I am 69 and retired. My portfolio is managed by a private client team and will provide for my remaining years very well. I have some extra cash and have decided to invest on my own through a discount brokerage firm. I am being beaten to death. I am investing for the long term. Please make some suggestions. -- J.H.
There are going to be a lot of jealous investors when they see you've got a self-directed portfolio worth more than $100,000 that you can invest without worrying about how it will impact your retirement lifestyle.
Your portfolio shows that you like to invest in large-cap, value-oriented investments. That carries through to your investment in a deeply discounted
closed-end bond fund,
First Australia Prime Income
. Value investors haven't done very well over the past few years, as momentum investors pushed technology valuations through the roof and left basic industries and services sitting on the sidelines.
You haven't held any of your investments longer than 16 months. In that time, you've lost about 13%. Of your 12 holdings, only three are currently in the black:
Value investors are come-around investors. They expect the market to come around to their viewpoint on a stock. Usually, some event has to take place that will enlighten the market. Meanwhile, good earnings and/or high dividend yields have to sustain the value investor until the market catches on. It's good to have a long-term outlook when you're a value investor.
But your value bias isn't the problem with your portfolio. Rather, it's your overemphasis on telecommunications stocks. As shown in the table below, you've got close to half of this portfolio invested in these stocks. With the drubbing that the telecommunications industry has taken since January (the
index is down 35%), it's no wonder your portfolio's value has declined.
Is the telecommunications sector a meteor that has flamed out or a comet that will shine brightly again? I think the sector is a comet, and a value investor can reasonably expect it to make a comeback. But why not move towards a sector fund rather than making such heavy bets on individual stocks?
Two of your holdings,
seem to be breaking up in the earth's atmosphere. (See a recent
Jim Cramer column for more on AT&T.)
It would also be a good idea to diversify your energy holdings. I don't see a reason to keep a quarter of the portfolio's value in one energy stock, ExxonMobil, when there are a lot of different ways to invest in this sector.
I don't know what drew you to First Australia Prime Income. The relationship between interest rates and currency rates is efficient enough that the average investor can't expect above average returns on foreign bond investments after currency adjustments. The fund, which has been in existence since 1986, hasn't performed very well, and in the time that you've held the fund, it is down 24%. The fund has a high annual expense ratio for a bond fund, and fully one-third of its annual income stream is a return of principal.
Trading at a 23% discount to its net asset value (NAV), it looks like First Australia Prime Income could be a decent closed-end fund play. The question is, who's going to put it in play? Lots of closed-end funds trade at discounts to NAV, but only a few will inspire arbitrage plays to close the gap between the share price and the NAV.
A final point: Work with your financial advisor and your accountant to determine the best way to harvest capital losses in your self-directed account and perhaps offset some gains in your professionally managed portfolio.
Send In Your Portfolio
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Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at