River Hill Magazine: Does Your Portfolio Look Like a Shoebox?

The title of this article is an investment take on the concept of clients presenting accountants with shoeboxes full of miscellaneous “stuff” at tax time. The accountants are then given the mandate to “make order out of chaos” by sifting through the rubble and miraculously pulling the necessary tax information together in a cohesive manner.

In the world of personal investing, it is quite common to find that a similar situation exists. The tax code is perhaps at least as much to blame for this inefficient fragmentation. It seems that every time a new idea is introduced to encourage saving for long-term goals, the easiest political solution is to create a new, unique tax-favored account to support the specific idea.

As a result, it is not uncommon to find many of the following type of accounts within a single household:

  1. Joint taxable account or separate individual taxable accounts
  2. Individual retirement accounts (IRA’s)
  3. Individual Roth IRA accountsPortfolio Shoebox
  4. Active employer-sponsored retirement plans (perhaps multiple) for each working adult
  5. Dormant (no new deposits being made) employer-sponsored retirement plans from “old” jobs
  6. Inherited accounts requiring minimum annual distributions that cannot be commingled
  7. Individual non-qualified tax-deferred annuities

If there are children in the household, perhaps there could be additional custodial accounts and Section 529 College Savings Plans for each child. In other words, your family may have quite a number of distinct accounts that cannot be commingled for various tax or legal reasons.

Up to this point, we have only considered the number of different accounts that find their way into the shoebox. When you consider that each account must be invested and the available investment choices made on an account-by-account basis, the shoebox really starts to get cluttered.

Most people have a tendency to make investment decisions in an ad hoc manner. Ad hoc means that investment decisions are made individually as cash becomes available to invest or as assets are acquired. The shoebox portfolio is a collection of multiple types of investments and accounts that accumulate gradually over time. Many of the individual investment holdings may even be different versions of essentially the same thing! This is particularly common if the investor attempts to create a balanced portfolio within each account.

A few more ways to accumulate miscellaneous investments in your shoebox are:

  1. Acting on “hot” tips from friends, relatives, co-workers, or brokers
  2. Refusing to sell any holdings that might lead to tax consequences
  3. The “Aunt Nelly” syndrome – these stock certificates were inherited from Aunt Nelly’s estate.

Aunt Nelly would be heartbroken if we ever got rid of them. (Aunt Nelly is dead!!!)

Five serious problems facing investors suffering from a shoebox portfolio are:

  1. Ongoing record-keeping challenges
  2. A potential tax-reporting nightmare (or at least a tax-inefficient portfolio)
  3. Lack of a clear investment strategy focusing on attainment of financial goals
  4. Inability to assess the risk, the cost, or the investment return of the total portfolio
  5. A mess for family members to “figure out and clean-up” in a sudden contingent situation.

The purpose of this article is to define the shoebox portfolio concept, identify the various, seemingly effortless ways that a shoebox portfolio can cultivate for many of us, and point out pitfalls and consequences of maintaining the status quo. A future article will focus on how to address this issue.

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 February issue of River Hill Magazine.