Portfolio Analysis: An $89,000 Retirement Plan Needs a Remodel

US News

Your investment portfolio is really a reflection of who you are. Put another way, it's a personal statement about how you approach financial risk, investment cost and taxes. If you're disorderly when it comes to these crucial aspects of your war plan, the bitter consequences will be a disorderly portfolio with disorderly performance results.

My latest portfolio report card is for P.K. in Rockville, Maryland. She's 38 years old, single and works in the public relations field. She contacted me because she wanted to see if her investment plan is correct and if the mutual funds she owns are helping or hurting.

P.K. has almost $89,000 invested in a 401(k) rollover from a previous employer and she manages the account without the help of a financial advisor. In terms of investing style, she describes herself as "conservative" and "doesn't have the time to follow the daily ups and downs of her retirement money." It sounds like the rough approach of 75 million or so Americans.

Her 401(k) rollover consists of just three mutual funds: The Dodge & Cox Income Fund, Davis New York Venture Fund and the Fidelity Freedom 2030 Fund. Here's the breakdown:

Symbol Market Value % of Portfolio Asset Class
DODIX $22,839 25.7% Intermediate Term Bonds
NYVTX $23,728 26.7% U.S. Large Cap Equity
FFFEX $42,301 47.6% Multi-Asset Class
$88,868 100%

P.K.'s current investment mix is almost a 70/30 split between stocks and bonds. Aside from the big two asset classes (stocks and bonds), she has exposure via the Fidelity fund to other important asset classes like commodities, real estate and Treasury Inflation-Protected Securities. Risk-wise, I don't think her current asset mix is out-of-line with her age or time horizon.

Since the bulk of P.K.'s retirement portfolio is invested in the Fidelity fund, let's examine it closer.

First, I want you ignore the propaganda about how mass produced target-date products sold by Wall Street's retirement planners are good for you. Second, I want you to understand that the default investment choice for all individual investors should always be a customized asset mix matching a person's unique investment personality, versus a canned off-the-shelf target-date solution like Fidelity's. The only good thing I can say about the fund is that it has decent exposure to major asset classes, but again, this is something that P.K. should be doing on her own.

When I drill down to the cost of P.K.'s portfolio, she bumps into serious trouble.

The Davis fund (A-shares) hit her with a 4.75 percent upfront load. This is a significant cost she's already paid but could have avoided. Furthermore, the Fidelity fund charges elevated annual expenses of 0.77 percent, which is almost 80 percent more compared to comparable target-date funds. Assuming she makes on changes, owning Fidelity over the next 30 years will steal around $50,250 of her money in excessive fees.

The Dodge & Cox fund is a bond income fund, but its annual expense ratio consumes 14 percent of its annual yield, which is unacceptably high for a bond fund.

In terms of tax efficiency, P.K.'s portfolio is fine. Thankfully, P.K. had enough sense to do a 401(k) rollover versus taking a check and spending the money on nonretirement expenses. Also, the interest and gains she has now and in the future are tax-deferred.

What about performance? At the end of June 2013, P.K. began with $81,156 and gained 9.5 percent or just over $7,700 through the end of June 2014. Over that same period, the total U.S. stock market gained 22.96 percent while the total U.S. bond market rose 1.29 percent. Using the same 73 percent stocks and 27 percent bonds allocation in passive exchange-traded funds would have resulted in a $14,430 gain which is almost double P.K.'s one-year gain of $7,700.

P.K.'s final portfolio report card is a "C."

Although she's fairly diversified, I'm concerned about the way she's going about it, by using an off-the-shelf generic target-date fund. Her investment costs in the Fidelity fund are excessive. Furthermore, the fund-of-fund approach these types of mutual funds use are notoriously nepotistic, conflict-riddled, and not in the interests of long-term investors.

Finally, her 401(k)'s underperformance versus a blended benchmark of stocks and bonds is a testament to the fact that her retirement portfolio needs readjustments. Although she forfeited $6,700 from market underperformance over the past year, I've seen worse. Hopefully, P.K. can tweak her 401(k) portfolio while there's still time and get back on track.

Hit the link below to get in touch with me to have your portfolio graded.

Ron DeLegge is the founder and chief portfolio strategist at ETFguide.com. He invented the Portfolio Report Card to help people understand the strengths and weaknesses of their investment portfolios so they can make better choices. Ron is also a radio host of the Index Investing Show and author of "Gents With No Cents: A Closer Look at Wall Street, its Customers, Financial Regulators and the Media."



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