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Portfolio Analysis: A $95,000 Investment Account Gets Political

By WTOP Staff

Even though the Standard & Poor’s 500 index 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 and Chesapeake Energy Corporation, 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.”

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Portfolio Analysis: A $95,000 Investment Account Gets Political originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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