My latest request for a Portfolio Report Card is from Andy in New Jersey. He was curious about whether his investment account was adequately diversified and if he is on the right track.
The portfolio I graded for Andy – a taxable TD Ameritrade account – was one of seven investment accounts he’s got scattered about at different brokerage firms. All of them but one are self-managed.
He’s a 41 single dad, self-employed, and describes himself as an aggressive investor.
Incidentally, I just featured Andy’s portfolio on my latest Index Investing Radio Show by breaking down all of his holdings and assigning him a final grade. Check it out.
Unfortunately for Andy, my analysis uncovered some major problems and his portfolio flunked on both risk and diversification.
In fact, only 2 of his current holdings the Vanguard Total Stock Market ETF (VTI) and the PowerShares RAFI 1000 (PRF) are what I would consider “core” or foundational portfolio pieces and both cover the same exact asset class; U.S. stocks. Furthermore, almost 100% of his TD account is committed exclusively to stocks – which is excessive. This includes his two mutual fund holdings – a Vanguard (VDIGX) and Yacktman fund – both focused on equities. It’s the type of volatile portfolio mix that will only do well in one-type of market cycle; when stocks are going up.
The other major problem is overlapping ETF positions. As the table below shows, he owns Internet stocks (PNQI), small cap technology stocks (PSCT), and even more small caps (RZG). There’s zero benefit to owning multiple funds that own the same types of securities.
Another one of Ron’s rules that should never be broken is owning individual stocks BEFORE you FIRST build a solid portfolio foundation with low cost exposure to all the major asset classes. It’s like trying to build the second story of a home without first completing the first floor!
In total, Andy owns 9 ETFs, 2 stocks, and 2 mutual funds (see table above) which are all poorly arranged. Where’s the low cost market exposure to major asset classes like bonds, emerging markets, commodities, and real estate?
Andy’s final Portfolio Report Card is a “C.” His weakest links are risk and diversification. He does OK on tax-efficiency and cost. His one-year performance (May 2013 to May 2013) was 27% versus a 16% gain for the total U.S. stock market (VTI). Although he “beat” the market, a rising tide lifts all boats and he got lucky. Hopefully, he can tweak his portfolio and start relying less on luck.
REMEMBER: Ron’s Portfolio Report Card challenge stands: If your investment portfolio scores an “A”, I’ll pay you $100. So far I’ve graded $5.1 million in portfolios since May, keep them coming! Hit the link below to get in touch with me.
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. Ron is also author of Gents with No Cents: A Closer Look at Wall Street, its Customers, Financial Regulators, and the Media (Half Full Publishing Group)