How to Evaluate Your Investments | A Portfolio Checkup Using Free Online Tools

everybody welcome back to the financial freedom show my name is rob berger in this episode i'm going to walk through how to evaluate an investment portfolio i've had the opportunity to evaluate countless investment portfolios since starting this youtube channel i've done many of them in past videos i literally have hundreds of emails from folks asking me to review their portfolio and the reality is i just can't do it it's just it's just overwhelming so what i thought i'd do is walk through in this video how i do it and a viewer has been kind enough to allow me to use his investment portfolio as sort of the guinea pig so we're going to tear apart his portfolio but i'm going to walk through how i do it how i think about it the tools that i use uh with the goal of sort of helping you evaluate your own portfolio i think this could also be useful if you're just starting out investing maybe you don't have much of a portfolio to evaluate i think sort of the steps that i take can be very useful in building your first investment portfolio as well so that's what we're going to do let's get started let me first show you his portfolio here it is and it may look a little overwhelming i don't know a little more complicated but it's really not he basically has three accounts at the top here we've got a fidelity 401k and he's at the moment got uh i guess uh six of their etfs and then below that is a vanguard roth ira also six investments these happen to be mutual funds mutual funds tend to have five letters in the ticker and uh etfs typically three but as you can see sometimes two or four and then his uh third account is a brokerage taxable account and uh and the portfolios in each account are are roughly the same there are some differences in the taxable account which are important we'll get to that uh in a minute but that's his portfolio and so uh the the way i like to start is actually believe it or not to ignore the portfolio first of all it's the starting point no may seem odd we're going to evaluate this portfolio by ignoring it but we kind of are and the reason is we want to know what our goal is what are we shooting for we want to have a target and just looking at a bunch of mutual funds it's like logging into your 401k and seeing all your investment options if that's your first step and you don't have a goal it can be very overwhelming so what's our goal well we want diversification right we don't have all our eggs in one basket we want to keep our costs low and don't worry i'll show you how we can evaluate the cost of these funds it's very easy we want to keep things as simple as we can we'll talk about that uh we want more stocks than bonds i think that's true certainly true if you're a long-term investor for those more than 20 years out from retirement personally i think a 90-10 portfolio is is a good place to be not written in stone it's a guideline some have 100 stocks some might have 80. for me it was 90 10. and then as you get well about 20 years out and moving from there down to about 10 years uh to retire i like to move down to about 80 in stocks and then as you move into retirement you sort of have to decide what your stock bond allocation is going to look like in retirement for me it's going to be around 70 stocks for this viewer whose portfolio we're going to look at he's targeting 60 40. certainly reasonable but the key point is we want more in stocks than bonds in the vast majority of cases and then the fifth thing since he has a taxable account we have to think about tax efficiency and what types of investments we should have and what types of accounts right that's what we have to think about that's sort of our so our goal then to take all of that and wrap it into sort of one nice package i think is this we want to identify what i call a core portfolio and what does that look like well let me show you it's very simple we want a core portfolio that covers three things we want oops let me get this working here we go we want u.s stocks we want some kind of fund or funds that sort of cover the u.s stock market that's the first thing i believe we want international stocks and let me just stop there there are those that say forget international stocks including some pretty smart people like warren buffett uh and jack bogle founder of vanguard so i you know i certainly wouldn't argue against either of those gentlemen but i certainly believe that international stocks are an important part of a diversified portfolio there's arguments against it obviously you can make your own decision and i've done videos on that in the past but for me a core portfolio includes exposure to international stocks that's the second thing and then the third thing is us bonds we want some kind of fund or funds that cover u.s bonds so there you go that's the core portfolio not complicated it's just u.s stocks international stocks and u.s bonds now we can achieve that in just one mutual fund if we want to we could use for example target date retirement fund covers all all three of those bases and i've talked about them in the past we could also use something like vanguard's life strategy funds which is a single fund you put your money in one place and then they divide it among those core groups of investments and you're done so that's an approach and a very simple approach and certainly one that i think is very reasonable now if we go back to the portfolio we're looking at today obviously that's not uh the choice he's made and that's perfectly fine so what i like to do in evaluating any portfolio or building one from scratch is to say okay in this case what funds does he have that might cover these three bases so we can and and that step uh does a couple of things first of all it helps us sort of uh work through the i'll call it clutter i don't mean that in a negative sense i should come up with a different word but there's a lot of different investments here that we're looking at we need to zero in on those investments that will satisfy this core uh part of the portfolio and that will help us uh first of all identify are we missing something maybe we don't have a fund that covers one of these three categories uh and and if we do have them good it helps us identify those and once we've identified them then we can look at everything else and say why are you here who invited you to this party uh you're not part of the core that we need so do we need you or not all right so the first thing we're going to look at if you see the third row here at the top he's got something called vt vanguard total world stock index fund that actually could serve as part of our core portfolio and i'm going to show you how we would identify that so what we're going to do the first tool i'm going to show you is morningstar it's a free tool uh you can use it to research more mutual funds and etf so all we need to do is the ticker we know it's vt and so if we look at it we always want to check a couple of things the first is the expense ratio remember fees are part of our goal we want to keep things cheap point zero eight or eight basis points is just uh point zero eight of one percent generally anything around 20 basis points or lower would certainly be inexpensive and so this is a very inexpensive fund so we've got that base covered and now we go to the portfolio and we can see what it invests in and we can see just like the name suggests it invests all over the globe uh 60 as you can see here is in u.s equity and 40 is in non-us equity or international and we could even dive into more detail we could come down here under exposure and look at region and see the different allocations or we could even do it by country so we see again 60 percent in the u.s and and then the rest divided among a number of countries so with that one fund we could if we want to cover both the u.s stocks and the international stock so going back to my white board here we could say you know what we've already got two of the three done just with vt and we're done that's an approach now um there is one uh drawback to that for many people if we go back to the screen a lot of folks say look i want some international exposure but i don't want 40 percent that's that's too much i want something less than 40 and that's one of the trade-offs we're going to find there's there's always trade-offs in life right simplicity versus flexibility so yes vt is certainly a simple approach but you you lose the flexibility to decide you know how much uh us versus international you're going to have there's no right or wrong answer it's just up to you to decide do you prefer the simplicity or do you prefer having a little more control for our purposes going back to his portfolio given the way he structured his portfolio i'm just going to assume that he doesn't want to use vt as the core certainly an option so now we have to say okay then what are we going to use we'll start with u.s stocks and probably this the best candidate here would be this fund right here vanguard total stock market index vti and by the way this fund here is a mutual fund vtsax but it's the it's the same thing it's the same investment one's an etf one's a mutual fund and um if we go back to morningstar we'll look up one of them and we'll look up the mutual fund version this time there it is again kind of the same thing we want to do every single time what's the cost all right four basis points good that's inexpensive and does it cover our can it be our core us fund and sure enough it's it's virtually all u.s equity this tells us that it it it invests in largely large companies that's the top row and it's sort of a blend that's what bld means between value and growth and just so we're clear a growth company is one that's really growing quickly uh increase increasing its revenue very quickly like an amazon maybe or tesla but they tend to be more expensive relative to their profits a value companies probably a company's been around a lot longer maybe even kind of seem boring like a coca-cola or a bank actually i don't know if coca-cola is a valued company now that i say that but most banks are these days and so they may not be growing their revenue as fast but their their the cost is is usually lower relative again relative to their profits it's not that one is better than the other sometimes growth companies outperform as they've done over the last few years but there have been decades where value companies have outperformed in this case we're looking for a core portfolio that covers everything we kind of want value we want growth we want big companies we want small companies so if we go back we can actually look at how much of this fund is in each of these squares if you will by clicking this weight link there it is so predominantly large but there's plenty of medium-sized companies plenty of small companies down here and we can look there's growth there's value there's blend it's got a little bit of everything excellent so for us stocks we can use vti i'll just do that or vtsax they're basically the same thing now one thing that i will do is there's a good list of all of the different kinds of funds that can fill in these core pieces of the portfolio i'm not going to cover every single fund in this video but i will link to that resource below the video so you can check that out you don't have to have a vanguard fund you could use schwab or fidelity or t-row price or you know there are other funds that you can use so i'll have that link below the video all right so we've got our u.s stocks that's great now going back to his portfolio what can we use for international and this gets a little tricky remember we looked at vt and it certainly has international exposure but only 40 percent the other 60 percent is in us stocks so not really ideal for the international exposure and there are others like we could look at this global equity v-h-g-e-x well let's check it out b-e-h-g-x did i remember that correctly i don't think i did let's try that one more time v-h-g-e-x ah here we go so we want to look at fees well the first thing we notice is 45 basis points there's a reason it's that much money we'll come back to that a little bit later but that's a little more than we want to spend on top of that if we look at the portfolio it's got the same problem as vt yeah it's got international stocks here 45 percent but look at that 55 or 54 percent is in u.s stocks not really ideal so one that i like for international exposure is just vxus again this is an etf there are mutual fund versions of this this happens to be vanguard what do we do first look at the expense ratio eight basis points love it we're good there go to the portfolio yep it's almost all uh international they do have some cash but it's almost all international if we look at weights we can see just like the the us stock fund we looked at it's got all the value the blend the growth the large the medium the small all covered and again we could go down further and look at the different regions and even by country if we wanted to and see what it invests in so this is i think a good fund we can actually just pencil it right in whoops try that again here we go now notice what we've done here if we go back to his portfolio he really doesn't have a good all total international stock fund so if he wants one this is something he's going to have to add we can see we looked at this one here we looked at vt in his taxable account he has the same vhgex so this would be something this is again this is why i go through this first step of what what can we use for our core portfolio and it'll show us any holes you know in in the portfolio and i think this might be one for him again vxus is just one of many you could use for a total international fund again the link below the video will have others all right so now for bonds and i really like what he's done with bonds personally if you look up here uh in his 401 k he's got two funds he's got the vanguard total bond market fund and a schwab tips fund and he's got 50 of his bond portfolio in each and i think that's a really good way to go if bonds are new to you i've done a number of bond videos in the channel you can search for them i highly recommend them but we can look at both of these very quickly bnd again it happens to be a vanguard fund and many would say this is all you need and that's certainly a reasonable approach so let's go through the quick steps doesn't take much three and a half basis points check we go to the portfolio and what we see is it's got about fifty percent a little less in u.s government bonds about twenty eight percent in in corporate bonds and then the rest in what are called securitized mainly mortgage-backed securities so this is a well-diversified portfolio and i think it's a very good choice and the other one that he used was chp or schp excuse me this is a schwab fund and it invests in tips the advantage of tips is that if inflation is higher than we expect tips can really pay off because the principal value of a tip goes up with inflation of course if inflation turns out to be lower than we expect we prefer not to have tips and so the idea is have a little of both and that's what he's done and i think it's a good uh reasonable approach uh just five basis points we see that there and if we go to the portfolio it's just a tips portfolio treasury inflation protected securities and so i think his approach to the bonds is strong so we've got uh bnd and schp so there you go we've identified sort of what he needs what he has for a core portfolio and maybe what he needs international stocks and i think that's step one and by the way you could stop there what we've just described is the three fund portfolio i suppose if you use two funds for your bonds then it's the for fund portfolio but we could be done we could just get rid of everything else and i think you've got an absolutely wonderful portfolio so now what do we do well in his portfolio let's take a look at it again we now have to go back through everything else and figure out why is it there for example vu which is an s p uh vanguard s p 500 index fund he's already got vti right that's part of our core so why do we need vu and frankly i don't think we do because there's huge overlap and i've done a video comparing vti and vu and their performance and risk over periods of time are almost identical but here's what i want to show you is how you can maybe figure that out for yourself because maybe you're comparing some other funds not just vue and vti and what i want to do is show you portfolio visualizer and a specific part of it when we're adding a fund like for example vu the question we should be asking of course is why are we adding it we've got our core portfolio done right why do we need another fund what's vu adding to this portfolio that we don't have already and there can be answers to that right i mean uh just conceptually we might say okay i know that vti which is our our u.s stock fund core portfolio has some small companies in it but i really believe in small companies and i'd like to make them a bigger part of my portfolio and that's very common so some will say okay i'm going to have most of my money in vti but i'm going to put 10 percent in a small cap or maybe small cap value fund others say i want 10 in emerging markets which are international uh funds that invest in emerging countries think china or russia i really believe in that or yes there are reits in vti but only a couple of percent and i like i like real estate i want to put 10 in reits so we sort of they call it tilting the portfolio one way or another certainly a reasonable approach and something i've done but the question becomes well does vu really tilt this portfolio one way or another what's it do all right one way to figure that out in portfolio visualizer is to use their asset correlation tool all the way down here and all we have to do is type in the tickers of what we want to compare so we're going to type in vti and vu if i've done this correctly and you can see we're looking at this on a monthly basis we could also do it daily or we'll just put in annual changes the results a little bit but this tells us that they're almost indistinguishable that the the correlation between these two funds is 0.99 now you might say well rob that's great what the heck does that mean so correlation ranges from a negative one to a one at one it means they're in lock step one goes up five percent the other one goes up five percent if they go down they go down together negative one means they go in opposite directions one goes up five percent the other goes down by five percent and if you're somewhere in between particularly as you get near zero there's no correlation at all they just they're totally independent of one another all right so back to the screen as you can see these pretty much move in lockstep so in my view vue doesn't add anything to this portfolio now does that mean it's some grave mistake no not at all but adding in this case let's say he's got 14 percent today in vu would not be you could take that 14 and put it in vti and you'd effectively have for all practical purposes in my opinion the same portfolio you just have it with one fewer etfs or mutual funds to have to deal with so in that sense you simplify things now that analysis i think is easy with vu and vti but it gets a little more interesting when you think about vig which is not an s p 500 it's a dividend appreciation fund so we can take a look at it we're going to first go over to morningstar type in the ticker and remember what we do same thing i want to look at those expenses six pips as i like as they like to say good good good what about the portfolio well when we look at it you know it's still in the blend it's sort of still in the same box here that vti is in i mean yeah this the blue dot is what represents the fund and it's it's sort of on that value line so maybe it's a little different and if we look at weights yeah 20 is in value only 12 and growth and there's very little in the small so it's different than vti for sure uh but how different well let's find out we'll take out vu and we'll put in vig well correlation is pretty strong uh it's you know 98.98 so in my view that tells us going back to his chart that vig nine percent in vig isn't really adding a lot if he wanted to have a value fund you could find funds that are even more value in other words if you put them in morningstar and we look at the map the blue dot isn't here it's way over here somewhere and that might add uh more diversity to the fund than vig but in my view vig doesn't add a lot of much a lot more a lot it's not hurting the portfolio i don't believe it's just adding some complexity to it let me give you a different example i want to move down here to a different fund and we're going to look at i can find it now here we go that's up here too this vanguard u.s growth so remember the dividend appreciation fund is sort of a value fund leans towards value but let's look at vw usx now the first thing always is our expenses this one's a little expensive this is a vanguard fund but it's still 38 basis points again we're going to come back to that and why let's look at the portfolio so this is growth and look where the blue dot is this is significantly different than than say a vti or an s p 5 500 that falls within the blend category this is investing in companies that are significantly uh tilted towards growth and we could even come down and look at what those companies are and you can see they're mainly a lot of tech amazon microsoft apple shopify tesla these are of course companies in the s p 500 so these companies there's definitely overlap between this fund and and vti or or an s p 500 but it's heavily tilted towards growth and if we take the ticker vw usx and we do the same thing we're probably going to see greater coral a less correlation well we'll find out here we go yeah so it's not huge but there is a shift right so it's not as highly correlated as what we've looked at before so one could argue it adds a little bit of diversity and here though we have to do take kind of another step so we've talked about tilting a portfolio one way or another so we've looked at the dividend appreciation fund that sort of tilts it towards value and we've looked at the growth fund which tilts towards growth well what if you have both of them in your portfolio well that's exactly what he's done if you look at it here he's got the u.s growth fund here he's got the dividend appreciation fund here now he doesn't have the same percent in each but he has them both in his roth ira he has just the dividend appreciation in his 401k and if we go down to the brokerage account he has both here's the thing to keep in mind yes we're looking at these funds sort of one at a time but we also always have to think about the portfolio as a whole we'll see that more when we get to personal capital in just a minute but here he's got sort of a value tilted fund the dividend appreciation and he's got growth well guess what they kind of offset each other and so he's not really tilted one way or another if we were to look at his portfolio in personal capital you'd see a little bit of tilt towards uh growth but it's still a pretty well-rounded portfolio let me show you that now and this is again this is personal capital it's a free tool this is a demo account these are just made up portfolios that i've created over the over the last year or so for videos but you can actually link your accounts it'll it'll bring in all of your investment data whether it's a retirement account an hsa a bank account taxable and i've done that with this portfolio let me show it to you i want to look at allocation and i have to select just his accounts that i've put in here so we've got this is his taxable account and you'll see why i like personal capital so much this gives us a bird's eye view of the entire portfolio and its allocation so we can see the numbers u.s stocks are 82 notice he doesn't have perhaps as much international stocks as he may have thought because the international funds he have are actually a mix of u.s and international right but if we zero in on u.s stocks we can see just visually yeah there's a little more in growth but it's overall a fairly well-rounded portfolio and so we can of course drill down into each of these and see which funds account for each asset class but if we go back to his portfolio again it raises the question is it really worth the complexity to add dividend appreciation and u.s growth if he wants to tilt the portfolio towards value he could he could focus on a value fund if he wants to tilt it towards growth he could focus you know and perhaps add a growth fund but if by adding both he's kind of staying in the middle and our core vti already does that so that's a question for him it's not a matter that this is right or wrong and having them in there doesn't somehow make the portfolio that's not you know create a huge issue other than it adds complexity and there may not be a need for that uh complexity so as we look back at the portfolio we've pretty much covered most of the funds uh in his account we've looked at vu and questioned whether he needs it same thing with vague and bt of course vti is sort of the core part of his portfolio maybe consider adding an international fund like vxus and then his bond portfolio looks good there are a couple of tax exempt funds down here muni funds in the brokerage account and that actually raises a really important question when you've got taxable accounts and that is really two things what kind of funds should you have in taxable accounts versus what kind of funds should you have in a retirement account and i have some sort of general rules of thumb and the first is if you own reits he does not own a reit fund you always want to keep that in a retirement fund or if you have if you have a taxable fund it's going to generate a lot of taxable income municipal funds like he has here you want in a taxable account because you get the tax advantages from them in exchange for slightly lower yields you wouldn't want to put them in a retirement fund you'd lose the tax break but here's something else that i want to focus on uh with his portfolio and it will actually kind of bring us towards the end of of the analysis and kind of how i think through uh rating a portfolio recall we looked at some funds where the expense ratios seem to be a little higher right and i think this vanguard fund here v w u s x was one of them so let's take a look at it here it is and we're going to go back to the quote page and it's 38 basis points and what that tells me with vanguard is that this is an actively managed fund what does that mean so you can put etfs and mutual funds into one of two categories in one case index funds or called passive investing just tracks an index like the s p 500 so the fund isn't hiring a bunch of people to evaluate stocks or bonds pick best one they say oh forget all that we're just going to track an index they tend to be a lot less expensive that's where we see you know funds that cost two or three or four or five or maybe 10 basis points for actively managed funds they say you know what no we're going to hire a bunch of smart people and they're going to evaluate stocks and bonds we're going to try to pick the best ones which sounds reasonable except that over the long term most of those actively managed funds don't actually outperform index funds on an after fee basis so going back to this fund this is an actively managed fund now as actively managed funds go 38 basis points is is a relatively inexpensive uh fund but there's a bigger problem when you put this fund in a taxable account and here's the thing you need to know and this can be true of index funds as well particularly with mutual funds they can distribute capital gains each year even if you don't sell any shares of the fund so you could end up paying taxes on capital gains every year even though you never sell any shares most funds if they distribute capital gains most of the time do it in december that raises an important question well rob how do we figure out if a mutual fund is likely to distribute capital gains well i'll show you you use morningstar and we'll use vanguard u.s growth investor as our example and what you want to do is go to performance tab right here this shows you the returns but we want to what we want to focus on are distributions so we click distributions you can see over here it's by date and uh in 2021 yet this fund only distributed in december that's the good news we've got income so what's that for a stock fund that would be dividends and dividends are sort of normal you know most uh stock funds you know have some sort of dividend yield you can actually see that if we go back to the quote page uh well this one actually the trailing 12-month yield they've got is basically uh uh zero but if we go to most are not zero that's pretty unusual um and if we go back to distributions we can see they did distribute some but very little that's okay but the big problem is capital gains this stands for short term capital gains and this is long term they distributed for each share you owned over a dollar 57 in short term and over seven dollars and 13 cents in long term and the nav of the fund the net asset value is 65 dollars so they distributed more than 10 percent of value of the fund in short and long term capital gains and we can see it visually over here so you're going to pay capital gains tax on that in the short term gets taxed as ordinary income even if you never sold a share by the way you could even get hit with that if you just bought the shares maybe you bought the shares in november and they distribute them the capital gains in december you can get hit so this is something you want to pay special attention to in the taxable account and so this is not a fund even aside from the fact that it's actively managed and its expense ratio that i would personally use in a taxable account now we can compare that by the way let's go back to vti that was one of our our core investments we go to performance now this is an etf so etfs typically don't distribute capital gains and yep you can see it's zero whoops these two columns are zero income is normal because it the fund pays dividends but we can even look at the mutual fund version of this which is vt sax and go to performance and there shouldn't be any capital gains here either yeah none so that is really important if you're going to invest particularly in a mutual fund in a taxable account you need to have an understanding of what the capital gains are now one more thing i want to show you uh before we bring the video to a close going back to his portfolio we mentioned these uh muni funds he's got v t e a x and v w i t x these are vanguard municipal bond funds they're exempt from federal income tax and for that reason particularly if you're in a higher tax bracket they can be a good a good option but the question is he's using two funds and they're both vanguard tax exempt funds why two of these why not just one of them did are they different in some way and so again we can look at these through morningstar but we can also go over again back to portfolio visualizer right and uh let me just remember this ticker so v t e a x is the first one and the second one is v w i t x and we can look at their correlation boy they're pretty much neck and neck and um you know we could pull them up in in morning star and take a deeper dive and see what they invest in and their their cost this one's nine basis points the portfolio is going to obviously be fixed income you know all fixed income and some cash here there might not be much differences you could also check the vanguard site to understand uh how these both work but it might be it might be an opportunity to simplify the portfolio again in a taxable account not that having both of these uh creates some some issue or or problem other than again i like to keep the um the portfolio as simple as possible and by the way before we leave the screen you know we looked at this vanguard us growth fund investor share for taxes the global equity fund has the same problem v h g e x if we look at its distributions as i recall it also distributes a fair amount of capital gains here recently yeah so about 10 percent based on the off the nav pretty quite significant in 2021 so that's another fund that you'd want to think twice about before owning in your taxable account the other thing i'll mention when it comes to investing in a taxable account is you really need to be thoughtful about what you invest in because once you once you go down the path and a number of years go by you're going to have a uh your unrealized capital gains of course are going to grow we hope that happens right that's a good thing but then you kind of get locked in because if you want to make a change well it's going to trigger taxes in retirement accounts we can make changes when we want and we don't worry about taxes but in a taxable account you do and so you really want to be thoughtful about how you're investing you want to be thoughtful in all of your accounts but keep in mind with a taxable account once you go down a path you kind of get stuck there unless you're willing to you know pay uncle sam to make changes to your portfolio well i know i've gone through a lot again i'll have links to some articles that walk through different options when it comes to again what i call the core portfolio i'll have links to the tools i use today personal capital morningstar and portfolio visualizer and i hope you find this helpful it's my way of thinking about a portfolio i will say that a lot of people do want to tilt as i mentioned they want to tilt towards growth and maybe have some qqq which tracks the nasdaq or they want to tilt towards small cap value i think all of those approaches are reasonable i tend to limit that to 10 so if i wanted to add in addition to say vti uh some small cap value i would i would not put in more than about ten percent uh that there's nothing magical per se about that number uh but for me it kind of it kind of reflects this view that i still want the portfolio to be driven by those core three asset classes u.s stocks international stocks and bonds and if i'm going to tilt one way or another i don't mind doing it but i want to keep that in check i don't want to get to an extreme because if you really tilt your portfolio say put 50 percent in a qqq fund or small cap value it's going to really increase the volatility of the portfolio and you could significantly under perform the market for for periods of time and that can be hard to stick with so that's my view that's my take on how to evaluate a portfolio and frankly how to build one from scratch if you have any questions please leave them in the comments below i'll help you out any way i can and until next time remember the best thing money can buy is financial freedom

Channel: Rob Berger

Views: 36,028

Keywords: how to invest, investing for beginners, investing 101, investing 101 beginners, how to build an investment portfolio, how to evaluate an investment portfolio, how to invest in index funds

Id: zdo0wo1_ams

Length: 38min 37sec (2317 seconds)

Published: Wed Jan 12 2022