Strategies to simplify a portfolio
I didn't start out with a Simple Path to Wealth/FI-style portfolio and would like to simplify mine, beginning with a Roth account. My accounts have always been self-managed and have done well; but, I would like to simplify them. I remember reading that JL Collins used to have individual stocks but no longer does. He doesn't detail how he made the shift, just that he did. Eventually I want to do this with a taxable account as well, but that process will be more complicated due to the tax implications. Has anyone else gone through this process? If so, did you do it all at once or piece by piece? I have reached FI and am essentially retired at age 60.
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I used to play the market as a hobby in my spare time and ended up with a portfolio worth almost $300k in my after tax brokerage. A few years ago I made the same decision as you did, to simplify my life and get out of the game of individual stocks. But instead of selling all the stocks right away and incur a big tax bill, I simply started to contribute all new money to ETFs ( as I am still working). My wife and I are big believers of tithing and giving to worthy causes, so I started donating appreciated stocks instead of cash, and selectively sold losers for tax loss harvesting. On average we gave away $20k to $30k worth of stocks a year, but since the market has been so strong over that time, the balance of the whole portfolio has not dropped too much. It’s kinda fun to pick which stock to give away every month and it’s easy on my psyche because I don’t have to worry about the tax consequences. So if you are charitable minded, this is another tool to help you “balance” your portfolio.
This is a good strategy. I don’t itemize at this time. As such, I don’t have access to some of the tax deduction vehicles that itemizers have, including donating appreciated stock and donor advised funds. I am charitably minded and plan to use the QCD to give from my traditional IRA when I am eligible. A family member used to do this — it was really effective. He would give away a large amount of money via QCD every year, and the account would grow back, which of course will not happen in every year. If at some point it makes sense for me to itemize, I would do what you’re doing.
If it doesn't make sense to itemize in a given year, you can give like 3 years' worth of appreciated stock donations to a Donor Advised Fund and itemize in that year of donation, then the following years you don't donate any more to the DAF but can make charitable distributions from its balance while claiming the standard deduction.
Ok - good thinking here - thanks.
Adding to the other comments, you don’t need to itemize to benefit from using a DAF or donating appreciated stock (Donations In Kind, or DIK).
The immediate benefit is flexibility: you can offload positions you don’t want or reset your cost basis with zero tax friction. When you donate shares, you transfer them directly to the nonprofit (no taxable event for you). The nonprofit can then sell the shares tax-free.
You then take the cash you would’ve donated and repurchase the same (or similar) investment. You end up with the same market exposure, but with a stepped-up cost basis (which reduces future capital gains taxes).
My wife and I do this every month with our own charitable giving. We don't itemize and we don't build up our donations over years to try to have one year of itemizing.
Okay, thanks.
You seem already to know that there are no tax consequences for trading inside a retirement account—as long as the money doesn't leave the account, selling shares inside a retirement account isn't a taxable event.
I think then what you're maybe asking is how to decide what your future simplified portfolio holds? For that you first need to know what withdrawals your portfolio needs to support. Then you can choose an asset allocation that supports that withdrawal rate.
So before you make any trades I think you have some homework to do. Fortunately there's a top notch resource for learning how to construct a portfolio for living off of. Check out this episode of the Risk Parity Radio podcast, hosted by 
UncleFrank. If the episode clicks with you, you can go back and listen to the foundational episodes which you can find on the website's episode guide.
- Episode 190: Portfolio Construction 101, Golden Ratio, I-Bonds, And Portfolio Reviews As Of July 15, 2022
Yes - thanks - helpful observations. I will listen to this later today.
Really top notch!
I listened to that episode. It was interesting. I started to wonder if anyone uses the automated portfolios that brokerage companies offer to approximate some of these allocations (eg Schwab automated/intelligent portfolios or equivalent)? Perhaps that’s another question for the forum?
That would be a great discussion for the forum. I’ll say even if you opt for automation, you still should do the upfront work of deciding what asset allocation is appropriate for your needs. AFAIK brokerage robo-portfolios in general give you only limited control over what you hold. So what Schwab's product offers may not match what you decided you need.
It might be interesting though to run your preferred portfolio against the portfolio(s) Schwab suggests for you in a tool like testfolio that Joe suggested to compare returns, max drawdown, volatility, etc.
Look also at what you would pay for the service. Schwab collects its fee by having you hold a certain percentage in cash and they take the interest. This percentage can be high, or at least higher than the percentage of cash you would otherwise have chosen on your own.
Thank you - I will also make a new post on this topic. I haven't yet gone forward with an automated portfolio because the process of choosing an allocation, and the options for tweaking it frustrate me (too rigid). Schwab makes money on the cash in their automated products, which is how they avoid fees, but the higher risk allocations don't have an outsized cash position. Still reviewing my choices.
I just did this transition 2 years ago in my brokerage to a risk parity style portfolio and have talked through the process with others.
Know exactly what you’re trying to go to. Understand what you have and how close it may be (run correlation analyzer in testfol.io and check out Morningstar style boxes). In taxable take any potential tax loss first. Then look by individual lots to see what you can sell for loss or small gains. From there it’s a decision on taxes vs getting to what you want.
If you’re retired then can you set a year aside to limit income so you can maximize 0% taxable gains (which can be upwards of $100k if MFJ)? Or split it out between multiple years to limit taxes.
One thing to do is look what is worst case, if sold all now how much tax would it be paid? In one scenario it was a $30k tax bill for $1m of assets being freed up, yea don’t want to pay taxes if don’t have to but not as big of an issue as it seemed.
Happy to chat through in more detail.
Thank you - I will start with your suggestions to run scenarios. I may reach out to chat. Much appreciated.