Christine Benz, director of personal finance at Morningstar, offers a candid look into her investment choices, revealing common pitfalls faced by many investors approaching retirement. Benz’s portfolio presents several areas of concern, primarily revolving around excess employer stock holdings, a significant accumulation of cash, a skewed allocation to fixed-income investments, and difficulties with “asset location,” the strategic placement of assets within different types of accounts to minimize tax liabilities. These issues stem, in part, from a pattern of inertia and a reluctance to make proactive adjustments, despite recognizing the problems.
The first and perhaps most significant issue Benz identifies is her substantial holdings in employer stock. She acknowledges that she initially understood the tax implications of Restricted Stock Units (RSUs) and the potential to immediately sell them upon vesting, reasoning that no tax benefit would be gained by holding them longer. However, this understanding was largely overridden by inertia. The looming prospect of a large tax bill triggered a reluctance to sell, leading to a considerable accumulation of company stock over the years. Benz’s approach highlights a common challenge: recognizing the logical action while failing to execute it due to psychological barriers, particularly the fear of taxes.
Beyond the employer stock, Benz has steadily built up a large cash reserve within her investment portfolio. While higher cash yields are attractive in the current interest rate environment, she notes that inflation continues to erode the purchasing power of that cash. This accumulation has occurred through bonuses, windfalls, and periods of reduced spending, such as during the economic downturn of 2020. The cash is viewed as a “luxury good,” offering a sense of security and flexibility—an understandable response for many investors—but one that ultimately creates an inefficient allocation of capital. The decision not to actively move the money into longer-term investments reflects a prioritization of peace of mind over optimal portfolio construction.
A noticeable imbalance in her portfolio is the limited allocation to bonds. Benz admits that she and her husband initially established a portfolio with heavy equity allocations in their 30s and have largely maintained this approach. However, as they approach retirement, she recognizes the importance of incorporating fixed-income investments, which can provide stability and reduce overall portfolio volatility. The “psychological” element of the cash and equities is also acknowledged – the liquid assets provide a sense of security, allowing investors to remain committed to their stock holdings. Yet, the deliberate lack of bonds points to a delayed acknowledgment of a critical element in a retirement portfolio.
Another area of concern revealed by Benz’s portfolio is her difficulties with “asset location.” She owns a particular fund within her taxable brokerage account, despite recognizing that it generates significant capital gains distributions over time, which would have been more effectively managed within a tax-sheltered account, such as an IRA. Benz explains that fixing these “asset location problems” is notoriously difficult, even when reinvested capital gains have helped boost her household’s cost basis. This highlights the complexities of tax-advantaged investing and the potential for unintentional tax liabilities when assets are not strategically placed.
Finally, Benz admits to inconsistencies in her approach to retirement savings. She has been slow to make IRA contributions, often delaying them until the last minute, sometimes by as much as 15 months after the deadline. Similarly, she has hesitated to convert traditional IRA assets to Roth accounts, allowing contributions and conversions to accumulate over several years before finally taking action. While strategic conversion opportunities exist, such as during the 2020 market downturn, Benz’s delayed action underscores the importance of discipline and proactive management, especially as retirement nears. This article was provided to The Associated Press by Morningstar. For more personal finance content, go to https://www.morningstar.com/personal-finance Christine Benz is director of personal finance for Morningstar.
