Yahoo Finanzen Portfolio Analysis: A $293,895 Retirement Plan Has a Loan Problem
Some of us got started late at saving and investing for retirement. And although the financial services industry enjoys browbeating people who lack discipline, became distracted or got into trouble and temporarily paused saving money, I think empathy is due when empathy is warranted.
This week's portfolio report card is for K.E., a 60-year-old whose story warrants empathy. She works in a medical office and ran into a rough patch with her retirement plan. Her husband battled unemployment during the Great Recession and she put three kids through college. Although this slowed down the velocity of K.E.'s ability to save for retirement, she didn't quit and she kept going.
K.E. asked me to analyze and grade her 401(k) plan, valued at $294,439. She owns nine mutual funds and she told me that "I have seen my retirement fund cut basically in half twice over the years due to downturns in the market. I don't trust the government and frankly I don't trust financial advisors either! So I rely on the portfolios offered by our retirement plan. I feel like it's all one big crapshoot either way I go."
What kind of grade does K.E.'s portfolio get? Let's find out.
Fund name | Ticker | Category | % Exposure | Dollar amount |
|---|---|---|---|---|
The Standard Stable Asset A (cash) | - | Cash | 27.52% | $81,036.00 |
Dreyfus Bond Market Index Basic | DBRIX | Bonds | 45.90% | $135,153.00 |
Vanguard Value Index Fund Admiral Shares | VVIAX | U.S. large value | 2.79% | $8,220.00 |
Vanguard 500 Index Admiral Shares | VFIAX | U.S. stocks | 6.57% | $19, 357.00 |
Vanguard Growth Index Admiral Shares | VIGAX | U.S. large growth | 2.89% | $8,496.00 |
JP Morgan Mid Cap Value Fund | JAMCX | U.S. mid value | 0.95% | $2,810.00 |
Columbia Acorn Z Fund | ACRNX | U.S. mid growth | 0.96% | $2,832.00 |
Vanguard Small Cap Index Admiral Shares | VSMAX | U.S. small cap | 1.93% | $5,671.00 |
American Funds Europacific R6 Fund | RERGX | International stocks | 2.90% | $8,538.10 |
Loan | 7.59% | $21,782.00 | ||
Total value | 100% | $293,895.07 |
Cost. Reducing investment cost is easily accomplished by investing in low-cost vehicles and making a concerted effort to eliminate trading activity. The mutual funds held in K.E.'s 401(k) plan charge 0.05 percent on the low end and 1.25 percent on the high end. Nevertheless, she has smartly positioned most of her assets in the lower cost index funds, which has kept a lid on cost. Her asset weighted expense ratio is 0.37 percent.
Diversification. The whole point of diversifying your investments is to spread financial risk across a variety of different asset classes versus putting all of your money into one thing.
K.E.'s portfolio has exposure to U.S. stocks (Vanguard 500 Index Admiral Shares, Vanguard Value Index Fund Admiral Shares, Vanguard Growth Index Admiral Shares, Vanguard Small Cap Index Admiral Shares), American Funds Europacific R6 Fund, bonds (Dreyfus Bond Market Index Basic) and cash (The Standard Stable Asset A). That's outstanding. However, her portfolio is deficient in this grading category, because she lacks exposure to two major asset classes: commodities and real estate. Remember that authentic portfolio diversification never excludes major asset classes.
Risk. K.E. described herself as a very conservative investor who was burned in the past. "Gun shy" and slightly scared may be another description. The overall asset mix of K.E.'s 401(k) plan is the following: 46 percent bonds, 27 percent stocks and 27 percent cash. If there's one possible error with this asset mix, it's that it's too conservative. However, K.E. is a risk averse 60-year-old and she told me that she can't stomach a significant hit when the next market correction happens.
Tax efficiency. All well-built investment portfolios deliberately minimize the threat of taxes. This includes tax-deferred retirement plans, such as individual retirement accounts and 401(k) plans where tax efficiency is often incorrectly presumed. Currently, K.E. has $21,782 outstanding 401(k) loan. If she leaves her job without paying off the loan, it will become taxable income. So long as the loan remains, it hangs over her as a constant threat of unwanted taxable income. Undermining the tax efficiency of a tax-deferred plan is never a good idea.
Performance. Investment portfolios that ignore the first four grading categories, which are cost, diversification, risk and tax efficiency, generally have performance problems. How did K.E. do? K.E.'s portfolio grew 7.4 percent from December 2013 to December 2014 compared to a 8.3 percent gain for our blended index benchmark matching this same asset mix. Although her one-year performance was slightly less than the benchmark, it's satisfactory.
The final grade. K.E.'s final grade is B (excellent). The tax efficiency of her retirement portfolio scored the poorest, whereas cost and performance were the best grading categories.
Although equity bulls will no doubt criticize her asset mix for being ultraconservative, she's clearly defensive and cannot afford to suffer a major setback. She also fully understands that she will probably have to work part time and string together income from Social Security and her current portfolio to survive financially.
Although K.E. got sidetracked with saving for her retirement, let's hope she continues without letup from this point forward. Her plan is to retire from full-time work in only six more years, so there's no wiggle room for major mistakes.
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.
More From US News & World Report
