Diversification means different things to different people. In
some cultures, diversification means having large families to
diversify so that when mom and dad get old, there will be plenty of
children and grandchildren to care for them in their old age. For
the individual investor, diversification boils down to spreading
your risk across a variety of major asset classes. Can owning just
one stock or mutual fund inside your portfolio get the job
Portfolio Report Card
is for Chris, a successful 47-year old entrepreneur who retired
12-years ago after selling his novelty shop.
Gold Experts are Wrong Again + Ron Dissects a
After years of having his money mismanaged by brokers, Chris
fired them. He now manages his $512,000 investment portfolio all by
himself and he owns just one mutual fund; the Franklin Income Fund
class-A shares (Nasdaq:FKNIX).
Before I give Chris his final Portfolio Report Card, let's
examine his investment account together.
On diversification, Chris' one-trick pony portfolio of FKINX
misses asset exposure to major categories like commodities, REITs
(NYSEARCA:RWO), and TIPS (NYSEARCA:GTIP). Thankfully, FKINX does
have exposure to other key assets like U.S. (NYSEARCA:SCHB) and
international stocks (NYSEARCA:EFA), bonds (NYSEARCA:CWB), and
cash. Nevertheless, Chris' current investment strategy is weak on
What about the actual cost of Chris' portfolio?
Unfortunately, too many income investors are focused on the
wrong ball and Chris is no different. In an email to me, he said,
"I use FKINX's dividend as income which gives me around $2,240 per
month." He's so fixated on his monthly payments, he sees nothing
On the surface, many observers would quickly point out that
FKINX carries a 30-day SEC yield of 3.16% - which is higher than
the S&P 500's yield (NYSEARCA:VOO). But that's only part of the
story. Look at how much of that income or dividend is being eaten
by FKINX's expenses.
The fund's annual expense ratio is 0.62%. Put another way, FKINX
consumes almost 20% of its yield, which is clearly way out the
ballpark in what an investor should be sharing with fund managers.
Also, FKINX has inhospitable load of 2.25% (breakpoints for Chris'
$512k account) which is still a high entry fee for future money he
decides to add.
All investors should take deliberate steps to minimize taxes.
That means smart asset location and tax-loss harvesting when
warranted. It also means not investing in mutual funds that
needlessly increase your tax liabilities when better choices are
available elsewhere. Here too, Chris can improve.
FKINX has a tax cost ratio of 2.21%, meaning shareholders over
the past year have paid around 2% of their assets to taxes. From an
asset location angle, Chris can do a better job by strategically
using a combination of tax-deferred and taxable brokerage accounts
to cut his tax liabilities.
What about performance?
From 7/17/13 to 7/17/14, FKINX gained 14.66% vs. a 12.18% gain
of blended benchmark of index ETFs with the same general mix of 33%
US stocks, 13% non-US stocks, 34% bonds, 13% convertible bonds, and
7% in cash.
Chris' final Portfolio Report Card is a "C."
While FKINX is classified as a "conservative income fund" Chris'
biggest risk is a lack of diversification. This is true from an
asset allocation and asset location perspective. He's got his nest
egg concentrated in one nest.
Also, if Chris does a better job of minimizing his investment
costs, it should substantially increase his portfolio's income.
Ultimately, his current portfolio strategy relies completely on
the very difficult long-term challenge of Franklin's fund managers
to outperform the market. It's the kind of bet and act of faith
that Chris might win, but the odds are stacked against him.
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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