We use a diagnostic tool called a “Portfolio MRI” to analyze your investments and assess its (1) volatility, (2) total fees, (3) turnover, and (4) diversification. This personalized investment analysis will help you better understand your investments, the costs and risks associated with them. Armed with this information, we can then analyze how different mixes or styles of investment portfolios may have performed in the past. That enables us to calculate the expected return for your portfolio, and it gives us an idea of how well your portfolio is meeting the goal providing broad diversification that delivers market returns with reduced risk.
You should know the cost of every investment you make. Nothing on this Earth is free. Not lunch. Not good advice. Certainly not bad advice. And that’s fair enough—so long and you’re not overcharged. In this day and age, it shouldn’t be hard to figure out if you’re being overcharged; yet it often is.
Over time, fees can take a tremendous bite out of your retirement. I suppose that’s why so many of them are hidden. It can be worthwhile to understand these costs when choosing a fund or trying to decide whether to stay invested in one you’re in.
Mutual funds hold thousands of different stocks, and have many hidden costs (expense ratios, turnover, load fees, etc.) that can significantly hurt your returns. And we know that there are countless ways to allocate our assets and diversify a portfolio. Also, we know that portfolios must be rebalanced to maintain the proper asset mix. So how do you know how sensible your portfolio is for you? How do you know where you are and how close or far that is from where you need to be? The answer is that you have to take a comprehensive assessment of your portfolio and compare it to the relevant benchmarks as well as other potential options.
The Portfolio MRI will measure the historic volatility of your portfolio and give you an idea of the historic volatility and performance of different asset classes. That allows us to estimate the risks you are taking relative to the returns you’ve seen and compare your portfolio’s performance to the performance of others over similar time periods. So not only can we can see how well the volatility we see matches up with your risk tolerance, we will also see whether alternatives asset mixes would be likely, based on historical data, to reduce volatility or yield higher returns (or both!).
Total Fees & Turnover
As we’ve already discussed, expenses can eat away at your portfolio. In fact, total fund expense (including but not limited to turnover ratio) is the most important variable to consider when comparing funds because it’s the one that actually makes a difference.
The Portfolio MRI will uncover what you are really paying in “total fees” not just the ones you know about. The easiest way to increase your return is to reduce your fees but if you don’t know what your fees are, there is no logical way to find less expensive ones. So we simply drill down into your portfolio to reveal all of the fees that affect your returns.
Since turnover within a portfolio can significantly affect returns due to transaction costs, we will also learn what percentage of your portfolio is turning over in a year. We can then assess that turnover in comparison with an index like the S&P 500 as well as one or more institutional mutual funds. Once we know your actual costs we can then show you how to lower them to keep more of your money working for you.
Diversification & Portfolio Overlap
Diversifying is easier said than done. It’s easy to own stocks across different market sectors—a tech company and an oil company and a clothing company plus a food company. Great. But there are more layers to diversification. You should diversify in terms of size and geography, in addition to market sector.
If you own mutual fund shares, assessing your diversification can involve some work, because the true scope of your investments is hidden. By drilling down into the funds you are invested in, we will learn how many hold the same stocks. We call this Portfolio Overlap. That redundancy can reduce your true diversification and add complexity to managing them. As we know, asset allocation and diversification are overwhelmingly important to a portfolio’s long-term performance. In fact, most people say they know that diversification is important and that their portfolio is diversified. But in reality, most people fall far short of achieving true diversification in their portfolio. Even people invested in one or more mutual funds often hold fewer than 4,000 unique stock or bond holdings in their portfolios, and they may therefore infer that they are well diversified. But in the modern financial world, many mutual funds hold over 10,000 different stocks. (The one I currently favor holds over 12,000.) More importantly, while a wide spread is important, the total number of unique holdings alone doesn’t actually tell you anything about how diverse those assets are—they could all be in foreign banks or fast food companies for all we know.
We will break down your asset allocations in detail, and make sure the mix meets your investment objectives. Then, using indices for different investment categories, we will compare the performance of your portfolio’s asset mix to the historical performance of other mixes. That way we can make sure you are truly, properly diversified.
Free Portfolio MRI – Find Out If You’re On Track to Meet Your Goals
The Portfolio MRI is part report-card and part recipe book. It breaks down information about your investments and stacks them up against inflation-adjusted historical data reflecting different asset mixes, funds, indicies, etc. So like to walk through the Portfolio MRI with my clients step-by-step. I want everyone to understand the logic behind the investment choices they are making, and how their portfolio fares in terms of the four rules of investing.