Portfolio Report Card: A $569,742 Retirement Plan with Sluggish Performance

Why do we take unnecessary risk with our investments? Is it because we’re gluttons for punishment or is it because we’re incredibly brave? Often, it’s because we’re simply distracted or unaware.

Although the S&P 500 is still hanging on to its year-to-date gain, stock market volatility or “VIX” has advanced more than 30% over the past three months. Usually, during times of rising volatility like now is when people begin to notice financial risk inside their portfolios. And it becomes a problem when our portfolio’s risk level is incompatible with our true risk capacity.

Since May, I’ve already graded and analyzed more than $15 million worth of investment portfolios with my Portfolio Report Card grading system. And my latest Report Card is for MT in Cave Creek, AZ. He’s 45 years old, married and he works in pharmaceutical sales. He asked me to analyze and grade his self-managed $569,742 portfolio. It’s divided between an individual IRA ($563,554) and a 401(k) retirement plan ($6,188).

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He told me he’s been able to accumulate over half a million dollars in retirement savings because “I have had very generous employers and I have always saved the percentage up to the company match since 1991.” Also, his IRA balance is a result of several 401(k) rollovers at previous jobs.

He owns 13 mutual funds, 9 ETFs, and 1 individual stock (NYSE:HCP). What type of Portfolio Report Card will MT get? Will it be an A, B,C, D, or F? Let’s analyze his holdings in five key areas and find out.

All well-built investment portfolios deliberately aim to minimize brokerage commissions, fund fees, and other costs to the greatest degree possible.

While it’s good to see that MT owns a few low-cost funds and ETFs like the Schwab S&P Index 500 (Nasdaq:SWPPX) and Utilities Select Sector SPDR ETF (NYSEARCA:XLU), he still owns a few funds like Loomis Sayles Bond Retail Fund (Nasdaq:LSBRX), Lazard Emerging Markets Equity Portfolio Institutional (Nasdaq:LZEMX), and Baron Real Estate Fund Retail (Nasdaq:BREFX) with elevated annual expenses. On portfolio cost, MT definitely has some fat to trim.

The combined annual fund expenses for MT’s IRA and 401(k) portfolio is 0.68%. A blended benchmark with an asset mix of index ETFs that matches his unique investor personality is 0.22% or three-times less.

A properly diversified portfolio always has exposure to all the major asset classes, not just the ones your personal bias favors.

MT’s overall asset mix is 60% in stocks (international and U.S.), 26.6% in bonds (international and U.S.), 9.5% in real state, and 3.9% in commodities.

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While it seems he’s made an attempt at diversifying, I don’t see enough exposure to broadly diversified funds that serve as acceptable proxies for the core asset classes. For example, he owns SWPPX, VBR, RWX, and SCHM – all OK choices. But sadly, these funds represent a very small portion of his overall portfolio when in reality they should be the core or foundation.

MT describes his investing style as somewhere between moderate and aggressive. Much of his money is oriented toward dividend income funds or sectors like utilities (Nasdaq:GASFX), real estate (Nasdaq:BREFX), and dividend stocks (NYSEARCA:PID).

Based upon my assessment, his overall asset mix of 60% stocks, 26.6% bonds, 9.5% real estate, and 3.9% in commodities matches up with his risk character. It’s also compatible with this age and life circumstances.

Tax Efficiency
It’s good to see that MT hasn’t destroyed the tax benefits of his tax deferred retirement plans by taking out premature distributions. Also, he has no outstanding 401(k) loans which could pose a tax threat to his money if he suddenly leaves his current job. Overall, MT’s portfolio does well on tax-efficiency.

In September 2013 MT had a combined balance of 502,000 and one-year later, his account balance has grown to $569,742. When we adjust his performance for the $18,720 he stashed away over the past year, he gained 9.8%.

By comparison, our yardstick for performance delivered a one-year return of 16.5% while he underperformed by 6.7%. MT’s unsatisfactory performance is a clear consequence of deficiencies in his previously graded categories.

The Final Grade
MT’s final Portfolio Report Card is a C. This type of grade means that MT’s portfolio has serious structural flaws that make it unsatisfactory. His retirement portfolio’s weakest points are cost, diversification, and performance.

On a positive note, MT is an excellent saver. He also appears to be coachable and willing to take the steps required to improve his investment results. Ultimately, I’m confident he’ll reach his goals, but only if he fixes the shortcomings of his current portfolio.

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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