To Create a Successful Investment Plan, Coordinate Your Assets

Does this sound familiar? You graduated from your residency more than 10 years ago. You switched jobs a few times. Sometimes you were an employee and other times an independent contractor. You got married and your spouse also had a few different jobs along the way. Now you have kids and don’t have much time to manage your finances.

One day, you decide to take an inventory of your investment portfolio, which might look like this:

Now you realize that instead of having an investment plan you have investment chaos. Here’s how you turn the chaos into harmony:

Step 1: Determine your asset allocation. Asset allocation is the process of constructing an investment portfolio through various investment classes to meet your financial goals and risk and return objectives. A big mistake I’ve seen many physicians and financial advisors make is that they don’t create a unified asset allocation across all of their accounts. Instead, each account has a separate allocation. In the end, only the overall asset allocation of the portfolio matters, not what each account is doing.

Step 2: List all accounts you own by type of account. This is shown in the table above, but you should add the custodian and balances of each account. Common types of accounts include: IRA, SEP IRA, Roth IRA, 401(k), 403(b), 457, defined benefit, and taxable.

Step 3: Break down each account by tax category. Make this simple by grouping accounts into three tax categories: tax deferred, tax free, and taxable. This is important because you may want to consider placing tax inefficient investment classes in tax-deferred accounts.

Step 4: List all investment choices for each account. If you have an employer-sponsored retirement plan, you may be restricted to certain mutual funds, but in other accounts you might be able to access almost any funds. For the latter wide open accounts, you’ll have to determine which specific funds to use. If you’ve got multiple funds within the same investment class, look at the internal expenses of each fund and rank them from low to high. Generally, the lower cost funds tend to perform better.

Step 5: Match all investment choices with specific investment classes. Remember, you’ve already created your asset allocation, which should include the proportion of your portfolio you want in specific investment classes. Now you need to match each fund with its respective asset class.

Step 6: Fill it in. You are now ready to allocate each specific fund you’ve chosen to specific accounts categorized by tax status and taking into account the fund choices within each account.

Step 7: Maintenance, maintenance, maintenance. You’ll probably realize from the previous step that much of what I told you conflicts with each other. For example, let’s say you want 30% of your asset allocation to be in international stocks, but the accounts you want them to be in happen to offer very high-cost funds. Or perhaps you just run out of room to place certain investment classes in certain tax categories. In those cases you’ll have to make a decision and may have to adjust your asset allocation altogether and go through this exercise again. On top of that, you’ll have to consider future contributions into each account and factor in all of this again. Then, what if the investment choices change?

The bottom line is that you’ll have to do this on an ongoing basis to make sure you’ve got a real investment plan.

Setu Mazumdar, MD, CFP, is board certified in EM and he is the President of Financial Planner For Doctors. FinancialPlannerForDoctors.com