X-Ray Your Retirement Accounts--and Interpret the Results
Conduct a quick portfolio checkup using our handy tool.
When it comes to overseeing your retirement portfolio, there's a lot to be said for a policy of benign neglect. If you're checking in on how you're doing every month, week, or day, you might be tempted to make unnecessary changes. But that can be counterproductive. While you may not be paying any taxes or transaction costs to trade within your IRAs or company retirement plans, you may not be adding to your returns by moving things around, assuming you took care with investment selection in the first place. That's why the mantra for many of the best investment managers is "Don't just do something--stand there!"
But that doesn't mean you shouldn't conduct periodic checkups of your retirement portfolio to make sure it's on track--ideally once or twice a year at most. And one of Morningstar's free tools--Instant X-Ray--can make quick work of that job.
Here are the key steps to take:
Step 1: Review overall asset allocation.
To help get a precise read on how your portfolio is currently positioned, turn to Morningstar's Instant X-Ray tool, free to all users of Morningstar.com. Using your most recent account statements, enter a ticker for each of your retirement holdings--including IRAs, retirement plan assets, and any taxable monies you have earmarked for retirement. Enter the dollar value for each holding, then click Show Instant X-Ray. You'll see a pie chart depicting how much you have in each of the major asset classes, which you can then compare with your target allocations.
Step 2: Compare to your targets.
If your portfolio is out of whack with your asset allocation targets, take note and plan to address this when you rebalance your portfolio. But what if you don't know how much you should have in stocks (U.S. and foreign), bonds, and cash? If that's the case, you need to get a plan. This article provides guidance on finding an asset-allocation framework that makes sense given your own particular circumstances.
Step 3: Assess intra-asset-class positioning.
Once you've assessed your portfolio's asset allocation, turn your attention to how your stock and bond holdings are positioned. Within Instant X-Ray, you can see stock and bond Morningstar Style Boxes (two nine-square grids in the upper right-hand corner of the X-Ray page) that depict the investment styles of your holdings. While you shouldn't expect to see an even distribution of holdings in each of the nine squares, you do want to take note if the majority of your holdings are huddled in one or two regions of the style box. For comparison's sake, Vanguard Total Stock Market Index (VTSMX) recently had 24% of its portfolio in each of the large-cap squares of the style box, 6% in the mid-value square, 7% each in mid-blend and mid-growth, and 3% in each of the small-cap squares.
Instant X-Ray also shows you how your stock holdings are dispersed across various market sectors as well as how that positioning compares with the S&P 500 Index's sector weightings. As with style-box positioning, you shouldn't get too worked up about some divergences, but you do want to take note of very big bets--sectors where your weighting is more than twice that of the index, for example. If you need help interpreting whether your portfolio's style and sector bets are notable or not, click on the Interpreter tab for a written explanation of what's notable about your portfolio's current positioning.
Step 4: Check for stock overlap.
Next, click on the Intersection tab, also on the main X-Ray page, to see whether your portfolio is disproportionately skewed toward one or two individual stock holdings. This is a good way to tell whether company stock is hogging an inappropriate share of your portfolio. (As a general rule of thumb, company stock should take up less--preferably much less--than 10% of your total holdings.)
Step 5: Assess fees.
There's a lot more information buried in the X-Ray tool, but if you're time-pressed, your last stop should be to click on the Fees tab to evaluate the expenses you're paying for your retirement holdings. Some users have criticized Morningstar analysts for our near-religious devotion to low fees, but our motivation is pretty straightforward. Among investment-related data points, low costs are the biggest predictor of investment success, and they also fall into the category of factors over which investors can exert at least some control. Ideally, your own retirement portfolio fees should be comfortably below that of a similarly weighted hypothetical portfolio, the benchmark provided within X-Ray.
Step 6: Plan your next move.
After you've reviewed your portfolio's current status, it's time to plan your next move. It's not likely that you'll uncover a portfolio problem you need to address right away, but you should make sure to schedule a time to rebalance your portfolio and address any problem spots, such as above-average costs. This article discusses a simple rebalancing program.
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Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.