If your investment portfolio were a movie, what genre would it be? Drama? Comedy? Adventure? Mystery? Horror?
In reality, all investment portfolios are comparable to a movie, where each person elects their own personal genre and classification.
My latest portfolio report card is for A.C., a married 44-year-old financial analyst from San Diego, California. A.C. says her main goal is to have enough money to retire. She says a little market risk doesn’t worry her because she has a longer-term view.
She self-manages her 401(k) plan and she considers herself an aggressive growth investor.
A.C. owns a total of nine mutual funds in her $182,357 retirement plan. What kind of grade will she get for her portfolio report card? Before I assign her a final grade, let’s analyze how she’s doing.
| A.C.’s $182,000 Retirement Plan | |||
|---|---|---|---|
| Allocation | Investment | Current Balance ($) | Shares or Units |
| 29.89% | BTC LIFEPATH 2035 G | $64,325.86 | 4,583.965 |
| 19.10% | TGP LG CAP CORE GRTH | $41,098.58 | 2,910.756 |
| 15.46% | DODGE & COX INTL STK | $33,266.42 | 712.038 |
| 13.53% | SPTN 500 IDX ADV IS | $29,122.50 | 409.772 |
| 8.01% | GENEVA SM CAP GROWTH | $17,230.69 | 1,582.248 |
| 7.78% | FID EQUITY INCOME k | $16,746.74 | 297.093 |
| 2.42% | VANG TOT INTL STK IS | $5,217.64 | 45.108 |
| 2.30% | SPTN EXT MKT IDX ADV | $4,957.30 | 89.176 |
| 1.49% | VANG TOT BD MKT INST | $3,215.85 | 296.392 |
Diversification. Truly diversified portfolios are never concentrated in one stock or mutual fund, but rather have adequate exposure to all of the core or major asset classes. How does A.C. do?
A.C.’s 401(k) account holds U.S. large- cap stocks via the Fidelity Spartan S&P 500 Fund, small cap stocks via the Geneva Small-Cap Growth Fund, international stocks via the Dodge & Cox International Fund and bonds via the Vanguard Total Bond Market Fund.
Unfortunately, her portfolio owns too much of the same thing in a few places: large-cap and international stocks.
For example, her largest holding (30 percent of her account) is a target-date fund called the Blackrock LifePath 2035 Fund, which already has broad exposure to domestic and international stocks along with bonds.
Yet, A.C. duplicates some of her exposure to the same asset classes held within BlackRock LifePath 2035. In the large-cap area, for instance, she owns three funds that offer exposure to these types of stocks: Fairholme Fund, Fidelity Equity-Income K Fund and the T. Rowe Price Large Cap Core Growth Fund. Simply put, it’s overkill.
Lastly, A.C.’s portfolio misses exposure to major asset classes like commodities, international real estate, and Treasury Inflation-Protected Securities.
Risk. A.C. described herself to me as an “aggressive growth” investor. If that’s true, then her portfolio should match that description.
Her current asset mix has 98.5 percent exposure to stocks and the rest to the U.S. bonds. She’s in her mid-40s which gives her a relatively long investment time horizon of 15 to 20 years before retiring. It also means (theoretically) she should be able to tolerate significant declines of 25 percent or more without panicking. This is easier said than done. I’m also not sure 98.5 percent exposure to a global stock market that declines 50 percent would sit too well with her.
There are degrees of aggressiveness and I would classify A.C.’s current asset mix as hyper-aggressive rather than simply aggressive growth. Has her current portfolio’s asset mix overstated her true risk capacity?
Cost. As mentioned earlier, A.C.’s largest holding is the BlackRock fund, which charges annual expenses of 0.11 percent. Her other four largest holdings charge annual expenses between 0.02 percent up to 0.64 percent.
It seems like she’s made a deliberate effort to contain cost by keeping her money in the lower cost mutual fund choices within her 401(k) plan. This strategy will help her to keep more of her performance returns where they belong: in her pocket.
Tax-efficiency. A.C. has no outstanding 401(k) loans that could pose a tax liability to her retirement plan if she leaves her job without paying back the loan in full.
Performance. It’s always a red flag whenever I grade investment portfolios that are unable to match or exceed the performance of a blended mix of passive index funds or exchange-traded funds.
From July 2013 to July 2014, A.C.’s investment portfolio grew from $157,785 to $182,357 for a 15.5 percent gain. Meanwhile, a portfolio of passive index ETFs that reflect an aggressive investor (matching her profile) gained 19.2 percent with annual fees under 0.20 percent.
Summary. A.C.’s final Portfolio Report Card is a “C.” This means her investment plan has major structural flaws.
Although she did OK on keeping the costs of her retirement plan down, her 98.5 percent exposure to stocks is well-beyond aggressive — it’s hyper-aggressive. Also, she has an overdiversified portfolio that’s cluttered with too many funds that own the same types of assets.
Finally, her lackluster 1-year performance of almost 4 percent less than a portfolio of market index funds is unacceptable.
On a positive note, A.C. still has a long time horizon before retiring. That means the sooner she makes improvements to her portfolio, the sooner she can start seeing positive results. The compounding effect of doing things right over a few decades is tremendous.
Ron DeLegge is the founder and chief portfolio strategist at ETFguide.com. He invented the Portfolio Report Card to help people understand the strengths and weaknesses of their investment portfolios so they can make better choices. Ron is also a radio host of the Index Investing Show and author of “Gents With No Cents: A Closer Look at Wall Street, its Customers, Financial Regulators and the Media.”
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Portfolio Analysis: A Hyper-Aggressive $182,000 Retirement Plan originally appeared on usnews.com
