Why Is One of My Investment Accounts Underperforming?

Welcome to 2016. In this new year, let’s explore some of the questions we hear most often when speaking with clients. We’ll lead with one that may be top of mind as you’re reviewing your year-end reports and considering where you stand in the roller coaster markets we’re enduring at the moment: 

Why is one of my investment accounts underperforming?

We hear this question a lot, especially when the market is particularly moody (which, let’s face it, is quite often). For example, clients will come to us after noticing that their Roth IRA seems to be steaming ahead of their Traditional IRA; they wonder if something needs to be adjusted. We sometimes hear a similar question about why one account’s returns are more volatile (swinging up and down more wildly) than another. 

These are logical questions. Fortunately, we’ve also a got logical answer. To cut to the chase, if your accounts have been optimized for their intended roles within your overall investment portfolio, then the differences are there by design. In fact, we’d be more worried if they were not operating as described. 

For example, because Roth IRA withdrawals are tax-free in retirement, your Roth IRA account is often the preferred location for holding your least tax-efficient stocks. These are the ones that exhibit more volatility in the near-term, but deliver higher expected returns over the long haul. By placing these in your Roth IRA, you’ll avoid paying taxes on the higher expected gains when you begin to withdraw the assets. 

Your Traditional IRA is often the most appropriate location for your fixed income (bond) investments, which are expected to perform more consistently but with lower returns. Your IRA is more conservative because, when the money comes out, you have to pay taxes on it at your marginal (ordinary income) rate, which is usually higher than the capital gains rate.

Last but not least, the remainder of your holdings tend to be placed in your taxable accounts. 

The considerations involved actually get more complicated than I’ve described here. Other factors come into play, such as tax-loss harvesting and tax-efficient estate planning. But bottom line, it’s best to think about the investment performance of your total portfolio rather than its various accounts. Doing otherwise is like comparing the “performance” of the tires versus the engine in your car. The comparison just doesn’t translate into a meaningful insight. As we build portfolios for our clients, we look at the portfolio as an entire vehicle, with each part playing its own, distinct role in helping you reach your desired destination. 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

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