It’s a distressing thought that your portfolio can be subject to limitations, but once you consider the various ways in which your portfolio might be constrained, you have the opportunity for making changes that enhance your ability to increase your wealth while protecting your gains.

Let’s take a look at how your portfolio’s performance could be restricted.

1. Time Horizon: This is a factor you probably don’t have much control over. We all know there is a strong likelihood your portfolio will eventually need to shift into more conservative holdings. Hopefully you began setting aside funds and made good investments at a very young age, and you’ve enjoyed the benefit of a long time horizon. As we know, time is an investment ally when you have a lot of it. If you began investing late in life, the limitation of years you’ve had to build your wealth might be a limiting factor when you reach retirement.

2. Taxes: Taxes can have a potent influence on your investment results, which is why taxes should be carefully analyzed for their influence on your wealth-building efforts. Even though your portfolio might be creating impressive gains annually, what really matters is how much money you retain after taxes have been paid, or will be paid as capital gains in the future. This is why investment advisors recommend you consider investment choices such as tax-deferred or tax-free investments compared with the apparent value of investing in income producing or capital growth investments. One person’s champagne is another person’s soda water, and every situation is unique to that particular investor’s circumstances. Even so, a conversation with your financial planner about the value of tax-deferred and tax-free investments in your portfolio should be considered.

Taxes are the #1 predator eroding your wealth, so considering the issues of whether to have an active or passive investment strategy for particular asset classes, noting that portfolio turnover accelerates taxes in taxable accounts, evaluating the impact of ordinary income tax rates and capital gains tax rates on your portfolio and estate, and contemplating ways to transfer your wealth and limit gift and estate taxes is worthy of considerable reflection.

3. Liquidity: There are times when you may have the need to convert assets into cash, but the cost of converting your assets’ value is too high to consider because of the penalty, which could come from volatile markets, fees, and/or taxes. Therefore, a certain amount of your portfolio may need to be held in cash or cash equivalents in order to provide required liquidity. While this might be a good tactic, your security with having cash available will also restrict your rate of return.

4. Legal: Oh, just think about all the limitations legally placed upon your portfolio! All the regulations and requirements and rules… As you know, there is a mountain of traffic lights that are green, amber, and red. Always seek the advice of an attorney for any concerns you have regarding your investment accounts’ legal and regulatory constraints.

5. Marketability of Assets: Some assets have surrender charges, and may also contain management or participation fees. Some of these features may be inappropriate or prohibitive as a good choice for your portfolio. When making a decision to purchase an asset, you have to be aware of limitations placed on your investment by fund managers and always consider the eventual cost of your exit.

6. Diversification: Perhaps your investments are limited to certain asset classes, which therefore control your portfolio’s exposure to market influences that may be more or less beneficial than the selections you’ve included. By carefully positioning your investments in asset classes designed to either increase and/or safeguard your wealth based on your personal financial need, you can use diversification to your advantage rather than being victimized by it.

7. Social: Social constraints on funds are also popular, since some investors choose to buy only ‘green’ or do not invest in companies that make armaments or pollute the planet. An investor who makes a conscious decision to invest with a social constraint understands that returns might not be as grand as investments in other companies, but is willing to accept a lower return in exchange for moral peace of mind.

8. Fees: Hopefully, this is not an alien topic and you’ve reviewed the variety and cost of fees you’re paying to invest in a fund. Many of these fees are disguised, so it would be a great help to have a discussion with your financial planner about the kinds of fees your portfolio is paying and how you might save some of your wealth by transferring to less costly management. Of course, it could be worth your while to work with a financial advisor who receives compensation as a fee-based advisor.

We hope this article about understanding the ways in which your portfolio may be constrained will lead you to a discussion with your financial advisor that opens the door to a more appropriate and better crafted portfolio designed around your specific financial requirements. If you’d like to discuss the possibilities of re-creating a more customized portfolio, we would love to meet with you and discuss your interests. Please give us a call. Thank you! 

Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM

Synergy Financial Management, LLC

13231 SE 36th Street, Suite 215

Bellevue, WA 98006

ph: 206.386.5455

fx: 206.386-5452

www.sfmadvisors.com