Many in the Monevator community ask about how to manage multiple portfolios, especially as part of a single family household.
Reader Sunil sums up the dilemma:
I understand the importance of diversification, but what about across multiple portfolios?
I have a SIPP and ISA, and run a SIPP and ISA for my wife. That’s four portfolios.
I’m not sure it’s prudent to pick the same set of funds for each, or even the same kind of asset split across all four.
I find it incredibly difficult to decide across four portfolios. Add to that, both my kids now have ISAs – I might end up running six portfolios!
The standard advice is that different investment objectives are best handled by separate portfolios, each with their own asset allocation.
For instance it’s very likely that the goals for kids’ ISAs are quite different to that of the adults in a household.
The latter tend to be into boring stuff like retirement. Children less so!
One thing to rule all your multiple portfolios
When family members share an objective, the standard advice is to treat your various accounts as a single portfolio.
That keeps things simple – assuming you have joint finances.
With the single portfolio mindset, there’s no need to replicate your 5% gold allocation, say, across four different accounts. You can keep your gold fund in one place and so avoid multiplying your dealing fees per account.
This ‘notionally single portfolio’ approach helps with tax-planning, too.
For example, you could tilt towards equities in your ISAs, and bonds in your SIPPs, to avoid breaching the Lifetime Allowance on your pension.
To recap, the basic advice is:
- One family portfolio per shared investment objective
- Spread across multiple accounts as needs be
- Using a single asset allocation
I recommend keeping track of this gestalt portfolio with a tool like Morningstar’s Portfolio Manager.
The tax problem with multiple portfolios
That’s the standard advice, and it’s perfectly sound.
I came to regret it, however.
I ran the family Accumulator’s accounts as a single portfolio. We held different equity sub-asset classes in our SIPPs and all seemed well.
But one sub-portfolio did much better than the other. And so one now looks like the pumped-up arm of an Olympic javelin thrower. The other like a T-Rex’s puny forelimb.
Okay, the difference isn’t that extreme but one portfolio has certainly been much luckier than the other.
That’s because it holds the lion’s share of our US equities. And they’ve beaten the bejesus out of everything else.
As a consequence, we’ll have to drawdown harder on this over-performing portfolio.
A more even split of our bills would be more tax-efficient. Now we’ll pay more income tax as one SIPP portfolio tunnels more deeply than anticipated into a pricy tax bracket.
A richer family than ours could also trigger Lifetime Allowance events if one of their SIPPs was particularly over-stimulated.
If your SIPPs won’t dance on the borders of the tax bands then it won’t matter. But for anyone young-ish or rich-ish, that’s hard to predict.
It’s not just SIPPs
You could also face the same predicament if one family member’s General Investment Accounts bursts its tax-free banks excessively.
Theoretically this shouldn’t matter for stocks and shares ISAs because they’re tax-free.
Except they’re not quite… Because if you die (god forbid) then ISAs lose their tax shield – in the event that you pass them on to anyone except your spouse or civil partner.
That would include your unmarried partner, kids, or favourite pet gerbil.
In these cases your ISAs also fall into the Sarlaac Pit of inheritance tax. And hence they are no longer really tax-free.
ISA assets affect your eligibility for many mean-tested benefits, too, whereas pre-retirement assets sitting in a pension scheme do not.
Being caught out by any of these scenarios might leave you worse off as a family unit than if you’d just set up two mirror portfolios.
In retrospect, I wish I’d mirrored our respective holdings so we could spread the tax burden more evenly across our tax allowances.
Of course, mirror portfolios do double your dealing fees.
But you can dodge that hit by using multi-asset funds like Vanguard LifeStrategy, or at least minimise the impact by choosing simple two or three fund portfolios.
Lopsided portfolios could also hurt if your investment platform / broker goes bust. Your assets are likely to be frozen while the administrator cleans up the mess.
What’s that? You had the foresight to open your partner’s accounts at a completely different platform that’s unaffected by the upheaval?
Okay, but sadly your broker was swept away in an economic tsunami that’s also wiped double-digits off your partner’s portfolio because the low-risk bonds were in your accounts.
And let’s say in this (hypothetical, somewhat extreme) example that it takes more than a year to unfreeze your assets.
Meanwhile, household bills surround you like kung-fu baddies. The only way to fend them off is by selling your partner’s equities when they’re down. Which is something that ideally you’d never want to do.
Granted, this is a low-probability scenario. But it’s one you can strike off your worry-list by maintaining a strong slug of low-risk assets in both partners’ portfolios.
Ask the Monevator massive
These may be edge cases but the standard advice doesn’t always apply when it collides with the quirks of the UK tax system. I had no idea The Accumulator family would be an edge case when we started out.
I’m interested to hear how the Monevator community manages multiple portfolios. Please let us know how your household handles this problem in the comments below.
Take it steady,