A Do It Yourself Investment Checkup Guide

Everybody should get in the habit of evaluating their portfolio at least once a quarter. Left unmonitored for a long enough period of time, your desired weightings can become unbalanced. For example, in one portfolio, I limit my positions to no more than a 5% weighting. After not checking the portfolio for three months, my positions in a gold ETF and Amazon ballooned to 10% each.

We’ve spent time learning about various investment strategies for retirement based on Modern Portfolio Theory. Now let’s spend time implementing what we’ve learned. After all, learning without taking action is not very useful.

To guide you on how to give your portfolio an investment checkup, let’s go through it together using my own example. I’ll show you what to think and what to do in seven steps. We’re at record highs in the stock and bond market, so now is a great time to do a deep dive analysis.

Step 1 – Do A Self-Assessment

The more honest you can be, the better you can assess your risk tolerance and goals. It’s important to be congruent with how you feel and how you invest. Here’s mine.

Age: 39

Work status: Tennis Bum / PF Blogger / Consultant

Investment strategy / goal: Conservative. Focused on principal protection, beating inflation, and maintaining regular investment income in that order. Might as well be a 65 year old classic retiree.

Number of income streams: Over 10 if online income is considered one income stream. Over 20 if online income is broken down into individual income streams.

Net worth composition: Physical real estate 40%, public equity 20%, business 15%, private equity 10%, risk free 15%. Would like to reduce my weighting in physical real estate to 30%, and reinvest 10% of the weighting outside of SF and Honolulu.

Investment education: Finance professional from 1999 – 2012, received MBA with emphasis in real estate and finance, have written over 1,200 personal finance articles since 2009, economics/finance geek who loves to crunch numbers.

Dependents: 1 – 5, depending on how much I must take care of my parents, in-laws, and children.

Work ethic: Consistent. Can still work 50 hours a week, but prefer not to. Worked 70 hours a week for 10 years when younger. Ideal number of work hours a week is 25-30.

Attitude towards money: Seen too many busts to take good fortune for granted. Willing to work full-time flipping burgers and driving a car if necessary to make ends meet. 100% believe money is a tool for trying to achieve maximum happiness.

Main weaknesses: Irreverent. Defiant. Working on not being so arrogant. Must constantly work on shining light on blind spots. Slowly losing energy and enthusiasm to work.

Step 2 – Run Investment Checkup

After linking your investment portfolios to your Personal Capital account, go to Advisor Tools -> Investment Checkup from the homepage to run some calculations based off your investment profile you first filled out. You want to find out areas that can be optimized.

You should see this screen below after you click Investment Checkup. In my case, Personal Capital says my Asset Allocation in conservative, just the way I like it. However, it’s tempting me by saying that I could have $350,000 more in retirement if I mobilized my cash.

I’m not down with mobilizing my cash because I might buy another property in two-to-three years due to an expected real estate downturn in San Francisco and Honolulu. At the same time, I want to reduce real estate as a percentage of my overall net worth, so I’ve got to hustle to grow my other assets. All money I allocate towards buying property within three years is to be held in risk-free investments like CDs.

Step 3 – Find Your Most Appropriate Target Allocation

On the same page, scroll down to the “What Is Target Allocation” section where you can move the bar left or right to see various investment strategies. Your goal is to choose the investment strategy that most reflects your goals, risk tolerance, and financial situation.

The various investment strategies from conservative to aggressive are:

• Capital Preservation
• Capital Preservation Plus
• Inflation Plus (my desired strategy for this portfolio)
• Conservative Balanced
• Moderate Balanced
• Moderate
• Moderate Growth
• Growth (what they recommend for me)
• High Growth
• Aggressive

Because I’m 39, Personal Capital still thinks I’m at least a couple decades away from retirement. In such a scenario, a Growth investment strategy makes sense. However, I’ve already found my “enough” money to live off, so I have no interest in taking outsized risk for higher returns. Instead, I’m more about capital preservation + beating inflation. As a result, I’ve chosen Inflation Plus as my desired investment strategy.

Step 4 – Compare The Results

After clicking the “Compare Inflation Plus Allocation” button, I’m being told that I’m still leaving $120,000 on the table over my lifetime based on my current asset allocation. Your goal is to choose an investment strategy where it says you’re leaving nothing on the table.

It’s important to align your beliefs with reality. I write I’m all about capital preservation + beating inflation, but it looks likes I’m slightly more conservative in the way I actually invest. Let’s take a look at how I invest in my Current Allocation versus the Target Allocation for how I’d like to invest in the Inflation Plus recommendation.

Inflation Plus Target Allocation Recommendation

Now I know the main reason why Personal Capital says I’m leaving $120,000 on the table is because I’ve got a 23.3% cash allocation versus their 2.0% target allocation. Another reason may be my 1.9% current allocation in Alternatives versus their 9.2% target allocation. But since the software doesn’t know I have private equity and venture debt investments, it thinks I’m underinvested in Alternatives whereas in reality I am not.

Now let’s look a the Capital Preservation Plus strategy, which is one step more conservation than the Inflation Plus strategy.

Capital Preservation Plus Target Allocation

The Capital Preservation Plus target allocation says that I’m not leaving any money on the table based on my current allocation and my goals. Given what I know about my desire to buy another property in ~2018, if you strip out my cash holdings, I actually invest more aggressively than the Inflation Plus strategy.

Remember to always think holistically about your money. Question the results and come up with your reasons why.

The below bar chart is another way to look at your Current Allocation versus their recommended Target Allocation by various strategies. If you click on the Investment Checkup page and scroll down, there is a whole bunch of great charts.

Step 5 – Find Out Where You Are On The Efficient Frontier

In the menu bar under in the Investment Checkup field, click the RISK & RETURN tab. It’ll show where your portfolio is on the efficient frontier. Given the X is below the hyperbola, it looks like I’m not getting properly compensated for the risk I’m taking. As such, I probably need to invest more in stocks if it wasn’t for this house I plan on buying.

Remember, the efficient frontier represents the set of allocations offering the highest expected return for each level of risk. The Y axis represents growth and the X axis represents volatility. It is derived from the historical returns and volatility of each the six major asset classes, as well as their correlations to each other.

If your portfolio is inside the frontier it means you are likely taking more risk than necessary.By owning a mix of assets which behave differently at different times, it is possible to lower volatility without sacrificing expected return.

Step 6 – Decide What To Do

Go to Portfolio in the menu bar to the left of Advisor Tools and click Allocation to see the composition of your investment portfolio. Once you know how much money you have to deploy, it’s easier to decide what to do.

In this portfolio, there’s $291,721 in cash to deploy. My plan is to continue hoarding cash while also being opportunistic during downturns. Stocks, bonds, and real estate in coastal cities all look expensive now. The ~$76,000 of stock I purchased post Brexit was all sold by end of July for a small 6% gain (yes I timed the market). This portfolio was down about ~$60,000 the second day after Brexit, reminding me I don’t want to lose that much money that quickly again.

One interesting note from this exercise is that for some reason, my equity structures notes are classified as U.S. Bonds not U.S. Equity and only my equity ETFs and single stock positions are classified as International Stocks and U.S. Stocks. My U.S. Bonds allocation is actually closer to 15% in this portfolio, with 23.34% cash, and 54% Stocks. So again, doing an investment checkup helps you think about the true makeup of your investments.

Step 7 – Run The Retirement Planner

Don’t forget why you are investing and analyzing your portfolio on a quarterly basis: financial freedom! The goal is to have your investments grow large enough to provide a steady income stream or capital base to withdraw from in retirement.

Go to Advisor Tools -> Retirement Planner to see how your investment portfolio shapes up. You’ve got to select some variables such as how much you want to spend in retirement, your desired age of retirement (I put 50 in mine so there would be something the planner could calculate), and input any upcoming expenses like college tuition.

Your #1 goal is to have your projected monthly spending ability be higher than your desired monthly spending ability. See the right hand bar chart below.

A retirement calculator is a great sanity check tool. But I strongly suggest you not rest on your laurels if the retirement planner is saying you are in great or excellent shape. Things change all the time. We’ve had a great bull run over the past 7 years and we could easily see a couple years of pull back.

It’s kind of sad that a $1.2M portfolio can only generate ~$30,000 a year in dividends, but that’s the low interest environment we live in. This is why I urge everybody to build income producing assets, acquire rental property, start your own website, take advantage of real estate crowdsourcing investments, build a dividend equity portfolio and hold on to these assets for as long as possible.

It’s kind of hard to imagine a $1.2M portfolio growing to over $3M in 11 years according to the Retirement Planner. But if I somehow contribute $0 for the entire 11 year period and earn a compounded 9% a year, I’ll get to $3.1M. Alternatively, I can contribute $100,000 a year to the portfolio and earn a compounded 3% a year to get to $3.01M.

Run your own numbers and see where you stack up. Keep inputting different variables to take into consideration different scenarios.

Do Not Leave Retirement to Chance

When it comes to investing, hope is definitely not a strategy. You’ve got to be methodical in your contribution and your analysis. You may think you’re investing according to your risk tolerance, but there’s a good chance that what you think and how you invest are inconsistent. You might also think you have a much higher allocation in one asset class, but in reality, you’re under-allocated. You’ll never know until you check.

Financial freedom is not a guarantee. But we can take some relatively simple steps to massively increase our chances of getting there before we’re too old, sick, or tired to try. Analyze your investments every quarter with Personal Capital, the best free financial tool on the internet. Not only will you get a better understanding of the way you invest, you’ll also discover more about your WHY.

Updated for 2019 and beyond. We are late innings in this bull market. Stay on top of your finances like a hawk!