World-class investment portfolios deliberately minimize taxes
and investment costs. Likewise, a well-built portfolio is
handcrafted to perfectly match the unique investor personality of
Since May, I've already executed
Portfolio Report Cards
on $10.6 million in investments and too many
investors are still coming up short.
This time around, my latest Portfolio Report Card is for S.G., a
single, 45-year old mortgage underwriter (yes they still exist!)
from Ohio. He told me his main goal is to retire at age 60 and his
biggest worry is having adequate savings to cover his expenses
including health insurance.
Ron Grades a $68,000 Investment Portfolio with a
S.G. owns a total of 16 mutual funds divided among a SEP IRA,
Roth IRA, and taxable investment account. He categorizes himself as
an "aggressive" investor and he pays a financial advisor 0.75%
annually to have his investment accounts managed.
What kind of grade will S.G.'s Portfolio Report Card be? Before
I give him a final grade, let's examine five key aspects of his
investments and see how he does.
Diversified portfolios always have exposure to all the core or
major asset classes. How does S.G. do?
S.G.'s SEP IRA account holds U.S. large-cap stocks
(Nasdaq:SLGAX), international stocks (Nasdaq:SEITX), emerging
market stocks (Nasdaq:SIEMX), high yield bonds (Nasdaq:SHYAX), and
a very small position in cash (Nasdaq:TPRX). He also owns a
strategically oriented mutual fund that owns various bonds along
with international and U.S. stocks called the SEI Multi-Asset
Accumulation Fund (Nasdaq:SAAAX).
Although none of S.G.'s investment accounts own real estate, he
covers himself by owning an 11-unit apartment rental with a $1.2
S.G.'s ROTH IRA has exposure (again) to large cap U.S. stocks
and his taxable account also owns a few fixed income funds and more
exposure to U.S. stocks.
Overall, his portfolio suffers from over-diversification by
owning too much of the same thing; large-cap and small-cap U.S.
stocks. Also, commodities and TIPS are two areas where S.G.'s
S.G. characterizes himself as an aggressive investor and I think
his 73% exposure to stocks in his SEP IRA, his 87.4% exposure
stocks in his taxable account, and his 100% exposure to stocks in
his ROTH IRA are an accurate reflection of someone who is
One of the ongoing problems all investors face is the subtle
differences between our risk perceptions and our actual tolerance
to market risk. Usually, we learn about this the hard way; after
the stock market falls 20% or more and we belatedly realize our
risk tolerance was substantially less than what our risk
perceptions told us. Will this turn out to be S.G.'s case?
The three largest holdings in S.G.'s SEP IRA are SAAAX, which
charges annual expenses of 1.17%, SLGAX which charges 0.89%, and
SEITX at 1.25%. The largest holdings inside his taxable account and
ROTH IRA charge annual expenses from 0.85% to 1.25%.
Not only are his mutual fund fees elevated, but he's paying
another 0.75% annually to an advisor, which puts his annual
investment costs closer to 1.5% to 2%. Yikes!
Some investors are so distracted by the need for smart asset
allocation, that they completely ignore the importance of having
smart asset location.
Own Mutual Funds? Avoid these Blunders!
Thankfully, S.G.'s portfolios have some semblances of the need
to purposely minimize taxes, but with a few contradictions. While
he owns a tax-free income fund (Nasdaq:TXEXX) and tax-managed
equity funds inside a taxable account, he simultaneously owns an
emerging markets debt fund with a tax cost ratio of 1.4% - which
makes it an ill-suited candidate inside the same taxable
I get really concerned when I grade investment portfolios that are
unable to match or exceed the performance of a blended mix of
passive index funds or ETFs. It's a major red flag.
From July 2013 to July 2014, S.G.'s investment portfolio gained
12.3% while a portfolio of passive index ETFs that reflect an
aggressive investor that matches his profile gained 16.53% with
annual fees of just 0.18%.
S.G.'s final Portfolio Report Card is a "C." His subpar performance
over the past year - during a favorable stock market climate - is
The high cost of his mutual funds is weighing down his
portfolio. Furthermore, his portfolio is over-diversified -
particularly with his exposure to large-cap and small-cap U.S.
stocks. One would expect a lot more from an advisor managed
Portfolios with a "C" have structural flaws that require major
adjustments. Hopefully, S.G. can fix what's wrong with his
portfolio and get back on track.
Portfolio Report Card
challenge stands: If your investment portfolio scores an "A",
you'll get paid $100. Ron grades family trust accounts, 401(k)
rollovers, 457 plans, 403(b), UGMA accounts, and anything posing as
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