Yahoo Finance Portfolio Analysis: A Flawed $863,309 Advisor-Managed Investment Plan
How can a person tell the difference between a healthy and unhealthy investment portfolio? Naturally, it's by how well (or poorly) a portfolio does at addressing crucial areas, such as taxes, cost, diversification, risk and performance. Here's the problem: Poorly constructed portfolios are usually ignorant about these first four things, which explain why unsatisfactory performance results follow. My latest portfolio report card is for P.L.R. in Medley, Florida. This vibrant married couple is in their early 60s. He's still working and she's retired.
P.L.R. has a financial advisor, but recently became concerned about the cost and investment choices within their portfolio. P.L.R. asked me to analyze and grade their combined portfolios to identify strengths and weakness of their $863,309 investment plan.
After a brief initial chat, P.L.R. told me they are still in the accumulation phase of their investment plan and they intend to hold off on taking retirement distributions and accessing Social Security until they reach full retirement age. "We want to protect what we have accumulated and only pull 3 percent (real return) out of our portfolio every year, starting in 2018," they say.
P.L.R.'s combined portfolios consist of two traditional individual retirement accounts, two Roth IRAs, and a joint taxable account. P.L.R. owns 17 mutual funds and seven exchange-traded funds. It's worth mentioning that P.L.R. told me they expect to receive a very poor portfolio report card grade of "D" or "F." Will they be able to beat their own depressed expectations? Let's do a portfolio report card and find out.
PLR IRA (His) | % Allocation | Asset Class |
|---|---|---|
AQMIX | $8,063 | Bonds |
VQT | $19,675 | U.S. Stocks |
SOPYX | $19,945 | U.S. Stocks |
EABOX | $32,220 | Bonds |
SGOVX | $20,754 | International Stocks |
FINFX | $55,811 | U.S. Stocks |
GIOIX | $12,126 | Bonds |
JHAIX | $15,203 | Multi-Asset |
GLBIX | $4,130 | Global Stocks |
MASFX | $19,678 | Multi-Asset |
PUBAX | $27,401 | Bonds |
FAIRX | $33,303 | U.S. Stocks |
OSTIX | $23,100 | Bonds |
Cash | $767 | |
$292,176 | ||
AQMIX | $38,164 | Bonds |
VQT | $19,521 | U.S. Stocks |
BGRFX | $30,693 | U.S. Mid Stocks |
SOPYX | $42,671 | U.S. Stocks |
SGOVX | $37,932 | International Stocks |
GIOIX | $33,178 | Bonds |
JHAIX | $29,984 | Multi-Asset |
MASFX | $8,959 | Multi-Asset |
DFISX | $19,932 | Intl Small Cap |
AEPFX | $19,768 | International Stock Growth |
IWV | $39,618 | U.S. Stocks Growth |
NWFFX | $33,374 | Emerging Markets |
XLV | $24,001 | Sector |
XLB | $23,755 | Sector |
BND | $39,949 | Bonds |
VEA | $39,938 | International Stocks |
Cash | $3,473 | |
$484,910 | ||
NWFFX | $13,846 | Emerging Markets |
JLCAX | $13,003 | U.S. Large Cap |
$26,849 | ||
BGRFX | $13,124 | U.S. Stocks |
VQT | $6,867 | U.S. Stocks |
GWX | $6,646 | International Small Cap |
$26,637 | ||
DFISX | $3,958 | International Small Cap |
GLBIX | $12,776 | Global Stocks |
FAIRX | $6,992 | U.S. Stocks |
Cash | $9,011 | |
$32,737 | ||
TOTAL VALUE | $863,309 |
Cost. A portfolio with excessive investment cost doesn't need a bad year to underperform, and that's why minimizing investment cost to the greatest degree possible is tantamount. This means cutting fund expenses, brokerage commissions and other costs. The average expense ratio for P.L.R.'s mutual fund and ETF holdings is 0.9 percent. And if we add another 1 percent for the annual-advisor fee they're paying, total expenses approach 2 percent annually.
Although P.L.R. owns a few low-cost ETFs, such as Vanguard Total Bond Market ETF, iShares Russell 3000 Index ETF, Health Care SPDR ETF and Materials Select Sector SPDR ETF, the bulk of their money is in higher-cost funds.
Diversification. Authentic diversification is all about exposure to all of the major asset classes, including stocks, bonds, commodities, real estate and cash. P.L.R.'s combined IRAs and taxable account has exposure to U.S. and foreign stocks, bonds and cash. This is excellent.
However, the combined portfolios miss major asset classes, including global real estate, international bonds and commodities. Also, some of the multi-asset class funds (See John Hancock Global Absolute Return Strategies and Litman Gregory Master Alternative Strategies) held in these portfolios hold a mix of stocks along with bonds, and complicate the process of precise asset allocation. Why? Because managers can increase or decrease their market exposure to whatever asset classes they want at will.
Finally, I discovered a real dearth of core-fund holdings in P.L.R.'s portfolio that rightly could be classified as broadly diversified proxies of the asset classes they track.
Risk. The risk character of a portfolio should always be 100-percent compatible with the risk profile of the person. P.L.R. told me they are neither aggressive nor conservative investors, but somewhere in the middle.
P.L.R.'s IRA (hers) holds 68 percent stocks, 23 percent bonds, 8.2 percent multi-asset class and his IRA holds 52.5 percent stocks, 25 percent bonds and 22.3 percent multi-asset class. This asset mix closely matches "moderate" investors in their early 60s.
Nevertheless, a 20 percent to 40 percent stock market correction would subject this portfolio mix to $100,000 to $200,000 in potential losses. Moreover, since the bulk of the combined portfolios are in actively managed funds, the inability of managers to beat benchmarks is another element of risk.
Tax efficiency. Minimizing the negative impact of taxes is easily accomplished by investing in tax-efficient vehicles like index ETFs, and through smart asset location. Avoiding premature retirement plan distributions and 401(k) loans are other tax-smart moves. I observed no tax-efficiency problems with P.L.R.'s combined portfolios. Well done.
Performance. Your performance return will always do one of two things: validate a portfolio's design or incriminate it. And it's how a person's portfolio performs against a blended-index benchmark that corresponds to the person's asset mix that reveals the unadulterated truth about performance.
P.L.R.'s combined portfolios had a 1-year gain of $10,496, or 1.7 percent, from Dec. 31, 2013 to Dec. 31, 2014, versus a 5.23 percent gain for a blended-index benchmark matching their asset mix. Put another way, P.L.R.'s underperformance of 3.5 percent is unsatisfactory.
The final grade. P.L.R.'s final portfolio report card grade is a "C." This grade means P.L.R.'s portfolio has meaningful structural weaknesses. The biggest problem areas are subpar performance and a high investment cost. In each of these sub-graded categories, P.L.R.'s portfolio flunked. Paying almost 2 percent in annual fees on an $863,309 portfolio is around $17,200. That's far too much money to be forfeiting every year.
Likewise, it's surprising to see a financial advisor-managed portfolio like P.L.R.'s is underdiversified by missing exposure to major asset classes, such as real estate and commodities. Clearly, this particular advisor is not earning their keep. In summary, I know that if P.L.R. fixes the weakness that I identified inside their investment portfolio they can and will get a better grade in the future. And more importantly, they can put their investments back on track and reach their goals.
How is your investment portfolio doing? Go to PortfolioReportCard.com to find out.
Ron DeLegge is the Founder and Chief Portfolio Strategist at ETFguide. He's inventor of the Portfolio Report Card which helps people to identify the strengths and weaknesses of their investment account, IRA, and 401(k) plan.
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