Is my portfolio spread across too many funds given my age?
My advisor with a well-known company has my retirement portfolio in 20 or more funds (30 percent is in ETFs) and four cash funds. It's very confusing. They claim to be a fiduciary. The money is safe but returns given this year (4.9 percent) have not been good enough in my opinion. I'm 65 years old and my spouse is 64. Is my portfolio spread across too many funds given my age?
Twenty four plus funds is likely far too many. If I were to review your portfolio, I'd likely see a lot of duplicative positions — same companies, same industries, same geographies, same bond maturities, etc. This is called the pu pu platter approach, and it is common among advisors or firms that don't express any real opinion on the markets. However, your return so far this year is actually pretty good and raises another alarm in my head. I suspect you have a lot of large-cap U.S. equity spread out among several different funds. So while you have a great many funds, I wonder if your portfolio is actually very diversified after all.
Twenty funds is a lot, and you likely have duplication. There is such a thing as over diversification. And Modern Portfolio Theory (MPT), which I don't agree with parts of, dictates that because the fact you are "seasoned" you need to have a nice chunk in bonds, and move more towards bonds as you get older. Never mind the fact that bonds are going down and have been for approx a year and interest rates are still rising. The 60-40 Balanced Funds are only up a few percent for the year because the 40% in bonds have lost money.
You want enough diversification so that one or two positions don't ruin your retirement, but not too much that is completely dilutes your return. Therefore you want to remain in a variety of the stronger sectors while avoiding the worst 30%. So this year, you should have avoided bonds, emerging markets, and gold. This will change at some point, but thus far, that trend is still very much intact.
I also believe that investors should have a sell discipline on all of their positions in their portfolio. This is contrary to the mainstream, but it is much more about the risk in the markets or asset class than your risk tolerance. Position sizing and a sell discipline are even more important as you get older and cannot afford to go through a major correction.
This is what you are feeling but just can't quite put your finger on it. Many mainstream advisors who are fiduciaries and honest believe the MPT data, but the numbers are cooked. MPT assumes that returns fall under the Normal Standard Distribution, or Bell Curve. They don't! Returns are not normally distributed under the Bell Curve. Returns are more widely distributed and have "fatter" tails, known as tail risk. In plain English this means that they are measuring for the 100 year flood, but it come every 10 years or so. There are more surprises to the upside and the downside.
They also believe you can't ever time the market on a trending basis (not day trading), therefore you simply have to invest in a whole diversified basket of stuff even if much of the basket is going down. I disagree & believe if you can just weed out the bottom 30% or so from the group, you will be better off using as many ETFs as necessary, normally 6 to 8, coupled with individual stocks with no mutual funds. Individual stocks don't have the carrying costs that funds do and you can better control your taxes. ETFs are also tax efficient, but mutual funds are not. Do they do individual stocks, or are they simply "outsourcing" to funds. These are all questions you should ask. I would also ask if they have a sell discipline or are they buy-and-hold. That's my two cents.
Hope this helps and best of luck, Dan Stewart CFA®
That does seem like an awful lot of funds and four different cash funds? When we put together portfolios, we typically will identify the styles of investing we want to own (large cap domestic, small cap, international, emerging markets, various bond types, alternatives, etc) Theoretically, you could have a portfolio that required that many, but I'm doubtful. If you were to run what I call a crossover report (an analysis that looks at how many of those funds own the same thing) I'll bet you that there's a lot of duplication.
I would caution you, however, on judging return based on the number of funds. If you require safe money, and you're diversified globally, then 4.9% is probably not a bad return. The only markets that are outperforming really are domestic equities. Your risk tolerance may not be equivalent to the risk associated with say the S&P 500.
You are quite right about the number of funds. In almost all cases, no more than a dozen funds covering most major asset classes should be sufficient. Indeed, I find it curious to see that there are four cash funds. One floating rate fund and perhaps a short term high yield fund would do the job.
You should also be in the lookout for funds with high fees, which could be reducing your returns.
With that said, however, and given the likelihood that your account holds equities and fixed income securities, returns in the mid single digits are within a normal range. As you probably know, bond returns have been flat and returns from international markets have been negative. Properly diversified portfolios need both, but they have been a drag on results so far.
Your Financial Advisor is with a well known company holding your retirement portfolio in 20 or more funds and four in cash funds. Working for a top tier well known company is not in and of itself the security you need to ensure your money is doing it's best job for you and your family. If you trust your advisor fabulous. Make certain that the questions you are asking today are the same questions you will take to your Advisor. Spreading risk too thinly may cost too much. Your portfolio may contain too many stocks that are not collectively working to make you profitable each and every day. This focus is essential for your success.
Spreading Risk into 20 or more funds (30 percen in ETF) and four in cash may be a great way to go but this depends on which fund is utilized and annualized returns gained within each of these funds over a one, five and ten year period. What must be taken into consideration are fees charged by each fund family. Brokers/Advisors are incentivized and get paid for enrolling clients in each fund. Be certain, the goal of the Advisor is not to make the Broker wealthy, the goal is to make you wealthy, period.
Direct questions to your Advisor. Get answers to why your portfolio contains the present dynamic portfolio mix. Are choices based on your specific goals and directives? Your Advisor is your trusted Fiduciary who knows why funds were chosen in the first place, why multiple portfolios and cash accounts were chosen for your needs.
If any of the selections made by your Advisor for your portfolio are "confusing" in any way it is time to ask very specific questions. If selections for your cherished retirement monies and portfolio selections are yielding gains of 4.9% which is similar to a conservative money market account, it is time to ask specific questions if your intent had been growth over time. Conversely, if your goal from the start was an ultra conservative investment strategy, choosing safety rather than search out a strategy with any potential for gain, perhaps 4.9% is fine.
In a dynamic finanancial portfolio the most important thing to focus on is for the individual to possess a clear understanding of your investment choices on a month to month basis, an annual basis for years to come. As importantly, knowing each stock, understanding each sector and the potential gains to be had from each fund family is crucial from the commencement of a game plan. This can not be done by the Broker alone but must be dynamically chosen between the Broker and yourself. If you are confused about any or all of this discussion, demand answers, seek out a second opinion, find out why many funds, diversity with little gain.
The most important thing for you and your spouse is clarity, focus and complete understanding of where your money is going into sound companies making solid long term profit slowly, consistently with an eye to the economy. Spreading risk in a portfolio containing 20 funds who all charge fees of varying amounts may not be best based on goals when you can achieve similar results utilizing a collaborative approach.
Review each and every holding within the account. Look at 1, 5 and 10 year returns for each and every Fund, each and every ETF, each and every individual stock. Markets fluxuate, acknowledge this fact. With control and monitoring of this phenomenon despite no guarantee in the markets, you can map a strategy to gain much over time. The average annuaizedl gain for S&P 500 since 1928 is 10% annual.
An investment in an IRA is a long term investment. As such, tax deferred funds held within an IRA must be made up of superior companies poised to do well for the long term. You along with your Broker must research companies, industries, Mutual Funds and ETFS looking at each and every stock within the fund so you benefit from good business acumen for each and every company(Amazon, Apple, Microsoft, Tesla).
Bravo for you for stopping now, questioning your returns achieved in 20 funds or more with a critical eye for performance. Your question spoke to the issue of Safety. Between you and your husband this is paramount. The master of this ship is you, not your Advisor. As Fiduciary the ultimate Trust and Responsibility is crucial for you to be grounded on all the funds you are invested in. If this is not made clear to you, you have the responsibility to take action. Time goes quickly. Do not wake one day to say where did time go?
Because you were forward thinking to stop and question your portfolio, I applaud you! I encourage educated caution going forward to maximize returns in a market that will offer returns to those willing to do their homework, decrease risk while investing in solid companies.
As a Financial Advisor, I mentor, guide and assist those who seek to achieve financial independence. I am passionate to empower all to achieve financial independence. My father recently passed. A brother in Law recently passed. I look at life differently today than I did when I was a young girl. I empower others to respect and to nurture money, your precious timeline and your opportunity to create a legacy one baby step at a time.
All the very best to you.
Jan Attard, MBA, Registered Investment Advisor
J. Oliver Maxwell, LLC