Leonardo da Vinci reportedly said, “Simplicity is the ultimate sophistication.” And he lived at a time before e-mail, voice mail, and the many other supposedly time-saving technologies have proven only to raise our expectations of what we can get done each day. If you long to simplify your life, we can help — at least where your investments are concerned.
 
This month’s cover article walks you through the process of organizing a complicated array of investment accounts into a single, simplified portfolio.

One reason modern financial life is challenging is because investors tend to have their money spread out among multiple investment accounts. It’s not uncommon for a married couple to have one or two 401(k) accounts, a couple of IRAs, and maybe more (especially if they’ve held several jobs and accumulated workplace retirement accounts at each stop along the way).

SMI has long counseled that the best way to approach investing is to think of all your money as being part of a single pot: one portfolio. But what does that mean, and how do you bridge the gap from having five investment accounts to making decisions as if it’s all a single entity? In this article, our goal is to cut through the complexity and show you how to treat multiple accounts as one portfolio.

The account/portfolio distinction

First, let’s define our terms. For the purposes of this article, an account is anywhere you have a sum of money invested. Your portfolio is the collection of all your investment accounts, whether that’s one or several. Yes, it’s possible to have more than one portfolio if, say, you’re using one approach to save for retirement and another to save for your kids’ college. But we’re going to keep things simple and focus on your retirement portfolio.

If you only have one investment account say a single IRA or 401(k) then for you, the words “account” and “portfolio” are synonymous. Your account is your portfolio and your portfolio consists of your one investment account. Whatever strategy or strategies you decide to use, you just allocate the money in that single account as described in the strategy sections of the SMI web site. Couldn’t be simpler.

But what if your life is a bit more complicated? Imagine a couple we’ll call Mark and Martha Smith who have a 401(k) and two IRAs containing $40,000, $50,000, and $60,000 respectively. We recommend treating all of these accounts as parts of a single portfolio. Doing so will minimize the number of trades they need to make, saving time and money.

How this one-portfolio approach can be executed will depend on which investment strategy or strategies are chosen, and the investment options available in each account. Here are the essential steps.

  1. Determine your asset allocation.
    The starting point is to figure out the best way for you to divide your money between lower-risk investments such as money-market funds and bonds, and higher-risk investments like stocks. This depends on your personal situation, that is, your investment time frame and risk-taking temperament. The process for making this asset allocation determination is explained in the Start Here section of our website: first you take a risk temperament quiz, then apply that result to a season-of-life allocation table to find your suggested stock/bond allocation. (You can skip this step if you are using the Dynamic Asset Allocation strategy exclusively — the asset allocation decisions are built into that strategy’s process.)

    The Smiths are 15-to-20 years from retirement and their investment temperament quiz showed them to be “Explorers,” which leads to a recommended allocation of 100% stocks.
     
  2. Choose your strategy.
    Select the SMI strategy or strategies you would like to use. You’ll find guidance in Step 4 of the Start Here section online. Below, we’ll walk through three examples based on various strategy choices an SMI member might make.
     
  3. Add and allocate.
    Add up the total amount of money you have across all of your accounts ($150,000 in the Smith’s case). Then determine how much of this single pot of money should be invested in each strategy and/or each specific fund within each strategy. The examples that follow will demonstrate how to do this.
     
  4. Execute.
    There are two keys here. First, begin with your most restrictive account and look to see what your investment options are. Some accounts come with certain constraints workplace retirement plans are known for providing limited investment choices. So start there, seeing which of your needed funds (or adequate alternatives) may be purchased there.

    Second, look to see if the balance in any one account matches either the full amount you want to allocate to a particular strategy, or the amount needed for one or more of the funds used in a strategy. It will simplify things if you can use a particular account to fully execute one of your strategies or to fully invest in some of the funds used in a strategy. If you found any of this confusing, hang in there! These points will be made clearer by the examples below. Let’s start with a single-strategy approach.

Scenario 1: 100% Upgrading

In our first scenario, the Smiths want to use the Fund Upgrading strategy exclusively. Upgrading with a 100% stock allocation calls for investing in five different stock-risk categories. The Smiths want to keep things simple and decide to invest in only one fund per Category, a perfectly acceptable way to execute Fund Upgrading (see this month’s Level 2 article).

Using the Fund Upgrading allocation calculator, the Smiths enter the amount they want to invest ($150,000), then select their season of life and investing temperament (as determined when they went through the Start Here section of the SMI website). The calculator shows how their 100% stock portfolio should be allocated among the five stock Categories used in Fund Upgrading (Table B).

As they begin to take the execution step, they follow the earlier advice to see how they can best utilize their most restrictive account their 401(k). If that account offered access to a “brokerage window,” the Smiths would likely have access to all the funds needed to implement all of SMI’s strategies without restriction. However, to make this exercise more challenging/realistic, we’re assuming they don’t have such access. Instead, their plan offers a list of 31 mutual funds. Of those 31 options, only 22 are primarily stock oriented.

For help with choosing from among the 22 stock fund alternatives, they turn to SMI’s Personal Portfolio Tracker. There, they create a portfolio consisting of the 22 fund choices offered in their 401(k) plan. (For this exercise, we used the actual funds offered within the plan of an SMI reader who wrote to us recently.)

The Tracker will organize their funds by SMI’s stock Categories and show how each one ranks compared with other funds in its Category based on each fund’s momentum score. The Tracker also shows each fund’s relative risk and recent 1-, 3-, 6-, and 12-month performance data. Each month, this information is updated automatically. So it’s worth taking a few minutes to do the one-time Tracker set-up!

Once all of their funds are entered in the Tracker, a quick look at the report will help the Smiths identify good candidates to include in their portfolio. Specifically, they are looking for any fund ranked in the top 25 percent (percentile numbers from 1-25 with 1 representing a score in the top 1%) of its Category.

In most cases, certain Categories will stand out in terms of having funds with high momentum scores while others will not. Naturally, the Smiths want to utilize the better-performing funds, in their case those in Categories 5 and 3. They put the full amount needed for Category 5 into the highest-ranked fund available to them in that Category. That leaves $16,000 in their 401(k), which they use to buy the highest-ranked Category 3 fund available to them. Using the Tracker made these decisions relatively easy.

Now it’s time for the Smiths to invest their IRA money in the remaining Categories. They note that the amounts they wish to invest in risk Categories 4 and 2, add up to $60,000, which is the balance in one of their IRAs. It will simplify things if the Smiths can use that one account to cover those two Categories.

Finally, they turn to their $50,000 IRA, using $11,000 to finish out their Category 3 investment ($11,000 plus the $16,000 they put into a Category 3 fund in their 401(k) equals the $27,000 called for by the Fund Upgrading allocation calculator). They then put the remaining $39,000 into the highest ranked Category 1 fund available to them. Table C shows their full one-portfolio allocation.

Scenario 2: 50% Dynamic Asset Allocation, 50% Upgrading

Even though the Smiths’ optimal asset allocation is 100% stocks, they decide they want the peace of mind of knowing their portfolio is specifically designed to weather the inevitable bear markets that come up in stocks from time to time. So, under this scenario, they split their portfolio evenly between Dynamic Asset Allocation (DAA) and Fund Upgrading.

Just as in the first scenario, the Smiths start with the Fund Upgrading allocation calculator, only this time they enter $75,000 (the portion allocated to Upgrading) instead of $150,000. The top of Table D shows how they are to divide that money across the five Upgrading stock Categories.

The lower part of Table D shows how they are to allocate their remaining $75,000 using DAA. Since DAA calls for investing equal amounts in only three funds at any one time (of the six monitored by the strategy), that means the Smiths will put $25,000 in each of the three funds. (The funds shown in this example SPY, EFA, and VNQ are not necessarily the three currently recommended funds.)

Following the advice to look first at their most restrictive account, their 401(k), the Smiths would enter all of their available funds into SMI’s Personal Portfolio Tracker. We already know from Scenario 1 that the fund options they have in Categories 5 and 3 are attractive, so they invest in those funds as before but reduce the amounts to account for the lower Upgrading allocation in this scenario. This totals $25,500, leaving $14,500 in their 401(k) yet to invest.

At this point, they have two options. One, they can look in the Tracker at the fund percentile rankings in the remaining Categories (4, 2, and 1) to see if there are funds with desirable scores. Ideally, they want funds with percentile rankings from 1 to 25. If they find any in the remaining three Categories, fine. (They might even be willing to lower their standards a bit, perhaps taking funds in the 25-40 range).

Alternatively, their second option is to see if they have funds in their 401(k) that behave and invest similarly to any of the funds in DAA. It’s unlikely they will have the specific DAA funds, but they might have funds that are based on the same indexes or invest in the same economic sectors.

Since they have decided to use the DAA strategy for part of their portfolio, they add the tickers for the six exchange-traded funds used in the DAA strategy to the Tracker as well. They can then look in the Tracker for funds that are similar in style to the DAA recommendations by examining the 401(k) funds listed just above and below the DAA funds on the Tracker report. For example, where the Tracker lists EFA (DAA’s foreign stock-index fund), is there a foreign stock fund listed just above or below EFA? If so, they would check to see how closely such funds match the momentum, risk, and performance numbers of the official DAA funds.

Many 401(k) plans offer funds that are similar to at least three of the DAA funds typically an S&P 500 index fund that can be used in place of SPY, a foreign stock-index fund that can be used in lieu of EFA, and a money-market fund option that can be substituted for SHY. 

(Some may also contain options for the other three asset classes, though this will be less common.)

In the Smiths case, they did find that an S&P 500 index fund was one of their options, so they invested their remaining 401(k) money in that fund.

Since one of their IRAs has a balance of $50,000, they opt for the simplicity of splitting that amount across two of the DAA funds (EFA and VNQ).

That leaves their $60,000 IRA. First, they invest $10,500 in SPY since that amount remains to be funded in DAA. They then invest in the top-ranked fund in each of Upgrading’s Risk Categories 4, 2, and 1 to finish their allocations. The results of their decision-making are shown in Table E.

Scenario 3: The 50/40/10 portfolio

For our final scenario, let’s say the Smiths want to invest a small portion of their assets in SMI’s most aggressive strategy — Sector Rotation (SR). They allocate 50% of their portfolio to DAA, 40% to Fund Upgrading, and 10% to Sector Rotation (For more on this 50/40/10 approach, read Higher Returns With Less Risk: The Best Combinations of SMI's Most Popular Strategies). For the Smiths, that means managing $75,000 with DAA, $60,000 with Fund Upgrading, and $15,000 with Sector Rotation. Using the Fund Upgrading allocation calculator, they determine how $60,000 should be allocated across the five Upgrading stock categories. Table F shows that, as well as how they are to allocate their funds across the remaining strategies.

Again, they first address how to invest their 401(k), their least flexible account. As before, they have attractive fund options in Categories 5 and 3, and an acceptable substitute for SPY in an S&P 500 index-fund. They invest the needed amounts there. Next, since one of their IRAs has a $50,000 balance, which is exactly how much they need to complete the EFA and VNQ positions in the DAA portion of their portfolio, they’ll use the full amount for that.

Table G shows the rest of the details. With $60,000 available to be invested in their remaining IRA, they invest $15,000 in the current SR fund recommendation. (While the Smiths could have attempted to fulfill their SR allocation in their 401(k) rather than go with the two Upgrading funds, that would not have been the best course — SR is almost impossible to implement in a 401(k) unless your plan offers a brokerage window that lets you invest beyond the funds in the plan.

Finally, they invest the $5,400 needed in SPY to round out that position, and spread the remaining $39,600 across three Upgrading Categories to complete the portfolio.

Points to keep in mind

  • Look for account consolidation opportunities before you begin.
    Before you start taking a one-portfolio approach, see if you can reduce your number of accounts by consolidating some. The fewer accounts you have, the easier it will be to execute a one-portfolio approach. For example, if you have a SEP IRA that’s no longer receiving contributions and a Traditional IRA, consider combining them into a single account.
     
  • Strive for simplicity.
    If you want to take some small liberties with the amounts to invest in certain funds, that’s fine. For example, let’s say you’re using Fund Upgrading exclusively, and because of the amounts in your various accounts, it’ll be easier to match the account balances if you decrease one Category’s allocation a few percent and increase another Category’s allocation by the same amount. That’s okay, as long as the allocations don’t get too out of whack.
     
  • Strive for flexibility.
    Keep in mind that every SMI strategy (except Just-the-Basics) requires some trading during a typical year. So, you’ll want to make sure the account you are using for a given strategy offers more than one fund used in that strategy.

    Let’s say you want to use Fund Upgrading and DAA, and one of your accounts is a 401(k) with a limited set of investment options. If you are fortunate to have three or four funds that are good matches for the funds used in DAA, but your Fund Upgrading options are a much more limited and less attractive, try to use your 401(k) money mostly for DAA. That should enable you to make whatever changes are necessary within that account instead of having to make changes in multiple accounts.
     
  • It may be emotionally challenging.
    The one-portfolio approach is designed to make life easier by minimizing the number of trades you have to make. However, this approach may feel more challenging from time to time emotionally, because the individual account balances may have greater volatility than your portfolio as a whole. For example, if you were to hold all of your Sector Rotation allocation in a single IRA account with your DAA and Upgrading holdings elsewhere, that IRA balance may soar and plummet compared to the other accounts because of the volatility inherent to Sector Rotation!

    The solution? Just as the one-portfolio approach calls for executing your strategy or strategies as if all of your accounts were one, make sure to view your returns that way as well. Several websites, including MarketWatch.com, allow you to connect all of your accounts and then view the returns as a total across all accounts. You can drill down into individual accounts as well, but start with that big picture view.

Final thoughts

To be sure, it will require effort to determine how to best apply a one-portfolio approach across multiple accounts. You may need to map out two or three scenarios on paper before you come up with the approach that makes the most sense. But the time you put into the process up front likely will save time and money over the long term.