Part 9: Diagnostic Portfolio Checklist

By Patrick Rau, CFA ∙ May 2016

 

The final “article” in this series is simply a quick summary that you can use as a reference checklist as you work on your portfolio. For more details, please refer to each relevant article, which I have denoted in parentheses.

 

Pre-Asset Allocation

 

• It is always good to know the historical returns and riskiness of the various asset classes, although past performance is no guarantee of future results (Part 1).

• The longer your time horizon, the more your portfolio should be weighted toward stocks, everything else being equal (Part 1).

• Diversification can help lower portfolio risk for a given level of return, or even increase expected returns while reducing risk, particularly over shorter-time horizons. But don’t go too overboard on diversification, since that will greatly increase transaction fees (Part 2).

• The lower the correlation coefficient between two assets, the more the diversification benefits they provide a portfolio (Part 2).

 

The Asset Allocation Process

 

• Start with your specific investment goals, and understand your ability and willingness to accept risk (Part 3).

• Begin your asset allocation with the four basic asset classes: stocks, bonds, cash, and other (Part 3).

• Then break these basic allocations into sub-allocations. You can use the rationale provided in that section to help (Part 3).

• There are several free online portfolio calculators that can assist you. I particularly like FutureAdvisor.com (Part 3).

 

Funding Your Portfolio

 

• Mutual funds vs. ETFs (Part 4). Both have their plusses and minuses. ETFs are likely more suitable for index investing, while you will need mutual funds or smart beta ETFs if your goal is to beat the market (Part 5).

• Managed mutual funds have a difficult time outperforming their benchmark indexes over time, but they can succeed over a number of years in the short-run (Part 5).

• My criteria for selecting mutual funds (Part 5).

  • Morningstar 4 to 5 stars

  • Forbes A to B ratings in both Up and Down markets

  • Low/no sales loads

  • Low expense ratios

  • Low turnover

  • High Active Shale score

• Can also invest in individual securities, but this takes time, effort, and skill. Investment advisors can help, but their fees could wipe out any gains they create (Part 6). However, there are some low fee advisors that primarily use low cost products (Part 3).

 

Ongoing Portfolio Maintenance

 

• Use Morningstar’s X-Ray feature to determine whether your portfolio is too heavily weighted in a particular industry or region (Part 3).

• Rebalance 2x per year. I suggest every April 15 and November 1 (Part 7).

• Review your long-term asset allocation targets every 1-3 years, or whenever your circumstances change (Part 7).

 

Things To Look For In a Financial Professional, Should You Choose to Hire One (Part 6)

 

• What is their fee structure? Remember, fees can severely undermine the future value of your investment portfolio, thanks to the impact of “negative compounding.”

• How do they select securities?

• How many financial professionals do they employ?

• Are their return goals realistic?

• Are they GIPS compliant?

 

Moves That May Improve Your Portfolio’s Performance (Part 7)

 

• Starting early

• 401k matching

• Reinvesting dividends

• Rebalancing 2x per year

• Revising your long-term allocations every 1-3 years

• Proper use of tax deferred vs taxable accounts

 

Thoughts on Retirement Spending (Part 8)

 

• Investment professional fees to plan for the “decumulation” phase of one’s investment cycle are generally well worth it.

• The traditional 4% annual spending rule is popular, and easy to implement, but still carries longevity risk.

• You can eschew actual annuities and create your own annuity with a TIPS ladder.

• Longevity insurance is a relatively new but powerful tool to combat longevity risk.

• Several new spending rules are emerging that will likely improve upon the 4% rule.

 

 

Patrick Rau, CFA, is a former equity research analyst, both on the sell-side specializing in energy and the buy-side as a generalist for a financial advisory firm. He holds a B.A. in Economics from the College of William & Mary, and an MBA in Finance from Georgetown University. He is married to Brenda Rau, Licensed Real Estate Salesperson with Compass Real Estate in New York City.

 

Disclaimer: All information and calculations are based on information deemed to be reliable. Patrick Rau, CFA is not an investment advisor, and this paper is for educational purposes only. Nothing herein should be considered financial or investment advice. Moreover, Patrick Rau, CFA shall not be held liable for any losses or damages that may result from any decisions you make based on any of this content.

​

​