How to Measure Portfolio Complexity

I recorded a new YouTube video this week about the various benefits of a simplified retirement portfolio and how to get there (I’ll share when it’s live).

Most of us — myself certainly included — have a portfolio that is more complex than we want it to be or that it should be.

Complexity does not lead to higher returns for DIY investors. Generally, greater complexity leads to lower returns (and heavier burdens to manage the complexity).

This is just one of many valid reasons to reduce complexity, as I highlighted in the first video of my mini-course.

Reducing complexity isn’t a quick fix, especially if you have several holdings in a taxable account (like I do).

The first step in reducing complexity is to stop making things more complex!

Then reverse it strategically over time.

I don’t regret building a taxable account of individual stock holdings that pay me dividends. I built it after maxing out retirement accounts and index funds.

The taxable account is a workhorse portfolio, providing me with income and flexibility while self-employed.

But I don’t want to be managing a complex investment portfolio in retirement, so I’m slowly making it more manageable by reducing holdings, accounts, and overlap.

Working on the video made me wonder whether there was an industry-standard way to measure portfolio complexity, particularly for DIY investors.

So I went down the AI rabbit hole to learn that several white papers and patents exist about measuring portfolio risk and complexity.

But these published writings are mathematically complex, overly academic, and geared more toward institutional investors and high-end wealth managers rather than DIY investors.

So, at the AI’s gentle urging, I asked it to develop a framework for measuring retirement portfolio complexity for DIY investors.

The results were satisfying. Yet, not something I would have spent a lot of time on without the AI.

The AI gave me eight portfolio complexity metrics and a scoring system to assign a rating (which could help someone track improvement).

I’ll spare you the scoring system, but share the eight metrics and some commentary.

1. Fund/Asset Count

• Definition: The total number of individual positions (ETFs, mutual funds, individual stocks, etc.) across all investment accounts. 
• Rationale: Each additional holding increases monitoring, rebalancing effort, and behavioral drag.
• How to Measure: Count holdings.

This was the most obvious measurement. The number of holdings certainly adds to complexity, which is why I consider my own retirement portfolio too complex. I’m lowering the number.

2. Asset Overlap

• Definition: Measures how much each fund duplicates investment exposure (e.g., owning both the S&P 500 and Total US Market Index).
• Rationale: Redundant funds add no diversification benefit but increase cognitive load.
• How to Measure: Use a correlation matrix or fund holdings data (The Morningstar Stock Intersection tool does this well).

Asset overlap is a common oversight for most DIY investors. For example, if you own VOO and VTI (S&P 500 index and U.S. Total Market Index ETFs), they are approximately 87% the same. 

That’s because both are market-cap-weighted ETFs. So NVIDIA, Microsoft, Apple, etc., down the list of largest holdings, are heavily weighted in each ETF.

Even though VTI has about 3,700 holdings vs. 500 for the S&P, the return impact on your portfolio is minimal. But by owning both, portfolio complexity increases.

Furthermore, if you own NVIDIA stock outright, you’re doubling down on what you already own (because it’s the largest holding in many funds).

3. Account Dispersion

• Definition: Number of accounts across which the retirement portfolio is spread (e.g., 401(k)s, IRAs, taxable, SEP IRA, spouse’s accounts, HSA).
• Rationale: Complexity rises with fragmented accounts that require separate or aggregated rebalancing or tax considerations.
• How to Measure: Count brokers and accounts.

How many brokerage providers do you use? How many total accounts across providers do you have? How do you justify keeping them all?

Most of us only need one traditional IRA, one Roth IRA, and one taxable account. 

If you and your spouse each have that many, that’s six accounts! That certainly adds complexity when you’re trying to manage a portfolio or rebalance. 

But many of us have several more, because of switching jobs, one-time transfer or signup bonuses, or whatever’s led to more accounts.

Aggregator tools like Empower and Morningstar can help when it’s time to rebalance. But ultimately, headed into retirement, you want to get most or all of your money under the same roof. 

I just completed consolidating two former employer accounts into my IRA. It was a pain; I had to call them, print forms, and get signatures notarized. Now that it’s done, it was worth it. But the formalities made it easy to procrastinate. 

4. Asset Class Breadth

• Definition: Number of distinct asset types represented (e.g., U.S. equity, international equity, U.S. bonds, REITs, TIPS, commodities, small-cap value tilt, Bitcoin, gold, alternatives, etc.).
• Rationale: Each new asset class adds tracking and rebalancing decisions.
• How to Measure: Count the types of assets you hold.

Many of us hold U.S. stock and bond funds, and that’s it. But with so many choices out there, we can expose our portfolios to so much more. 

As you own more asset classes and diversify, the complexity of your portfolio increases. Especially if you need new accounts to hold crypto, venture capital, or crowdfunded assets like real estate.

Diversification is an important part of building a secure retirement nest egg. But we can achieve diversification with low complexity and minimum overlap. 

5. Maintenance Burden

• Definition: The frequency of maintenance or intervention that is required.
• Rationale: A simple 3-fund portfolio may require 1–2 trades a year; a 20-fund global portfolio with individual stocks and other assets may require many more. 
• How to Measure: Average annual trades per account, number of manual transactions, or tracking spreadsheets required.

Owning a wider variety of assets may require more tinkering with the portfolio, and that’s what you want to avoid. Tinkering reduces returns and increases behavioral risk. 

A cleaner portfolio will require less maintenance and thought, and therefore, less of your time and attention.

6. Understandability

• Definition: A qualitative measure of how easily you (or your spouse/heirs) can describe what the portfolio owns, why it owns it, and how it’s managed.
• Rationale: Complexity is “bad” when it reduces clarity and discipline. Understandability bridges those dimensions — it measures behavioral simplicity.

Ask yourself three questions: 

• Can you explain your portfolio’s goal in one sentence? “This is a 70/30 global index portfolio for retirement income.” “It’s a mix of growth funds, some tech stocks, and alternative assets”.
• Can you name what each fund or stock does in 10 seconds or less? “VTI = total U.S. stock market.” “FSSNX… I think that’s small-cap?”
• Could your spouse or child manage it if you weren’t around? Yes, the instructions are simple. No, they’d have no idea where to start.

Most intermediate DIY investors would pass this test. However, I see scenarios when investors don’t understand what’s in their portfolio, either because an advisor set it up or they never understood what they were buying. 

For example, a popular dividend ETF called JEPI has a high yield, but makes its income from selling covered call options. Plenty of DIY investors hold that ETF for the high yield, without understanding it. 

7. Rebalancing Complexity

Definition: The effort required to bring the portfolio back to target allocations.

Rationale: Even a simple-looking portfolio can be a pain if assets are scattered across tax-advantaged accounts, brokerage platforms, and fund families.

I recommend DIY investors only rebalance once per year. This should not be a complex endeavor. The task usually entails swapping a portion of stock funds for bond funds. 

This item ties back to the first and third items on the list. More accounts and holdings make rebalancing more challenging. 

I made a video about rebalancing a complex retirement portfolio and the tools available to help. 

8. Tax Coordination

Definition: The degree of planning needed to keep your allocation tax-efficient across different account types (taxable, IRA, Roth, etc.).

Rationale: Sophisticated tax placement (e.g., bonds in IRA, stocks in taxable) can improve asset allocation — but adds complexity that many DIY investors mishandle.

If I were the AI that put this together, I would have raised this one into the top five. That’s because it’s an issue I face right now, holding several individual stocks that have risen 100+% in a taxable account. 

Sure, it sounds like a good problem to have. But I can’t just sell holdings, because some sales would increase my taxable income, which can impact estimated tax payments, health care costs, and Roth Conversions.

Alternative assets can cause problems, too. If you invest in some types of real estate or partnerships, you may receive a K-1 instead of a 1099, which complicates taxes and may require the hiring of a CPA to do your taxes. 

As I “unwind” my own taxable portfolios over the next decade, this tax issue is the biggest.

That’s why I’m taking dividend and capital gain proceeds and using them as Roth IRA contributions, getting the cash into a long-term account with no tax consequences.

Retirement portfolio planning is a bit like health and longevity planning — the earlier you start making positive changes, the better off you’ll be down the line. 

A simpler DIY retirement portfolio isn’t just easier to manage — it’s easier to live with.

Less tinkering, fewer logins, and clearer goals all lead to better long-term results, less work, financial clarity, and a simpler estate.

If your retirement portfolio is more complicated than you want it to be, start simplifying now.

Look for efficient ways to streamline your portfolio while approaching retirement, so you’ll have more time away from a computer screen when you get there. 

Featured photo by Patricia Serna via Unsplash