Are All Your Investment Accounts in Sync?

Written by Chris DeVito

Pretty broad question eh? But what am I actually talking about? When it comes to long-term investing there are lots of things that help determine your success. Things like what you invest in (um…duh), how long you invest for (time to compound), and whether of not you let your emotions affect your strategy execution (are you panic selling!?).

Most investors in the long run like the idea of being diversified, quite simply put, don’t own assets that all go up and all go down at the same time. Seems straightforward right? While that may seem rather obvious there is another “hidden” part to investing that I feel often gets overlooked.

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So, what is it? Well, here it is, the potential multi-million-dollar question…… How are you diversifying your assets amongst all your accounts? Do you own stocks and bonds in your 401(k) as well as your brokerage account or IRA? Do you own Cash Value Life Insurance but also invest heavily in fixed income? Have you ever mapped out all your investments to see what your “total” portfolio mix really looks like? If so, you may have some “inefficiencies” in your overall portfolio. Allow me to explain.

One of the most common funds I see clients invested in is something called a Target-Date Retirement fund, you’ve seen them in your 401(k) most likely. You select a year based on when you hope to retire and the fund adjusts the investments over time, while you’re young it invests in more equities and as you get older it moves into more bonds. Seems helpful, doesn’t it? While it could be, there is one major flaw. These funds, like literally any other fund on the planet, have no idea what other investments you have. They don’t know if you’ve bought a ton of Nvidia in your Roth IRA. They don’t know if you have Cash Value Insurance. They don’t know if you’ve been putting $50,000 a year into a brokerage account and buying an S&P 500 Index Fund. They have absolutely no idea that you just bought your 2nd rental property!!!

Like these funds, none of your investments knows exactly what’s going on in your other accounts. So how do you know if they’re all working together? It’s kind of like an NFL team is lining up and nobody knows what play everyone else is running. Wouldn’t it make more sense for them to know?

Yes Chris, you’ve made your point. But, what does that actually mean in terms of things I can do? Well consider this. Let’s say you consider yourself an 80/20 investor, meaning you want to have 80% of your investment in equities and 20% in bonds. Is investing 80/20 in all your accounts the most efficient thing to do? I would argue it’s not.

 For instance, if you are expecting your stocks to appreciate more over time (meaning the greatest return) why not own those in an account like your Roth IRA where you will pay literally $0 in taxes on the gains? If you own bonds which you are expecting to have a less overall return than your equities why own much of them in an account like your 401(k) where you will likely pay a higher tax on those gains in the future? After all, 401(k)s are taxed as ordinary income. Not to mention there are types of bonds like Treasuries or Municipal bonds that offer tax incentives. These types of bonds could make more sense to own in your brokerage account since they have a tax benefit you wouldn’t get if you owned them in your IRA or 401(k). The simple idea is this. If you own more of your assets that you expect to grow more in accounts that eventually get taxed at a lower rate (if at all) like a Roth which is untaxed or a brokerage account where you’d have Long-Term Capital gains. Then, you are more likely to keep more of those gains for yourself. If you own fixed income, there could be ways to take advantage of the type of bonds to minimize your tax burden. And if not, you may be okay with paying a higher tax on these assets as you aren’t expecting them to gain as much value as your equities.

So, are all of your accounts in sync or are they all invested the same way?

DISCLOSURE

All investing is subject to risk, including the possible loss of the money you invest. No strategy assures success or prevents against loss.

Diversification is a strategy designed to help manage investment risk. It does not guarantee a profit or protect against investment loss in declining markets.

Bonds: In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties.

The principal value of   Target Date Funds is not guaranteed at any time, including at or after the target date. 7908609RG_May27