Free Portfolio Analysis by Vanguard

Vanguard offers a portfolio evaluation tool called Portfolio Watch, as part of its Voyager select services. The analysis compares your stock and mutual fund investments with overall market weightings in terms of capitalization, style, and industry sector. The concept is that the more your holdings vary from the market bench marks, the greater the probability that your returns will differ, higher or lower, from the market.

The exam included an evaluation of overall market risk, mutual fund costs, tax efficiency and concluded with steps or recommendations to update and fine tune my investment strategy.

Before we get to the analysis, let’s take a look at my portfolio asset allocation. I call it the CoffeeHouse Portfolio with a Double Espresso Shot. The allocations for each holding are shown in the following table. The dollar amount of the asset is divided by the total dollar amount of the portfolio to arrive at the “weighting” for each fund or stock in the portfolio.

The Fixed Income asset type is a money market account. The 40% allocation to Large CAP stocks has been broken down into three subcategories: Health care fund, defense contractor stocks and technology stocks. So, health care is actually 28% (0.7*40) of my holdings, defense is 10% and technology 2%.


















Cautions
Throughout the analysis VG provided advice, tips and made note of a few cautions. VG states that these cautions are areas where my portfolio differs from the broad market target. I have listed each of the four cautions below. I have also summarized my assessment and what my plan of action is concerning these cautions.

Bond allocation is low
I have never been comfortable settling for the significantly lower returns of bonds. In Bogle’s book, Bogle on Mutual Funds, he talks of bonds returning 7% and equities 8%. This was back in the 90’s - I would like to find a quality bond at that rate, today. Bonds are not risk free and have much less upside than stocks.

Certainly as one moves into retirement it is prudent to add more fixed income assets to reduce risk and smooth out the market ride. I have been accumulating cash in a Money Market account as MMs have outperformed bonds in the last few years with minimal additional risk. I plan to direct that cash towards the purchase of TIPS and Municipal bonds in the near-term future.

Hold Less than 5% in company stock
VG recommends not holding over 5% in any one stock. This is sensible advice given the volatility of individual stocks. I have not made this change because the stock that I hold at 10% is a non-cyclical, defensive stock that should do well in volatile markets and recessions. I am well aware of the Enron debacle, but I think every situation needs to be evaluated in it's own light.

Increase Emerging market holdings
Given the capital and liquidity issues that are occurring in the US (see financial mortgage meltdown), I am hesitant to invest in new developing countries that may require extensive amounts of capital for business development. I prefer to invest in developed international markets which have less risk. Additionally, Emerging markets have had a significant run-up in performance lately and are not a good value buy at this time, anyway. This is a sector that I have researched, but never felt compelled to pull the trigger.

Hold Growth and Value stocks in similar proportions
VG recommends a portfolio with equal weight in growth funds and value funds. This is an area that I have been working on to get to at least a 2:1 ratio (Growth equals 2 X Value). I will continue to add new funds to the value side of this as I move into retirement phase. In addition, I am interested in increasing my holdings in Berkshire Hathaway stock – which I consider to be a large cap value stock.

Overall take
The analysis and charts are organized and informative. The advice is straightforward and easy to understand. I especially liked the “xray” ability that VG used to dissect some of my fund holdings. For instance, one fund has a 15/85 split between international and domestic holdings. The tool actually split the fund by the appropriate amount into each of the two sectors, so that my total portfolio allocation reflected this split.

The analysis confirmed my suspicions about some of the shortcomings of my asset allocation strategy. The second opinion was helpful and motivational. After reading through the analysis a couple of times, I have been encouraged to make some changes to my bond and value fund allocations.