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Retiree's Nest Egg in Too Few Baskets

TSC's Portfolio Planner turns up overlapping holdings and an over-reliance on large-cap stocks.

Can a mutual fund portfolio that provided a 15% return in 1999 sustain Ron Ayers through his retirement?

Ayers, 60, retired last April from his job as a buyer of maintenance, repair and operating supplies at a

Kraft Foods

plant in Garland, Texas.

He walked away with a healthy nest egg worth about $410,000. However, prospects for future work are uncertain. So he wants to be sure his retirement money -- about half of which came from a company pension plan and the other half from a 401(k) plan -- will provide an income of $2,500 to $3,000 a month.

"Given my age and the likelihood I will not find employment

I have been looking, my long-term goal is modest income," writes Ayers, who is divorced and has two grown children.

His retirement money has been rolled into an IRA. About 60% is in mutual funds, and the rest is invested in a lineup of high-quality stocks that includes

General Electric

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Home Depot

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Qwest Communications



Given that the mutual fund portfolio alone gained 15% last year, and that Ayers' high-side goal of $36,000 a year in income represents about 9% of his nest egg's value, he seems to be in good shape -- so far. But that's just a surface view.

We asked Ron Roge of

R.W. Roge & Co.

in Bohemia, N.Y., to dig a little deeper and determine whether Ayers is on track for the long term.

Roge's diagnosis: "Lots of overlap" in the holdings of his funds and his stock portfolio. For example, Cisco can be found in the portfolios of three of his funds plus in his individual stock holdings. And

Fannie Mae




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Bristol-Myers Squibb

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turn up in at least three funds in the portfolio.

In addition, the portfolio is invested entirely in large-cap stocks, Roge points out. That means Ayers missed out on some fantastic gains last year in small-cap growth funds (up an average of 62.6%, according to


) and mid-cap growth funds (up an average of 72.9%).

His portfolio also has no international exposure, and the bond portion is mostly in a high-yield, or junk bond, fund, which doesn't provide enough of a hedge for the stock portion of the portfolio.

The bottom line: Ayers needs to diversify among more types of assets to protect himself if large-cap stocks fall out of favor and to participate in other promising areas of the market.

Roge constructed the following alternative portfolio for Ayers, made up entirely of mutual funds.


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Spectra fund is a technology-dominated large-cap growth fund run by a highly respected manager, David Alger.

Roge added some exposure to value stocks through the



Value and Restructuring fund. Though the value investing style has been out of favor, Roge says Excelsior "has a new definition of value" that allowed it to make three tech stocks,

Texas Instruments

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, its largest holdings as of Jan. 29.


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Small-Cap and


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Mid Cap diversify the portfolio beyond large-cap stocks, and the international portion is split between two funds with solid track records,

UMB Scout

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Worldwide and Artisan

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Roge retains



High Yield Bond in Ayers' portfolio, albeit at a drastically reduced percentage. He would add


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Convertible Securities fund, which, he says, will perform better in what he expects to be a rising-interest-rate environment.

"This portfolio will give him much less overlap and exposure to large-, mid- and small-cap stocks, international exposure and a little more diversification in the bond area," says Roge.

Roge says it is up to Ayers whether he wants to hold on to his individual stocks or put everything into mutual funds.

All of the funds Roge recommends are available without sales charges. But as a practical matter, it could take Ayers a while to remake his portfolio if he decides to accept Roge's advice. He bought his current funds through a broker, and they are all B-class shares. That means they come with sales fees that are imposed when he sells the shares. However, the fees are waived if he holds the shares for five years, and he can withdraw 10% of the value of the funds each year without penalty.

The TSC Portfolio Planners series aims to provide general fund and investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.