16
“I’m
56
, single, and have $
1
million saved. But I fear
it’s nowhere near enough, and I wish I could work
forever but know that at my age layoffs come out of
nowhere.”
So began Catherine’s email requesting a portfolio
makeover. As is the case for many people who have
invested for many years, Catherine, a media profes-
sional, has money in several pools, including a
401
(k),
Roth
IRA
, and multiple taxable brokerage accounts,
including one managed by a financial advisor. “My
money is all over the place!” she lamented.
Catherine is luckier than most, however, in that she’ll
be able to draw upon a pension during retirement that
will provide
$
25
,
000
in income per year. Social Secu-
rity will provide another source of in-retirement
income, though she hopes to delay receipt until age
70
, at which time she expects to receive about
$
36
,
000
a year.
Catherine’s main goal is to make sure that the total
asset allocation of all of her accounts is on the right
track. Although she’s pleased with the growth in her
portfolio as equities have rallied recently, she knows
that at this life stage, it’s wise to start taking risk off
the table. Catherine said she’d also like another set of
eyes on the fund choices she’s made, including guid-
ance on whether she can cut any deadwood from her
portfolio of
50
distinct holdings.
Catherine would like to work until she’s
65
or
67
, but
given the downsizing that has confronted her indus-
try, she is bracing herself for the possibility that she’d
need to tap her portfolio earlier than that—in a
worst-case scenario, within the next few years. Thus,
she’s balancing two key financial considerations:
growing her assets for a long and happy retirement
and the possibility that retirement could arrive
before she’s truly ready for it.
The “Before” Portfolio
Catherine’s portfolio is more sprawling than most.
She currently has
50
distinct positions, not counting
her cash and I-bond holdings. That’s a big port-
folio, particularly when you consider that she has
invested exclusively in mutual funds rather than
individual stocks.
Her portfolio has a
45%
equity weighting
(
34%
domestic
,
11%
foreign
) with
27%
in cash
(including
her stable-value holdings in her
401
(k)) and another
27%
in bonds
. Her bond portfolio, meanwhile,
encompasses a broad cross-section of securities,
including Treasuries and Treasury Inflation-Protected
Securities; corporate bonds, including high yield;
international bonds; municipal bonds; and bank loans.
Despite the obvious portfolio sprawl, which Catherine
herself cites as an issue, she’s doing a lot right.
Importantly, her savings habits are strong: She con-
tributes the maximum allowable amount to her
Roth
IRA
and
HSA
and puts another
$
18
,
000
per year
into her
401
(k), including contributions from her
employer. She has also generally selected low-cost
funds. In large part because of her portfolio’s big em-
phasis on inexpensive exchange-traded funds, her
holdings have an average expense ratio of
0
.
36%
per year. Finally, Catherine has made good use of the
basic principles of asset location, stashing tax-
inefficient assets such as higher-yielding bond types
and
REIT
s inside her tax-sheltered accounts.
The “After” Portfolio
I tried to address a few key issues with the portfolio
makeover. First, I aimed to arrive at an asset alloca-
tion that makes sense given her time horizon,
providing for short-term income needs for her early-
retirement years as well as growth potential to
accommodate a long and active retirement. Second, I
wanted to dramatically reduce her number of hold-
ings to simplify the task of overseeing her total port-
folio as well as to ensure that her portfolio has
adequate exposure to core asset classes. Finally, I
wanted to make sure that Catherine had the right
types of assets within each of her accounts, factoring
in the expected time horizon for each pool of
money, tax efficiency, and the availability of funds
in each account wrapper.
Cutting a Huge Portfolio Down to Size
Portfolio Matters
|
Christine Benz
Welcome to our
new feature,
Portfolio Matters,
by Christine Benz,
Morningstar’s director of
personal finance. We’re
thrilled to have Christine
help you manage the port-
folio challenges that you
face each month. Christine
will address personal
finance issues with prac-
tical solutions throughout
the year.
