Monday, May 20, 2019

Give Your Portfolio a Checkup - Morningstar Individual Investor Conference 2013

Here is the link.

2:04/ 50:09
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
5:49/50:09
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
6:07/ 50:09
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
7:42/ 50:09
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
10:55/ 50:09
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)
12:30/ 50:09
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
18:19/ 50:09
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

22:41/ 50:09
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%

25:11/ 50:09
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

27:45/ 50:09
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
30:41/ 50:09
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:




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