Portfolio Analysis: A Cost-Efficient $353,000 Retirement Plan

Ron DeLegge


The financial services industry likes to use boiler-plate risk tolerance questionnaires to determine people's investment risk. In reality, the fastest and best way toward understanding whether a person's portfolio matches up with their risk profile is by examining their current investment portfolio in its entirety. Ultimately, it's how a person is currently investing their money -- not how they would like to invest or will invest -- that reveals most about who they are.

My latest portfolio report card is for Mary in Santee, California. She's married, 45 years old and told me she considers herself a "moderately aggressive" investor.

Mary is saving $17,500 annually in her 401(k) plan while her company chips in another $3,500. She told me that retiring at age 57 would make her very happy, but she's OK with retiring at age 60.

She self-manages a 401(k) retirement plan with $353,000 scattered across seven mutual funds and company stock. Before I assign her investment portfolio a final grade, let's examine Mary's portfolio.

Diversification. Investment p ortfolios that lack exposure to all the major asset classes are not truly diversified. It's an irrefutable truth. In Mary's case, her 401(k) plan has exposure to most of the biggies, including domestic and international stocks along with bonds. Still, her retirement plan misses exposure to other major asset classes like commodities, real estate and cash.

Risk. Most investors don't realize they've exceeded their level of risk tolerance until the stock market sinks more than 20 percent.

And I think that may be the case with Mary's 401(k) portfolio.

Her asset mix is 89 percent in stocks, 6 percent in bonds and 5 percent in company stock. Mary's current allocation is three-scales more risky than people in her age group and is much higher than her "moderately aggressive" description suggests. Mary's current asset mix is what I'd associate with someone 25 to 30 years younger.

Cost. Mary's largest holding is the Vanguard Institutional Index Plus (Standard & Poor's 500 index), a large-cap U.S. stock fund that charges just two basis points or 0.02 percent annually. She's getting a screaming deal on a fund that will outperform 85 percent or more of Wall Street's big shot money managers. Plus, I'm glad to see she's been smart enough to deliberately steer the bulk of her 401(k) money in low-cost funds.

Isn't that something all 401(k) savers should be doing? Remember: The less you pay in fees, the more of your performance returns you get to keep. And over decades, the compounding effect of cost savings can mean five, six and seven-figure differences in your favor.

Tax-efficiency. Mary's 401(k) money is growing tax-deferred. She has no outstanding loans and she has no tax liability issues from what I observed.

Performance. What is a satisfactory performance return? One that matches or exceeds a blended mix of passive index exchange-traded funds that correspond to a person's asset allocation. And from March 2013 to March 2014, Mary's 401(k) portfolio gained 17 percent while a portfolio of passive index ETFs with Mary's same allocation gained 18 percent. Well done, Mary.

Summary. Mary's final portfolio report card is a B+, which is a fantastic score. Although it's not perfect, it's awfully close.

She's done an outstanding job at minimizing expenses and the total blended cost of the funds in her 401(k) plan is just 0.20 percent annually. On a $353,000 account, that works out to be just $706 annually!

The biggest weakness in Mary's portfolio is under-diversification and elevated market risk.

Mary's 401(k) plan is heavily overweight in stocks and her retirement portfolio has been the beneficiary of a sharply rising equity market. She's in good shape, until the next major correction, at which point, her 401(k) plan will get clobbered. Before that happens, her homework is to recalibrate her portfolio to a risk profile that better matches her age and goals.

Remember: I grade family trust accounts, 401(k) rollovers, 457 plans, 403(b), Uniform Gift to Minors Act (UGMA) accounts and anything posing as an "investment." Hit the link below to get in touch with me.

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."