. Figuring out the best way to move your money while minimizing taxes and dealing with the uncertainty surrounding future market returns makes moving portfolios a complicated and emotionally-charged endeavor. What if you mess up? What if your new portfolio loses money the moment you buy in?

When in doubt, doing nothing really isn’t such a bad choice. But staying the course isn’t always the wisest decision when that course was set years ago before you really knew what you were doing. It’s ok to change plans when you grow as a person and learn new information, and there’s no reason to let fear and uncertainty get in the way. So no matter whether you’re finally pulling cash out of storage or considering a strategic portfolio change, let’s talk about how to plan a thoughtful financial transition.

I receive lots of questions on this topic which allows me the benefit of seeing the concerns of a wide cross-section of investors around the world. While everyone is different, a few general themes tend to come up relatively often.

So let’s grab a few from the mailbag. Here are the three most common questions about changing portfolios from people just like you.


How do I build my desired portfolio with limited fund options?

Even when we have the perfect portfolio plan in mind, sometimes it’s not possible to find every fund we need to build our ideal asset allocation. For example, niche small cap value funds or specific maturities of international bonds are not available in every country. And while workplace retirement plans are terrific savings vehicles, it’s an unfortunate fact of life that the fund options are usually terrible with limited choices and high fees. So hard-working savers often have to get creative and deal with what’s available. Nevertheless, there are a few things you can do to make the best of the situation.

Ask for a brokerage window.

If the options in your retirement account don’t meet your investing needs, the first thing I would try is to ask your plan administrator about something called a “brokerage window” or a “self-directed option”. Even though most retirement plans come with a very short list of funds out of the box, using a brokerage window allows access to virtually all securities in the market. Not every company will allow this option, but it’s worth asking about before settling on funds you really don’t like.

Focus on the expense ratios.

When the abbreviated selection of funds is unavoidable, go down the list and write the expense ratio next to each name. Completely cross out any fund with an expense ratio over 1%, as I’m telling you right now they’re probably not worth it no matter how well they’ve done lately. Next, circle each fund with the lowest expense ratios — ideally under 0.5%. Fees matter a lot with investing, and focusing your attention on the low-fee funds will pay off in the long run.

Do the best you can.

If the only good inexpensive options are a large cap blend fund and an intermediate bond fund, then personally I wouldn’t stress about building the perfect portfolio in that particular account. I’d much rather have a low-cost Classic 60-40 portfolio than an expensive Merriman Ultimate approximation patched together with actively managed funds that barely resemble the desired indices and drain more money in fees than they contribute to the final portfolio performance. Just do the best you can.

If a retirement plan like a 401k* is the bottleneck, try thinking of your portfolio as a whole and building your ideal asset allocation using funds in other accounts. Then be patient. When you move jobs in the future, you will have the option of rolling your workplace retirement account over into an IRA of your choice with many more investing options.

(*) While I use US account examples, I’m sure investors elsewhere have similar options that I simply don’t know about. Learn how they work, and use each type to the fullest.


I want to change portfolios. How do I avoid a huge tax bill?

When changing portfolios, the number one thing all investors should think about before they sell a single share is how that sale will affect their tax bill. Depending on where you live, the account you’re using, the type of asset you’re selling, the value when you bought in, how long you’ve held your investments, and your personal tax bracket, taxes can be all over the map. I’m definitely not a tax professional and even the best will never be able to cover the full spectrum of possible tax situations in every state and country. But here are a few high-level ideas that are universal to many types of investors.

Don’t buy a new portfolio. Build one over time.

Generally speaking, taxes from switching portfolios happen when you sell something. So instead of thinking in terms of selling everything and buying a new portfolio, carefully survey your current portfolio for foundation assets you can build on. For example, let’s say you currently run a Three-Fund Portfolio but want to switch to the Coffeehouse Portfolio. In that case, you don’t necessarily have to sell a thing. Assuming you’re still working and accumulating savings, consider keeping the funds you already own while purchasing additional funds with new contributions until you reach your target percentages. It may take a little longer than if you sold a bunch of stocks and bonds up front, but you’ll also eventually reach your target portfolio tax-free.

Be flexible with asset choices.

Once you select a target portfolio, think about slight tweaks that may make more sense in your personal situation. Maybe you currently own a large cap blend fund and would prefer a total market fund, but you’re sitting on a bunch of capital gains that will generate a huge tax bill if you sell. One approach might be to notice that the returns of TSM and LCB are really quite similar and to make the most of the fund you already own. And another approach might be to purchase a small cap blend fund that, in combination with your LCB fund, generates virtually identical returns to your desired total market allocation. Be creative! Not every portfolio recipe needs to be followed exactly to achieve very similar results.

Plan before you sell.

Sometimes selling an asset with a gain is a necessary part of the plan, and the specific details of managing capital gains taxes for every individual is a lot more complicated than I can cover here. But there are lots of ways to minimize taxes. Maybe you can use tax-loss harvesting to minimize taxable gains, hold an asset until it qualifies for long-term rates, or split a sale between two tax years to stay in a lower tax bracket each year. And every country has its own unique rules than can be put to good use by educated investors. Take your time to research strategies and build a plan. Personally I like to use tax planning software like TurboTax to game out certain trades before I make them. And if you need help, this is a perfect opportunity to consult a local tax professional for advice.


Is now a good time to buy ________?

If you ask someone interested in a hands-off asset allocation what they think about market timing, you’re likely to get a thoughtful treatise on why it’s a bad idea. But ask the same investor if they worry about altering their portfolio at the wrong time and I wager they’ll offer a much more honest and nuanced answer. “Is it really a good idea to add more stocks with valuations so high? What about bonds with interest rates so low? I hear that’s a terrible idea right now.” Fear of watching a new investment immediately move against you can be a strong deterrent. I get it. In my experience, to eliminate that fear you need to change your perspective.

Focus on the recipe.

One of the biggest stumbling blocks I see in investing — from the smallest individual investor all the way up to the biggest names in the business — is the infatuation with analyzing each individual investment in isolation rather than studying the performance of the portfolio as a whole. To see what I mean and why it’s important, let’s look at a few different assets — stocks, long-term bonds, gold, and cash. I’m confident that educated investors can construct intelligent arguments for why each of them have very poor prospects at the moment. And looking at the histories, getting stuck with a worst-case scenario for any one asset is indeed not very appealing. We’re talking a decade or more of losses.

But if you only look at each asset in isolation, you completely miss the big picture. When you combine equal parts of each of these four assets you get the Permanent Portfolio, a classic example of one of the most consistent asset allocations on record.

While carefully considering the expected returns of every asset in the portfolio is a staple of old-school stock-picking strategies, it sorta misses the point of modern asset allocation. Just as a cake isn’t the same if you leave out the flour, a portfolio isn’t the same if you leave out certain assets. Buy the right recipe that accounts for market uncertainty, and the outlook of the individual ingredients is largely irrelevant.

Audition the change before moving your money.

Portfolio Charts provides tons of historical data to help you understand the full range of investing outcomes. But it’s not the same as watching things move in real time, and that disconnect between expectations and reality can sometimes be a major source of regret when the market changes after you switch portfolios. To help combat that feeling, I recommend taking a few weeks or months to track a new portfolio before committing to it with real money. Enter the proposed ETFs into your favorite stock tracking app and watch the assets move in their natural up-and-down rhythm. And be sure to also look at the total portfolio change as well. Get comfortable with your new portfolio, and the little bit of extra experience will help you make the change with confidence.

Make a plan, and stick to it.

A natural corollary to the question of when to buy certain assets is the question of whether it’s best to switch portfolios all at once (lump-sum investing) or over time (dollar-cost averaging). While I understand some people have strong opinions on that issue, I’m personally neutral. I don’t have data to prove that one method will be more profitable than the other in the short term, and in the long run any theoretical difference in account balances will be long-forgotten noise. I also can’t discount the fact that some people are more psychologically inclined to jump in the deep end of the pool while others are more comfortable wading in a few steps at a time. From my perspective, the end goal is the same — to reach your target asset allocation with no regrets. So make a plan, follow through, and be happy!


You’ve got this.

Even when the details seem intimidating, always keep your eye on the prize. Don’t let fear and uncertainty deter you from pursuing the asset allocation you’ve always wanted. You deserve to be a happy investor. And no matter whether you’re navigating limited fund options, smartly managing taxes, debating the timing of a new investment, or dealing with any number of other questions, just know that you’re not alone. Lots of people dealt with the same issues and emerged much stronger for the effort. And you can, too!

So do your research, pack the boxes, call the movers, and say hello to an exciting new financial future. When the dust settles, I’m confident you’ll look back on the journey and wonder what took you so long.


Has Portfolio Charts helped you plan your own investing move?