And welcome back to The Retire Early Retire Now podcast.

I'm your host, hunter Kelly, certified financial planner and founder of Palm Valley Wealth Management.

Today we're digging into something incredibly practical, something.

Every investor, no matter their income, should revisit at least once a year.

And that is portfolio cleanup.

Most people spend so much time thinking about what to buy the next fund, the hottest stock, a new strategy.

But very few people take time to evaluate what they already own.

And over time, your portfolio drifts.

The market moves sectors get overweighted.

Your life changes and goals update.

and before you know it, you're holding 18 different funds, three s and p 500 products, leftover employer plans and individual stocks that you don't even remember buying.

So today's episode gives you a clear framework to know what to sell, what to keep, and what to rebalance.

so you end the year and start the new one with a cleaner, simpler, smarter portfolio.

And if you're enjoying this show, do me a quick favor.

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Helps the listeners find this podcast and support the work that we are doing here before we decide what stays and what goes.

We have to start with clarity.

What do you actually own today and how does it fit together with everything else?

Let's begin with a simple portfolio diagnostic.

Your first step to portfolio cleanup is creating a complete inventory of what you own.

This means writing out or putting in an Excel sheet.

Every account you have, every fund you have, every holding or stock or bond you have, and every percentage, to that allocation.

You cannot clean up a portfolio that you don't fully understand and it, And you'll be surprised on how many people discover, overlap or positions they didn't even know were sitting out there.

This is so common.

when I meet with prospective clients, they have no clue what they own.

They don't understand how it works, where sometimes where their money is.

and so I can think back to a time where I started working with a client way back in the start of my career.

And we initially met and he had, three or four different employer accounts.

And for whatever reason, there was one we could not move.

And a few years later I had in my notes to ask about this account because, it was coming, coming to a time where we could move the account and consolidate everything.

And he swore he did not have it.

and in my notes, I knew he had this account, which had six figures in it.

And this was not a small portion of their net worth.

This was a, a very, significant part of their net worth.

And he assumed that account didn't exist, and I tried my best to, help him find the account.

and for whatever reason, he just didn't know where it was.

Right.

come the following year, he received his statement like he.

Like you should have and magically it appeared.

Right?

this goes back to one of my first episodes that I did, for this podcast called The Desk Drawer Theory.

Right?

and that is, making sure that you are organized right?

having.

Process in place to understand where your investments are, why you have them, the goals that you have, how are you achieving those goals through the investments?

'cause at the end of the day, the investments make everything go round and round, right?

Whether that's just starting to save or if you're in the later phases where the investments are actually producing income, right?

we ho luckily we were able to find that account and get that consolidated.

and he wasn't, Losing out on potential money that he could be, using for his retirement.

And back to the original statement, we wanna do, We wanna do an inventory, right?

We want to know where our accounts are.

We wanna know what funds in there, what the holdings in each fund.

So if you have an ETF or a mutual fund, what are they holding?

What's the objective of those funds?

If you hold individual stocks, why do you have them?

what are they, what are their, the allocations and so on and so forth.

And so having a full understanding.

And so the next thing you wanna do is look for duplication.

One of the next common things that I see is, someone may own VOO plus BTI or VOO and fx A IX, right?

All these are or ticker symbols, right?

their ETFs or index funds.

And they all mimic the same 500 companies or the same index, right?

If you have a net worth of a easy round number of a million dollars and you think you have two or three different ETFs, but you own two or three different ETFs that mimic the same index, then there's gonna be going to be a lot of overlap.

Or if you own mutual funds that are, similar and objectives, so large cap growth, while the manager may have some small differences.

there may be a lot of overlap.

So maybe you're heavy in tech or heavy in growth, or you're heavy in us and you don't have any exposure to, foreign allocation, right?

you want to check and see, do I have overlap?

Overlap isn't necessarily always dangerous, but if you have overlap, it can make your portfolio messy, harder to manage.

Or you just have less, intention on the objective that you want to achieve, right?

So why do we, maybe there's a reason for that overlap, right?

And so then we wanna evaluate the sector and style.

are we overloaded in tech?

Do we have, a large holding in US stocks when, maybe we wanted some more international or only US stocks and we wanted some international, or maybe we need some international, or are we all large cap growth?

And again, that's probably the most common thing I see, especially over the last five to 10 years as large cap growth has done really well.

If you've, only invested that you may be over concentrated and maybe you're at a place where, the volatility that you're going to receive from these different holdings, doesn't fit your objective anymore.

And maybe it does.

And maybe, having that over exposure isn't such a big deal.

And so these are the things that you just want to think through, right?

Making sure that you don't need to make any large adjustments or, maybe you just need to stay the course.

So hidden concentration can expose you to more risk than you think.

so you just want to be cognizant of that.

And so finally the last thing we wanna do is review tax location, which we've talked, a fair amount on this podcast about.

So what is tax location?

It just helps us determine how much tax efficiency we have over all of our accounts.

So where do our holdings live?

Is it in your Roth?

Is it in your taxable account?

Is it in your 401k?

Is it pre-taxed money in your 401k?

Is it Roth money in your 401k?

Do we have some after tax dollars?

where is this money living and does it make sense?

Is it efficient from a tax standpoint?

So the type of account determines the tax efficiency of the assets held inside.

So once you understand the map of your portfolio.

From a 30,000 foot view, your total investible assets, even down to the particular holdings that you earn hold inside each account and what that tax location or that tax efficiency looks like.

You're ready for the most important part.

And that, is deciding what deserves to stay.

So now that we've diagnosed what's in the portfolio, we understand what's in the portfolio.

Let's talk about the backbone, the pieces worth keeping long term.

When you look at, the portfolios of long-term successful investors, They all have one thing in common.

The core is simple.

They build around a low cost diversified index.

Index funds.

The steady.

Consistent performers designed to capture broad market returns.

These are the key positions, s and p 500 funds total.

US market funds, international funds, mall cap, and mid cap indexes.

make it.

Simple, right?

I'm a big proponent of keeping your investments simple.

Yes.

Is there a time and place where you want to be a little bit more complex?

Yes, there, there certainly is, but for the vast majority of your accounts and the vast majority of investors, we want to keep it simple.

And so the old adage of the KISS method, keep it simple, stupid, right?

These funds make up the backbone of your portfolio.

They don't require guessing, timing, emotion, it's a simple, portfolio, right?

They simply compound.

and if you're investing in a taxable brokerage account, there's an important note here.

ETFs are usually more tax efficient than mutual funds.

Even when they track the same exact index.

this is a little bit, I'm gonna aside if you have a taxable brokerage account, if you're doing the right things.

Uh, I talk about having a taxable brokerage account in most of my podcasts, especially when we're talking about investing specifically.

You're gonna want to either have individual holdings, which is, for a small select group of people.

but if you want to keep it more simple, ETFs are the way to go, not mutual fund, and here's why.

Mutual funds can trigger taxes inside the fund.

When investors buy or sell a mutual fund.

The fund itself has to buy or sell stocks that creates capital gains.

And those capital gains get distributed to all shareholders.

So there is, sometimes a scenario where you buy into, a mutual fund.

The mutual fund, the way that they calculate the prices of the share the nav, may go down.

But because of the transactions that had to occur inside that mutual fund, you may still owe capital gains taxes at the end of the year for that tax year.

and so ETFs, avoid these internal trades.

When you buy or sell an ETF, you're trading the shares with another investor on an exchange.

The ETF doesn't have.

Have to sell off any of the underlying holdings.

The ETF uses a in kind exchange the process with, large institutions that allows them to swap securities without triggering gains.

so this is what makes ETFs more tax efficient.

So you're going to want to use ETFs the vast majority of time.

over mutual funds inside of brokerage accounts.

So in short, mutual funds make internal trades that create taxes, ETFs, avoid those trades and avoid the taxes.

That's why, tax efficient ETFs are almost always worth keeping inside of a taxable brokerage account.

Lastly, keep purpose driven assets.

Roth IRA, we want growth style investments, this is our growth engine, HSA investments.

We wanna make sure that we have, growth oriented.

Investments is in there as well, but with enough cash to make sure that we can handle any medical expenses that we have, throughout the year.

Diversified allocation tied to a long-term goal.

So just making sure that we understand, is our goal or is our allocation meeting that, goal.

And remind yourself, keeping is a strategic choice, not the default.

Only.

Keep what is efficient, intentional, and aligned with your goals.

So if there's something that doesn't make sense, get rid of that holding right now.

Now that we know what deserves a place in your long-term plan, let's talk about the opposite.

The stuff that adds clutter, drag, and confusion.

What to sell.

This is where most portfolios need the biggest cleanup.

Here's what often ends up on the sale, or reduced list, redundant holdings.

So like I talked about earlier, if you're looking through your inventory list and you see that you own, three different 500, three different s and p 500 funds in one account.

maybe you can, consolidate those accounts, especially if it's in a retirement account and there's really no, tax consequences to selling these and consolidating them to one, multiple funds that own all the same.

So what we're talking about here is multiple funds that.

Own all the same underlying stocks, right?

So BTI and BOO, very similar holdings, right?

So we would potentially want to consolidate them again so that, It just makes it easier.

That's what we're, we're getting to keep it as simple as possible, right?

you want to evaluate your expense ratios.

If you're paying 0.6%, 0.8%, or 1.25% in expense ratios and getting index like returns, well, it's time to reconsider.

Should I just go to an index?

Right?

So I'm never going to, say that you should always pick the lowest cost investment, right?

you, there's certainly potentially value in paying for more.

But if you're not getting that value, why pay more?

Right?

so just like with any other thing that you purchase in your life, if there, if the value is not there, you're not going to pay for it.

So look at your investments and go, okay, the amount of return that I'm getting, if this is actively traded fund and it's supposed to beat the s and p, is that fun doing that?

And if it's not, go try to find something.

That meets that value, right?

Number three, older employer investments, managed funds, default allocations and leftover holdings from a job you left years ago.

Generally consolidating these either into your current 401k provider or into an IRA is a good idea just from a.

Keeping it simple standpoint, right?

if there are holdings there that you, you like better than your current 401k or that you can get in your IRA, then maybe you keep it.

but consolidating is generally the better idea, whether that be into a current 401k or an IRA.

and there's a lot of things to consider there.

I've done some podcasts on that, but, we wanna look at that number four, concentrated single stock position.

So anything representing more than 10 to 15% of your portfolio introduces unnecessary risk.

So you really want to take a look at, oh, I have this employer stock, or maybe I hit big on X, Y, Z stock.

And now it's 30, 40, 50, 60, 80% of my, my net worth or my investible assets.

Well, now you're starting to introduce unnecessary risk.

So how can we de-risk this?

Well, we can start looking at selling some of those positions so that we can de-risk and diversify, uh, over, multiple funds or, or ETFs, things of that nature, right?

Number five, tax inefficient active mutual funds.

So funds that distribute capital gains every year, especially in taxable accounts.

So if you have mutual funds inside of your taxable brokerage accounts, look at the 10 90 nines that you're getting from, from these accounts.

Are they producing a lot of capital gains?

Do they have a high turnover, which you can look at, the funds fact sheet, what does their turnover look like?

And if it's not great from a tax standpoint.

I'm sure there's another fund out there, another ETF, that you can get similar rate of returns and reduce some of those taxes, and then you can look at the after tax return and maybe if it.

Still doesn't, produce, uh, the same amount of return, but because of the taxes ends up beating, the tax inefficient fund.

that would make sense as well, right?

So we wanna look at that.

And before you sell anything, consider taxes.

Are there embedded gains?

So especially with these concentrated, positions, what are you willing to pay in capital gains?

can you spread that over multiple tax years?

Uh, what does that look like?

Do you have losses you can harvest to offset those gains?

Maybe you already have losses from previous years that you can offset from making some of these transactions or some of these cells should you trim position slowly over a few years, right?

These are all questions that you should be asking yourself.

So this phase is about removing clutter so that your portfolio becomes simple.

More intentional and easier to manage.

So we wanna make sure, that.

The goal here is to keep it simple, right?

Keep it simple.

Keep it simple.

That's the theme of today's podcast, once you, once the clutter is removed and the core is identified, the final step is bringing everything back into alignment, and that's where rebalancing.

Comes in, rebalancing is super important.

Rebalancing is how you maintain the structure of your portfolio over time.

It forces discipline, reduces risk, and ensures your investments align with your time horizon and goals.

So initially, when you set up a portfolio, you have an ideal allocation, and over time you'll have bigger winners, you'll have bigger losers, somewhere in between, and you'll have drift right.

maybe your large cap was 40% of your allocation, and because it's outperformed everything else, maybe it's 50 or 60% of your allocation now.

And so that doesn't align with that initial allocation.

And so what we wanna do is we want to rebalance so that we can get back to that original allocation, which this is going to force you to sell high.

And buy low, right?

Because you're gonna sell that allocation back down to 40% and you're going to use that cash now to buy the holdings that are less of an allocation now because of that drift.

Right?

And so maybe they're losers or maybe they're just less winners and they're at more of a value now, right?

And so rebalancing involves redirecting new contributions.

Triggering rebalancing involves redirecting new contributions, trimming overweight sectors, and adding to unrepresented areas, adding to underrepresented areas.

A good rule of thumb is rebalance annual and when your target drifts, anywhere from five to 10%.

so the way that I think about it is we're gonna rebalance, uh, at least annually in my client's portfolios, generally quarterly.

but we are gonna look for what's called opportunistic rebalancing.

Points in time, right?

So if there is a lot of volatility and that drift exceeds five to 10%, we will take the time to to rebalance, right?

Even if it's out of our normal scheduled time to rebalance and always rebalance in the most tax efficient count.

First, usually in your 401k or IRA to avoid unnecessary capital gains.

Yes, things can get sticky in your brokerage accounts, so we wanna be careful, uh, in the brokerage accounts when we're rebalancing.

So there's a couple different ways that you can rebalance inside of your brokerage account.

Um, if you're adding new money, you would just add that new money to those underrepresented areas, right?

Uh, that would be the, the easiest way, to do that.

So we would use new contributions, to add to lagging areas or underrepresented areas.

You could use dividends to do the same thing.

You could rebalance inside those IRAs first and use kind of your overall allocation of your total investible assets, So if you have, maybe.

a concentrated holding in your taxable records account.

You could rebalancing your IRAs and everything to accommodate that particular account, right?

and sell in your taxable only when it's strategic, right?

And so let's bring this all together with a simple checklist that we can walk through this week.

So action item.

This week we want to take a look at your portfolio, right?

And so these are the seven steps that you're going to want to do to make sure that you can do that, right?

So take this week to, to.

Revamp your portfolio, whether that's keeping it more simple, redirecting, uh, to make your tax location a little bit better, or getting rid, rid of some pesky mutual funds inside of your taxable brokerage count, whatever that may be.

And so here are the seven steps.

Number one, create that inventory.

Right.

Create it on an Excel sheet.

Write it down if you're old fashioned on a piece of paper, whatever that may be, of your holdings, where they are, what accounts, percentages, all of those sorts of things.

Identify those duplicates.

Maybe you have what you thought were two different ETFs, but they're really kind of the same thing.

Uh, flag overpriced or redundant funds.

Identify any single stock concentration.

So if you have one stock that is over 15 to 20% of your allocation, you should look at how can I best like de-risk this, uh, from my portfolio check tax location?

We wanna make sure that we're tax efficient, determine.

Your keep versus sell list, rebalance to your target allocation.

Do this once a year and your portfolio will stay healthy, organized, and aligned in your long-term goals.

This can make all the difference, over a long period of time, but it's something that you have to stay intentional with.

It's something that you have to stay on top of, and making sure that you.

Do this periodically.

This episode helps you think more clearly about your investments.

Make sure you follow the podcast and share this with someone that you think could use a portfolio refresh And if you want a deeper dive, if you want a second opinion or a full cleanup of your strategy tailored to your goals go to my website palm Valley wm.com and you can schedule a call with me and we can take a look at what you have going on.

Would love to help you.

And don't forget, take a quick second at Lead, a five star review on your favorite podcasting app.

Helps this show grow and keeps the content coming.

I'm Hunter Kelly.

Thanks for tuning in.

And remember, simplicity beats complexity and intention.

Beats, guesswork.

Keep your portfolio clean and your strategy clear.

This podcast is meant for educational purposes only.

It is not meant to be investment or financial planning and advice.

Do not make decisions solely based on this podcast alone.

Please seek professional help when considering your own situation.