Avoid These Mistakes

July 05, 2022
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         When we meet with potential new clients, one of the things that we do is take a look at their current investments and look for potential areas of concern. Today, I wanted to take a real statement that we received from a real client and break it down for you so that you can see what we look for when evaluating a client’s portfolio. Now, of course I have removed the client’s name from the statement as well as any financial information or information about the advisor that they were working with. My goal here isn’t to shame other advisors but rather just to make you aware of some issues that you should watch out for.


          The first thing that I want to draw attention to with this statement is the large number of funds that the account is invested in. This client was invested in 15 different funds, which is likely more than what is necessary here. The account was relatively small which means that the money was spread pretty thin among these 15 funds. Remember, each of these funds also own a large number of individual stocks and bonds as well. The argument could be made that this strategy then is justified because it provides the client with a well-diversified portfolio. But as we are about to see, that is not entirely accurate.


           This table shows the percentage of the account that is invested in each fund in the portfolio. You will notice that over 50% is allocated to only 3 of the fund out of the 15. So right off the bat this casts doubt on the idea that this is a truly diversified portfolio.

        This next table looks at all of the underlying holdings of the 15 funds in the portfolio and shows us how much overlap there is. Simply put, some stocks are owned by multiple funds in our portfolio so this table shows us what percentage of our portfolio is invested in each stock across all 15 funds. What is interesting to note about this table is that about 15% of the entire portfolio is invested in only 7 individual stocks. This isn’t necessarily a problem depending on your investment goals and risk tolerance, but it does pour some cold water on the idea that this is a well-diversified portfolio.


         Last but not least, I want to take a look at the all-time performance of this portfolio. First, here is a chart that shows the portfolio’s asset allocation. What I want to draw your attention to is the fact that the portfolio is invested over 93% in stocks. This might be a suitable allocation for someone who is a long ways off from retirement and is not concerned about risk. That said, we would hope that a portfolio of this nature would have returns that at least matched that of the overall market. However, when I looked at the all-time returns for the this portfolio, they were below 8%.. Historically, the S&P 500 has returned over 9%. My point here is that this client was not getting a lot of bang for their buck.


         The last thing that I want to mention is that the majority of the funds in this portfolio are low-cost index ETFs. There has been quite a lot said about the benefits and detriments of these types of funds which I am not going to echo here. But what I do hope is that this illustrates the need for intentional asset allocation no matter the strategy you choose to employ or whether or not you choose to work with an advisor.

          Thanks for reading, and let me know if you would like to see more blog posts like this. And hey, if you would like me to evaluate your portfolio like I did this one, click on the link below to schedule some time for us to chat!

This week’s song of the week is in honor of Independence Day. Enjoy!

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