A few weeks ago a friend asked me for a portfolio review. She wanted to know what she owned and the associated taxes and fees she was paying for her investments.
After reviewing her portfolio and speaking with her, she decided to become a client. First, we talked about her goals and her investment objectives and then I made a lot of adjustments to her portfolio.
Here are some “before” observations on her portfolio
1. Dividend paying stocks, stock mutual funds, interest paying bonds and bond funds were in a taxable brokerage account. She had to pay the marginal ordinary income tax rate on the payments each year.
For example, if you are single and earn $100,000, you are in the 24% federal tax bracket. If you receive $1,000 of dividends and interest, $240 is paid to the IRS.
2. There was too much exposure to the consumer discretionary sector. After reviewing all of the investments, her portfolio was 26% invested in the consumer discretionary sector. This is entirely too high!
As a comparison, for example, the S&P 500 has 12% exposure to the consumer discretionary sector, which is more appropriate from a portfolio perspective.
3. Some funds have very high fees.
One mutual fund in her portfolio has a 1.06% annual expense ratio. For every $10,000 invested that’s $106 of expenses every year. That’s before transaction fees and other fees paid. Another mutual fund has a 0.92% annual expense ratio – $92 for every $10,000 invested.
4. There were too many single developed country ETFs.
Her portfolio had a lot of single developed country ETFs, such as a Sweden ETF and an Australian ETF, just to name a few. With this approach, there was a lot of “single country risk.” Plus fees and transaction expenses are higher because there were many different ETFs.
Here is the “after” portfolio
After understanding her goals and objectives, I made many adjustments in her portfolio.
1. The dividend and interest paying investments are now held in tax deferred and tax free accounts.
First, I made a decision to place the dividend and income investments in tax efficient accounts. When these investments are held in a tax deferred (401(k)), or tax free account (Roth), the dividends and interest are tax free.
2. We adjusted the consumer discretionary exposures and now the portfolio consumer discretionary exposure is now 10%.
Secondly, I adjusted the consumer discretionary exposure. This is an appropriate amount of exposure to this sector given her goals and objectives.
3. Sold the high expense mutual mutual funds (1.06% and 0.92% annual expenses) and replaced them with much lower cost ETFs.
Third, I chose low cost ETFs for her portfolio to save on expenses. For example, one ETF has an annual expense ratio of 0.08% and the other has an expense ratio of 0.10%, saving my client a lot of money each and every year.
4. The developed country exposure is through one ETF.
There were too many single country ETFs. It’s better to buy one ETF with exposure to many developed countries. This strategy reduces expenses, trading costs, and increases diversification.
In conclusion, her portfolio is now better diversified, more tax efficient, and has lower expenses. Do you really know what’s in your portfolio? You can contact me for a free consultation.