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Portfolio Analysis: a Hyper-Aggressive $1.29 Million Portfolio With Holes

By U.S. News & World Report

It’s commonly and incorrectly presumed that people with large investment portfolios are smart investors. But as counterintuitive as it may sound, this false presumption is simply not true. How do I know?

Because I’ve analyzed and graded many multimillion dollar investment portfolios ($27 million is the largest one I’ve graded so far this year) using my Portfolio Report Card grading system — and many of these very portfolios have flunked on cost, risk, diversification and performance.

What’s the basic translation? Being a good saver doesn’t automatically make a person a good investor. On the other hand, combining a good savings habit along with a militant approach toward investment costs, risk, diversification and taxes should lead to the satisfactory performance you seek.

My latest Portfolio Report Card is for a married couple, SMB, living in Houston. Both are in their early 50s and they asked me to grade their combined $1.29 million investment portfolio that consists of two traditional IRAs, two Roth IRAs, a Roth 401(k), a 403(b), a 401(k) plan and a brokerage account.

SMB told me they are aggressive growth investors and generating income is a low priority at this stage of their investment plan. The entire $1.29 million portfolio is self-managed.

What kind of grade does SMB’s portfolio get? Let’s analyze it together.

Snapshot of SMB’s $1.29 Million Portfolio
His IRA Holdings & 401(k) Ticker Category Dollar Amount
Vanguard Dividend Growth VDIGX U.S. Large Blend $65,335.71
Vanguard Growth VIGAX U.S. Large Growth $328,300.71
FMI Large Cap FMIHX Intl. Stocks $98,975.49
PRIMECAP Odyssey Aggressive POAGX U.S. Mid Growth $97,844.08
Vanguard Selected Value VASVX U.S. Mid Value $69,742.02
Oakmark International OAKIX Intl. Stocks $32,217.57
American Funds Europacific Growth RERGX Intl. Stocks $127,465.95
Vanguard Institutional Idx VINIX U.S. Large Blend $49,459.40
T. Rowe Price New Horizons PRNHX U.S. Small Growth $52,540.32
Total Value $921,881.25
Her IRA Holdings & 403(b) Ticker Category Dollar Amount
GuideStone Funds Equity Index GEQZX U.S. Large Blend $24,703.35
Vanguard Energy VGNEX Sector $10,670.19
Vanguard Intl. Growth VWIGX Intl. Stocks $21,571.16
Vanguard Primecap VPCCX U.S. Large Growth $35,838.20
Cash — Cash $88,999.04
Total Value $181,781.94
Her Brokerage Acct. Holdings Ticker Category Dollar Amount
Vanguard 500 Index VFIAX U.S. Large Blend $114,678.05
Vanguard Dividend Growth VDIGX U.S. Large Blend $25,012.11
Vanguard Intl. Value VTRIX Intl. Stocks $31,953.11
Vanguard Strategic Equity VSEQX U.S. Mid Cap $16,855.38
BP BP Individual Stock $6,366.29
Total Value $194,864.94
Total Portfolio Value $1,298,528.13

SMB’s combined portfolio holds 17 mutual funds, one individual stock and cash. The asset-weighted annual fund expenses on the mutual funds are 0.39 percent versus 0.20 percent for our index benchmarks. Put another way, SMB’s fund costs are almost twice as high versus the benchmark. This portfolio still has too much fat. Time for a diet!

Cost. The investment costs you bear today compound over time and will erode your investment returns. And that’s why reducing the negative impact of trading commissions, fund fees and other frictional costs is something the prudent investor carefully does.

Diversification. A truly diversified investment portfolio will always have broad market exposure to the five major asset classes — stocks, bonds, commodities, real estate and cash. How does SMB’s portfolio do?

SMB’s portfolio owns mutual funds investing in U.S. stocks, international stocks and cash. However, the portfolio misses direct exposure to major asset classes such as bonds, commodities and real estate. Put another way, SMB has a two-asset class portfolio that comes up far short of being genuinely diversified.

Risk. Your investment portfolio’s risk character should always be 100 percent compatible with your capacity for risk and volatility along with your unique financial circumstances, liquidity requirements and age.

The overall asset mix of SMB’s combined portfolio is 92.2 percent stocks and 7.8 percent cash. This asset mix tilts on the hyperaggressive side for aggressive investors in their early 50s. Put another way, a market decline of 20 percent to 40 percent would subject the total portfolio to potential market losses of $208,000 to $416,000.

Tax efficiency. What you sow is what you reap — and a smartly designed investment portfolio takes proactive steps at cutting the threat of taxes. Owning tax-efficient investment vehicles and having proper asset location are two easy steps.

About 85 percent of SMB’s portfolio is invested in tax-deferred retirement accounts and they have no outstanding loan balances or premature retirement distributions that have increased their tax bill.

Their taxable brokerage account has exposure to Vanguard stock funds with reasonable tax-cost ratios. Overall, SMB’s portfolio does outstanding at tax efficiency.

Performance. Investment performance will always reveal whether an investment portfolio is architecturally strong or weak. Satisfactory performance is a direct result of controlling cost, taxes, risk and diversification.

SMB’s portfolio grew $91,159 (8.1 percent) from June 2014 to June 2015, versus a gain of 9.1 percent for the index benchmark matching their same asset mix. Although they slight underperformed the benchmark, it wasn’t by much and their portfolio’s one-year performance is satisfactory.

The final grade. SMB’s final Portfolio Report Card grade is “B” (good). They scored best in the following categories: tax-efficiency and performance.

However, this portfolio flunked in the risk category. Their 92 percent exposure to equities isn’t age appropriate and is well beyond just aggressive — it’s hyperaggressive! SMB’s margin of safety is nonexistent and a market decline of 20 percent to 40 percent market decline would subject their portfolio to significant market losses.

Likewise, a lack of diversified exposure to major asset classes like real estate, commodities and bonds is a missing ingredient.

What about cost? Although SMB owns several low-cost index funds, the higher cost funds they own unnecessarily elevate the total portfolio’s fund expenses. Cutting investment cost further should boost SMB’s long-term net returns.

Will SMB take corrective action to fix the weaknesses in their portfolio? For their sake, let’s hope so.

More from U.S. News

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Portfolio Analysis: a Hyper-Aggressive $1.29 Million Portfolio With Holes originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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