Greetings Dr. Don, Thanks in advance for looking over my portfolio. My name is D.W. I'm married with three small children (ages 7, 9 and 12). We have additional assets outside of the publicly traded stocks and funds below. We can tolerate a good amount of risk. I am 42 years old and my wife is 37. We have income to cover house payments and funds set aside for college funding. We do not anticipate needing the investments or income for at least 10 years. Please note that some of the taxable holdings are in DRIP (Dividend Reinvestment Plan) accounts. Thanks for reviewing my portfolio. Sincerely, D. W.
I took on the task of reviewing your portfolio because I was fascinated by the size and complexity of the portfolio. All told, you've got more than 50 holdings, but because many of the holdings are in the same industry, there's not as much diversification as you would expect.
If you feel you can pick the companies that will outperform their industry, buy the companies. If you can't pick them, but feel the sector will outperform the overall market, then overweight the sector and let the market sort out the winners for you. Your portfolio has a lot of individual investments in the same sectors in which your mutual funds have heavy concentrations -- technology and telecom, in particular.
Here's some advice: Lose the DRIP accounts. With a taxable portfolio of almost $175,000, you don't need to deal with the vagaries of these accounts. Consolidate them into your brokerage account.
Also, you should lose all your small positions. You've got about 25 positions that each represents less than 1% of the total value of your portfolio. If you don't like an investment enough to commit 1% of your financial assets to the investment, then it's time to move that money elsewhere. Don't forget to consider the tax implications when you reinvest your taxable accounts, but look to manage the tax situation rather than just avoiding taking gains or losses.
Your international exposure of a little more than 10% isn't a concern, but why do you need two world-stock funds,
Janus Worldwide and
Scudder Global Discovery, and two foreign funds,
Liberty Acorn International
Pilgrim International Small Cap Growth, to get you to that point? The international focus of these funds is on Europe, Japan and the Pacific Rim, while the two world-stock funds also have a lot of exposure to U.S. and Canadian stocks. Do you really need four funds to get you this exposure?
Regarding loads, you didn't specify the classes of mutual funds that you own, so I don't know if you paid
front-end loads or opted for deferred sales loads in these international funds. In any case, don't trade these funds without understanding the financial impact involved in doing so. Of these four funds, only Janus Worldwide is considered a
no-load mutual fund.
With respect to funds, I count 20 different mutual funds in 23 separate positions in your portfolio. That's a lot of mutual funds. You can change funds in your tax-deferred and tax-advantaged accounts without worrying about the tax implications of that trading. Including a core holding of a no-load index fund would help you to diversify your holdings, while consolidating some of these fund investments.
Investing 20%-30% of this portfolio into an index fund would go a long way toward letting you manage your risk exposure. From there, you can layer on your sector funds and individual stock investments, and be better able to understand the weightings you're placing on the various market sectors. Your current portfolio is a menagerie that can't be effectively managed. Consolidating into a diversified fund brings the number of holdings to a manageable level and allows you to spend more time staying on top of the holdings outside that core holding.
Also, don't forget to take a holistic approach to your portfolio. This means doing things like not ignoring what's going on in your 401(k), keeping in mind what your equity position is in your home and considering how the kid's college funds are invested. Starting out with an asset-allocation breakdown between stocks, bonds and cash would be a good beginning.
Doing so would help you see, for example, that you have a large cash position (10%) in your taxable account. Is this your liquidity in case of a financial emergency, or just a parking place while you decide where to reinvest the money? Depending on your financial goals, there may be room for some bonds in this portfolio, but my sense from your letter is that you're comfortable with the risks inherent in an equity portfolio and don't want to consider bonds at this time.
You also mentioned in your letter that you've got college for the kids covered and that you're not worried about meeting your current expenses, like the mortgage, so this part of your portfolio is dedicated to meeting your long-term financial goals. But have you defined exactly what those goals are? Are you looking to retire in your 50s, buy a second home, travel or all of the above? The more you want from your portfolio, the more aggressive you need to be when making investments in it, but increasing the portfolio's risk also increases the chances that you won't meet your investment goals, so you have to weigh reward and risk carefully against one another.
Send In Your Portfolio
If you would like to submit your portfolio for a makeover, send it to email@example.com. Give us enough details -- dollar values or percentages -- so we can determine how your assets are allocated. Also tell us a little about yourself and your investing goals, and let us know how we can contact you if we have further questions. Though we'll use only your initials publicly, please include your full name so we can verify your identity. Unfortunately, we cannot guarantee your portfolio will be selected for a makeover, nor can we promise to respond individually to everyone who submits a portfolio.
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. At the time of publication, he owned shares of the Vanguard Growth Index fund, though positions can change at any time. 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