Building An Investment Portfolio

Are you wondering how to build an investment portfolio? The simple truth is not all portfolios are not created equal and building an investment portfolio can be a complex process. Understanding how your investment portfolio is positioned and how it can affect every other area in your financial life is really important. This goes beyond simple asset allocation, it not only involves the mix of asset categories but the what investments make up those categories in your portfolio and why.

Building An Investment Portfolio

Guy, let’s just start by talking about how you position portfolios and some of the tools you use that can reduce the taxes on investments.

Guy Riccardi

We specialize is in creating risk-adjusted portfolios utilizing individual positions on both the equity and the fixed income side (bond). There’s a couple of reasons why we like to use the individual positions,  we feel that you can better help control the overall volatility of the portfolio this way and be tax efficient.

Investment Quote | Financial Advisor WisconsinWe take both a top-down and a bottom-up approach when building portfolios. At the top down, we are building out the proper sector exposure. That’s all stuff that you could be using ETFs or even mutual funds to do. The bottom-up is the actual fundamental analysis to get the actual stock selection. That’s building out those particular sectors.

 

When the focus of the portfolio is to capture a certain amount of upside growth but doing it in a way to help control or minimize volatility then utilizing the individual positions is what can help do this.

 

Tax Efficient Investing

This type of portfolio management also tends to create a much more tax-efficient type portfolio. The reason being is because when you’re building out all these different positions to get your overall net exposure in any one market we know that not everything is all correlated with each other. Last year, 2020, we know that the majority of the growth was really being driven by about four different sectors for most of the year and there were another eight sectors out there that weren’t doing as well.

 

If you had some exposure to individual positions with some of those different sectors, that’s where although your overall portfolio might’ve been growing, you also might have some losses that you could be taking advantage of either through a tax swap or tax harvesting.

 

There’s a lot of people that talk about tax swapping or tax harvesting, but few actually do it. Or if they do, they’ll put the focus of that into the fourth quarter. However, a large market event (like March last year) could open up that opportunity to be doing some of that swapping some of that harvesting and proactively taking losses while maintaining that exposure through an alternative. Taking the loss purely for the fact of taking in that loss is going to be valuable for you later.

 

We just did a review for someone who had over 600,000 in a non-qualified account. They didn’t sell or make any changes last year, they kept the funds they had, but other people sold the funds, which means the funds had to sell holdings. So at the end of the year, they’re getting large 1099s because the fund had to sell positions with large capital gains and that is passed thru to the current fund holders. This is where it becomes really inefficient because the larger the account, the bigger the tax.

 

That’s the secondary issue that we see with mutual funds. First, having the pooled structure in a fund limits your flexibility to utilize either tax harvesting or tax swaps. The second issue with mutual funds they get very affected by the redemption and unfortunately for investors, they reap the tax consequences. This becomes even more frustrating for new investors who are actually paying for gains that they didn’t even participate in. 

To learn more about why investment positioning is so important and the key to success, watch our Retirement 101 webinar. And to find out how your portfolio is positioned, schedule a review call!

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