The first article in this series (February, 2015) defined the concept of a shoebox portfolio, identified the various effortless ways that a shoebox portfolio can be cultivated, and pointed out the pitfalls and consequences of neglecting a thorough portfolio review on a periodic basis.
This article focuses on how to address the problems of a shoebox portfolio by undertaking a comprehensive portfolio review and taking action to streamline the shoebox.
Step 1: The first step in this review process is to organize the items in your shoebox by making a list of every distinct financial account that is owned by the members of your household. A simple table can be created listing the name of the account holder, the type of account, the brokerage company that serves as custodian for the account, and the current value of the account. It is best to use the same reporting date for all accounts such as the end of a month, quarter, or year.
Account types refer to all of the various account forms mentioned in last month’s article – individual, joint, IRA, Roth IRA, 401(k), Pension, Tax-Deferred Annuities, custodial accounts for minors, etc. A spreadsheet program such as Microsoft Excel is ideal for this exercise because it can eventually be useful when calculating totals, percentages, and “slicing and dicing” the various components and groupings of the portfolio.
Step 2: Once the list of accounts has been compiled, the next step is to designate these various accounts by the account owner.
Step 3: The third step is to separate this list of accounts by owner into the two major categories of tax-deferred accounts and taxable accounts. This step will become important later as specific investment decisions are reviewed or made to optimize the total household portfolio for tax-efficiency.
Step 4: Now it is time to add the itemized list of the specific investments currently held in each account to your spreadsheet. The sum of the individual investments in each account should provide a total that agrees or reconciles with the total value of the account. It should be noted that some investments are treated more favorably than others by the tax code and may be able to be strategically re-positioned by account type to optimize tax-efficiency.
Step 5: Subtotal the value of all taxable accounts in a given household portfolio, and then subtotal the value of the tax-deferred accounts. The sum of the taxable account subtotal and the tax-deferred account subtotal should equate to the grand total value of the portfolio at the household level. To cross-check, add up the total account value of each individual account from your account statements. This amount should reconcile to the grand total of your portfolio.
Thus far, all we have done is build an organized, reconciled current snapshot of the shoebox portfolio. Step 6: Review the spreadsheet focusing at the account level to determine if there are opportunities to streamline and simplify your financial situation by consolidating similar account types. For example, multiple, dormant (no new deposits being made), company retirement plans from old employers may be able to be rolled into a single self-directed IRA account to minimize annual fees, improve investment choices, and simplify record keeping.
With the number of the accounts in the portfolio streamlined, and sorted by taxable and tax-deferred status by account holder, it is finally time to analyze the portfolio and develop an effective investment strategy. This will be the topic for a future article.
Christopher P. Parr, CFP®, is a River Hill resident and president of Parr Financial Solutions, Inc., a Columbia-based, independent, fee-only, wealth management firm. He can be reached at 410-740-9011 or online: www.ParrFinancialSolutions.com.
This article was written for the April 2015 issue of River Hill Magazine.