Give Your Portfolio a Checkup - Morningstar Individual Investor Conference 2013

Here is the link.

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Six steps in the portfolio checkup process
Step 1: Gauge viability of your current plan
Step 2: Evaluate portfolio positioning
Step 3: Check liquid reserves
Step 4: Review individual holdings
Step 5: Troubleshoot potential risk factors
Step 6: Conduct a cost, tax-cost audit

Step 1: Gauge viability of your current plan (Accumulators)

• Use an online calculator to gauge adequacy of current investments and savings rate. 
• Thumbnail test: 12% to 15% current salary = annual savings target
• Another: 25 times current income needs = at-retirement target ($100,000 in annual income needed --> $2.5 million portfolio)
• More precise online tools include:
• T. Rowe Price Retirement Income Calculator
• Fidelity Retirement Quick Check
• Fidelity Retirement Income Planner

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Step 1: Gauge Viability of Your current plan (Accumulators)

The best tools are holistic and factor in:

• Inflation
• Reasonable return expectations
• Taxes
• The role of other income sources such as pensions and Social Security

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Step 1: Gauge Viability of Your Current Plan (Accumulators)

Also check progress toward maxing out tax-advantaged vehicles for the year

• 401 (k) contribution limits for 2013
• $17,500 if under 50
• $23,000 if over 50
• IRA contribution limits for 2013
• $5,500 if under 50
• $6,500 if over 50

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Step 1: Gauge Viability of Your Current Plan (Retirees)

• If already retired and taking withdrawals, check viability of current withdrawal rate
• The traditional rule of thumb is that 4% with an annual inflation adjustment is a safe withdrawal rate for most
• For someone with an $800,000 portfolio:
• Year 1 Withdrawal: $32,000
• Year 2 Withdrawal: $32,960 (assuming 3% inflation)
• Recent research has suggested that an even more conservative withdrawal rate (3%) makes sense given low bond yields

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Step 2: Evaluate Portfolio Positioning

• Morningstar's X-Ray tool is a good starting point
• Portfolio Manage enables you to X-Ray, as does Instant X-Ray (on Tools tab of Morningstar.com)

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Step 2: Evaluate portfolio positioning 

• Focus on asset allocation relative to your targets (Morningstar Lifetime Allocation Indexes, target date funds can be a starting point)
• Next check sector/ style positioning
• Geographic exposure
• Individual stock overload

14:36/ 50:09 <- I need to work on this research. Do not panic! 

Step 2:What should you do if you're light on stocks?

• Take comfort in the fact that stocks in aggregate aren't notably expensive, though not cheap either (average price/fair value for Morningstar's covered stocks = 1.01)
• Employ a dollar-cost averaging strategy, deploying fixed amounts at regular intervals
• Make sure you have a good value-oriented manager (or two) in your portfolio
• Look to Morningstar's highly rated stocks for ideas

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Step 2: What should you do if you're light on bonds?

• Rebalance into bonds, but limit interest-rate sensitivity and keep credit quality high
• Invest with flexible core funds such as Harbor Bond (HABDX), Metropolitan West Total Return Bond (MWTRX)
• If retirement is close at hand and you're notably underweight bonds, de-risk immediately
• Move bond money to cash
• Dollar-cost average over a period of months

step 2: Evaluate portfolio positioning: Some benchmarks

Total U.S. market style                            Price/fair value by style

24   24  25  Large                                     0.93   0.99  1.05  Large

  6     6    7  Mid                                        1.03   1.05  1.10  Mid

  3     3    3  Small                                      N/A   N/A   N/A Small

 V     B        G                                            V        B       G

V - Value

B - Blend 

G - Growth 

To check benchmarks in 2019, please check this web page: Market fair value. 

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Step 2: Evaluate Portfolio Positioning: some benchmarks

Global market cap distribution
U.S.: 46.2%
Rest of world: 53.8%
Developed markets: 88.6%
Developed markets: 11.4%

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Step 3: Check Liquid Reserves
Baseline amount if retired:
6 months' to 2 years' worth of living expenses

Baseline amount if working:
3 to 6 months' worth of living expenses

Do not count:
Residual cash in mutual funds, short-term bonds

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Step 4: Review Individual Holdings
Morningstar ratings and analyst reports enable you to quickly review status of current holdings.
For funds, red flags include:

• Manager, strategy changes
• Persistent underperformance v. cheap index fund
• Dramatically heavy stock, sector bets

For stocks, red flags include:

• High price/fair value
• Negative moat trend

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Step 5: Troubleshoot Potential Risk Factors

Risk Factor 1: Potential yield-chasing in bonds, where landmines abound

• Limited yield cushion on higher-risk bond categories
• Excessive interest-rate sensitivity

Risk Factor 2: Potential overvaluation in certain dividend payers

One more slide: