A $95,000 investment account gets political

There's a place to express your views about politics, but it's not with your core retirement savings.

By MSN Money Partner Aug 27, 2014 2:56PM
Image: 401k © Photodisc, SuperStockBy Ron DeLegge, U.S. News & World Report

Even though the Standard & Poor's 500 Index ($INX) has once again broken to record highs (just above 2,000) and is now up 164 percent since bottoming in 2009, the unfortunate plight of far too many investors is consistent market underperformance.   


In truth, it's alarming whenever a person’s investment portfolio has subpar performance. It's especially alarming when that lackluster performance occurs smack dab in the middle of a raging bull market

Simply put, if a person's investment portfolio can't perform well during favorable periods, how can they expect to do well during less favorable times? It's delusional to believe, after years of poor performance, a person's portfolio will suddenly change for the better.

This week's portfolio report card is for Charles in Sweetwater, Oklahoma. He’s a 66-year-old cattle farmer. 

Charles told me he "doesn’t have much gamble" left in him because he "lost his butt" in the 2008 stock market drubbing. He lost money in individual stocks, such as Bank of America (BAC) and Chesapeake Energy Corporation (CHK), during the downturn. 

"I had most of my money in what I thought were safe stocks and diversified, but little did I know. I just panicked and got out at the bottom and never got back in," he says.

Charles self-manages $95,000 scattered among three types of accounts; a traditional individual retirement account, Roth IRA and taxable investment account. Let's examine his investments to see what kind of portfolio report card he receives.  

Diversification. Having an adequately diversified portfolio is not about the quantity of investments you own, but rather, how well your money is divided among a variety of investments with dissimilar characteristics.

Charles has $15,000 invested in physical silver while the remaining $80,000 in his traditional IRA, Roth IRA and taxable account are invested in money market accounts and cash equivalents. Although he has exposure to two major asset classes -- cash and commodities -- he misses stocks, bonds and global real estate.

A 66-year-old farmer’s current investment mix:

  • $15,000 in physical silver
  • $15,000 in Roth IRA (money market)
  •  $35,000 in traditional IRA (money market)
  • $30,000 in taxable account (money market)

Cost. Minimizing investment costs should be every serious investor's priority. Of course, investment portfolios with excessive trading activity or elevated fund expenses are major red flags. But so are portfolios with hidden 12b-1 fees, loads and advisory fees that don't match the extent of the actual advisory work being done.   

Because the bulk of Charles' portfolio is invested in cash, and it's been that way for a while, he doesn't have any issues in terms of cost.

Risk. Charles told me, "What worries me most is this country being $17 trillion in debt, printing worthless money, and not knowing how to play the market." One of Charles' chief problems is that he's focused on the wrong ball.

Instead of worrying about this country's economic problems, Charles should be focused on his own financial needs and the things that he can control in his own life.

His current asset allocation is what I would expect of someone on capital preservation mode, who needs to be 100 percent liquid because he is expecting a major upcoming expense. However, that doesn’t appear to fit with Charles' life circumstances or financial situation.

Ultimately, his portfolio's risk and asset mix aren't compatible with his ultra-conservative leanings. The portfolio is excessively conservative, which created a whole new realm of risks Charles never thought about. And that's why his 85 percent exposure to cash and 15 percent to silver doesn't get the job done.  

Tax-efficiency. From what I analyzed, Charles' three investment accounts aren’t creating any unfavorable tax burdens. He's still contributing $6,500 to his IRAs, so he gets some tax deductions there too. 

Eventually, his plan is to tap his traditional IRA in 4 ½ years by withdrawing the required minimum. Since the traditional IRA has only $35,000, he won't get much money. Thankfully, he has enough income from his other businesses and ventures to survive.

Performance. How did Charles' combined portfolios perform compared to a portfolio of passive index exchange-traded funds with exposure to the five major asset classes? The yardstick portfolio I assembled, that matches his age, risk profile and life circumstances, returned almost 8 percent over the past year versus his portfolio's 0.15 percent return. That's a Grand Canyon difference in underperformance.

Summary. The final portfolio report card for Charles' combined investment accounts is an "F." He flunked in nearly every category that mattered. 

His portfolio's biggest weakness is that its concentration is in just two asset classes -- cash and commodities -- which is under-diversified and incompatible with his true risk profile. If he fixes these crucial areas, it should help his portfolio's performance in the long-run.

Market timing, hunches, dart-throwing and political views have absolutely no place in a person's core investment portfolio. Stop already. Save that stuff for your non-core investment accounts -- or your risk capital, which is the money that you can afford to lose.

The sanctified hour has arrived for Charles to take responsibility and control of his investments. "F" is an unacceptable score in any year, and I want him to end his streak of missed opportunities and poor decision-making. Can he do it? I sure hope so.  

Ron DeLegge is the founder and chief portfolio strategist at ETFguide.com. He invented the Portfolio Report Card to help people understand the strengths and weaknesses of their investment portfolios so they can make better choices. Ron is also a radio host of the Index Investing Show and author of  "Gents With No Cents: A Closer Look at Wall Street, its Customers, Financial Regulators and the Media.”

More from U.S. News & World Report

Aug 27, 2014 4:11PM
The stock market up 164-percent in just 5-years? After an almost complete systemic collapse of not just the stock market but the whole entire economy, and not just in the U.S., but the whole world, and the only thing that stopped it was a full on rigging, manipulation, and endless stimulation. No mention of extracting the failures, the excess greed and avarice? No. And then the stock market rewards itself with a 164-percent bullsh*t bear market funded completely on FED free money. Why are not all of these criminals tarred and feathered?
Aug 27, 2014 3:36PM
Newly released GDP numbers are now a corrected 1.5 percent (from 5.5-percent) -- after seven (7) years of FED stimulus to rich folks and Wall Street? And all the market can do is shout about single digit records on the stock market? Apparently, lies, liars, greed and avarice controlling a fully controlled, rigged, and manipulated market have been "priced in". This can be the only reason for people like Cramer to babble on. Whoop it up there, Lame Street.  
Aug 28, 2014 9:40AM
There's a lesson in here somewhere if we're smart enough to find it. I think it is this: "Trickle down" economic policy won't work if there's no demand, especially in a global economy. The FED policy of printing money and letting banks decide what's best just hasn't worked, has it? What will work is a structured economic policy that rewards investment in THIS country and penalizes excess speculating in commodities and other such investments.
Aug 28, 2014 10:28AM
All the pieces are in place for cataclysmic failure. Revising numbers that built the current value of the indices generally suggests crime. Punishment quickly follows. 
Aug 28, 2014 10:27AM
Isn't it a little late for him to get back into the rigged market?  If he were to buy stocks now, the coming market collapse will prove that he was right to stay out of the market.
Aug 27, 2014 5:59PM

His portfolio sounds reasonable for a small farmer.  His biggest asset no doubt is LAND.  And his agribusiness.  Silver makes plenty of sense.  Guns and Ammo also.  Cash and cash equivalents in case he needs to more for his business make sense too. He can always add stocks whenever he choses to do so.  He certainly should not buy bonds. And stocks could fall 50% or more if interest rates rise, and the government continues with these democrat policies of trying to tax and print our way to prosperity and trying to borrow and spend our way out of debt.

I'd say his portfolio gets a B- as he is invested in things he understands.  And has avoided the risks of stocks. 

Aug 28, 2014 8:14AM
Recent Rutgers survey says America is growing more and more pissed with the Rigged Recession and it's long term effects. Seems reasonable that commonsense people are concerned and Kool Aid addicts are so enamored by greed that they ignore every warning sign until the gleam from the blade of the guillotine wakes them out of their stupor. 
Where do you run to once you've screwed the whole world?
Aug 27, 2014 3:27PM

"Instead of worrying about this country's economic problems, Charles should be focused on his own financial needs and the things that he can control in his own life."

What? It was clearly the Country's economic problems that caused the Great Recession. Seeing how we have NOT solved anything since, his concerns are more then warranted. How some folks think it's their right to Fear Folks into some Bogus so called opportunities is beyond belief. If this GROWN man doesn't want to risk money in Rigged Markets, that's his call, not Yours. Yet another gloried Car Salesman trying to fear folks in Markets. My grade for that type of behavior, F.

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