Evaluate the Performance of Your Investments

Congratulations, you’re halfway done! Now that you know what you have along with some idea of how to accomplish your goals, it’s time to go over your portfolio to see whether it fits the investment objectives and risk tolerance that you identified. You also need to examine each of your investments and other assets to see whether each one is providing you with a competitive return relative to its peers.

You may want to hire a professional to help you analyze your holdings, in part because there are some tough things they can do fairly easily – such as mathematically quantify the volatility of your portfolio. From reading the previous chapter, you should have at least a general idea of whether your current portfolio fits your objectives. In order to give you an idea of how this works, let’s look at a hypothetical scenario.

A Performance Scenario 

Wendy P. is 42 years old and works full time in marketing. She moved around from job to job in years past, but is making good money in her current position and plans to stay there for the foreseeable future.

Wendy has a moderate risk tolerance and plans to work until age 67 (25 years from now). She has accumulated the following assets since she graduated from college:

• Whole life insurance policy: $100K face value; $11,000 cash value

• 300 shares of Sprint, purchased for her as a college graduation gift and held in a retail brokerage account

• $10,000 in her employer’s 401(k) plan with a 3% matching contribution (she contributes 7% of her $50,000 salary), invested in an aggressive growth fund

• $20,000 IRA rollover at Merrill Lynch, invested in a utility stock fund

• $15,000 contributory Roth IRA at her bank, invested in a growth-and-income fund

• $10,000 in a money market fund

• $40,000 of home equity, remaining balance on mortgage of $70,000, which will be paid off in 18 years

Wendy appears to be reasonably on track. Because of her age, her primary investment objective at this point should still be growth, and, for the  most part, her portfolio seems to reflect that. She has an adequate emergency fund and her home equity is increasing, as it should be. The mutual funds in her retirement accounts seem to be weighted a bit conservatively at this point since they can grow for another 25 years, but if Wendy continues to contribute $3,500 annually to her aggressive growth fund with a matching contribution of $1,500, it will become her main holding in just a few years. In 25 years, it could be worth about $600,000 if it grows at an average annual rate of 10%. 

Meanwhile, if her utility and growth-and-income funds grow at a rate of 6% over that time, they will be collectively worth about $150,000 by retirement.  Her house should be paid off by then, and when she stops working, she may want to look at rolling over her retirement plan into a fixed or indexed annuity that can pay her a guaranteed stream of income for life. In fact, her growth fund may actually be housed inside an annuity contract inside her retirement plan now, but this may only reduce her returns over time, as variable annuities come with several layers of fees and expenses that will reduce her returns over time. If Wendy wants to really let her money grow, she would be wise to invest directly in a growth fund that is not part of a variable contract if that is available in her plan. 

As noted in the introduction to this section, it’s also a good idea to examine each of your holdings separately. Wendy would be wise to get a fact sheet on each of her mutual funds from Morningstar or another third-party analyst that can provide unbiased commentary on the fund’s performance as well as a breakdown of historical performance, fees and expenses and how the fund compares to its peers. She is wise to hold her stock outside of a retirement account so that she can get long-term capital gains treatment on the sale whenever she decides to liquidate it. If she reinvests the dividends now, that may be another source of income when she retires. 

Of course, your risk tolerance and time horizon will likely differ from Wendy’s. If you were in her shoes, perhaps you wouldn’t feel comfortable having that much of your retirement money invested in an aggressive mutual fund and would choose more moderate alternatives. Just remember that you need to have at least the majority of your retirement money growing faster than inflation over time, so that your purchasing power is increasing. Wendy still has her moderate funds, plus her home equity and the cash value in her policy, to access in addition to her emergency fund (the money market account) if she needs to.