When investing for our future, we can often miss the forest for the trees, focusing too much on a smaller subset of our portfolio rather than the whole. Too much emphasis on individual accounts could lead portfolios astray and might get in the way of the goals you're actually trying to accomplish.
This can be a particular problem if your portfolio is distributed across multiple firms or divided between accounts that you manage yourself and accounts that you have elected to put under professional management. In both cases, it's possible to lose sight of the whole picture. As a result, the allocations in your various accounts may be working against each other, potentially hindering your ability to reach your overall goal.
If you share your life with a spouse or partner, it's likely that you also share long-term goals with them as well. In fact, there are many goals for which it is essential that you work in concert with your spouse or partner in order to maximize your likelihood of achieving them—for example, developing a retirement income stream that can help you maintain a particular lifestyle in your later years, creating a solid financial safety net for you and your family to help protect against unexpected events or shifts in the market, and creating a plan to help ensure you have enough money to cover the rising cost of medical and long-term health care expenses as you age. Failing to communicate with your spouse or partner could lead to a lack of alignment in your portfolios, which may result in a less-than-optimal financial outcome.
"It is common to see one spouse that completely handles all of the investing and planning for their household," says Matt Bullard, regional vice president for managed solutions at Fidelity Investments. "That leaves the other spouse in the dark about their overall financial situation and about how close they may be to meeting their goals. This could leave them overwhelmed should something happen to the partner who has been handling the finances and puts them in charge."
Refocusing on your family's long-term goals
A potential solution to the pitfalls of individualized, account-based financial planning involves both coming together around your shared goals and taking a step back to help ensure that you and your spouse or partner understand the full scope of your financial situation. This can include:
- Creating a clear vision from multiple perspectives. A good financial plan starts with a firm grasp of your financial situation, your time horizon, and your tolerance for risk. When you assess these factors individually, your answers will reflect your perspective alone. While you may assume that you and your spouse or partner are on the same page, that may not be the case. Approaching these questions together can help you sort out the finer details and may even reveal things you didn't expect. It may lead to a conclusion that more accurately represents your vision for your future as a unit, rather than as individuals. With this foundation, you may be able to identify multiple goals for your investment portfolio.
- Approaching investment management holistically. With a well-integrated vision for your financial future, you can now assess whether or not your investment accounts are being managed in a manner that is aligned to the long-term goals you have identified. You can begin with a target asset allocation that you believe is well-suited to bringing a particular goal to a reality and then apply that allocation to your portfolio as a whole—across firms and among accounts that are managed by you and your spouse or partner and accounts you have opted to have managed by a professional.
- Implementing tax-smart techniques.1 With an allocation for each of your goals identified, you can now begin determining how best to locate your assets—that is, figuring out whether putting particular types of assets in particular types of accounts may reduce your overall tax burden and help to keep more of your money in your portfolio. For example, you may want to place income-producing assets that pay taxable dividends and interests on a regular basis into a tax-deferred account, like an IRA or 401(k), as any income you earn on those investments will be reinvested and taxes will only be incurred at the time of withdrawal. Additionally, you may wish to place tax-efficient assets that are more focused on long-term growth potential than income into a taxable account.
- Identifying opportunities across accounts on an ongoing basis. With your entire portfolio in view, it may be easier to identify important opportunities that can help to potentially enhance your long-term performance and may save you time, money, and effort. Portfolio rebalancing, money movement, and withdrawals may all be made easier and more tax-efficient when you have the ability to look across all of your taxable and tax-advantaged accounts and be selective about where you draw from and when.
Building a joint financial plan
Imagine a hypothetical couple, Ben and Sally, who are in their early 50s and planning on retiring in 10 years. Together, they have $1.5 million in assets dedicated to a retirement goal—however, they have been approaching their investments in a disjointed fashion: Sally has $700,000 in her professionally managed account, Ben has $300,000 in his own professionally managed account, and together they oversee a self-directed account with $500,000 in income-generating bonds in it.
Ben and Sally agree that retirement is important to them, and they share the same time horizon as to when they wish to retire. By taking an account-focused individual approach to their planning, however, they may have inadvertently ended up with an overall, aggregate asset allocation that is more conservative than is appropriate for their goal. Ben and Sally's professionally managed accounts were not allocated with the other's account in mind, nor did they factor in the effect of the joint, unmanaged account that Ben and Sally also consider part of their retirement savings.
Sally indicated she wanted a balanced approach, while Ben expressed a desire for more growth and a higher tolerance for risk. This is reflected in the allocations of their individual managed accounts. But when you look at the aggregate asset allocation, you can see that they have in fact settled on an allocation that is likely more conservative than either realizes or would prefer.
With a more concerted approach, one that takes into account the full breadth of Ben and Sally's goals, feelings, and financial situation, they may have been able to reach a more accurate target asset allocation, one that is more aggressive and sets the couple on a path that is more appropriate overall. While their individual managed accounts have taken on more aggressive allocations, the aggregate goal asset allocation better represents their combined intentions.
Then, they could begin to think about asset location; that is, strategically positioning their assets across accounts, designed to help enhance their after-tax returns. This would allow them to maintain their overall goal asset allocation, while varying the allocations of their individual accounts to create more tax efficiency.
When you work together with your spouse or partner to create a plan for your financial future, there's strength in numbers. Adding in a layer of professional management to help ensure that things stay on track may also be advantageous, especially if you're no longer sure you have the time for or, frankly, the interest in the finer points of overseeing your portfolio. But overall, what's important is that you take a complete view of your financial situation and make the effort to consider every aspect of your portfolio to help ensure that you are prepared for what's to come and doing everything you can to help achieve your goals.