How to Do Your Own Portfolio Makeover

This video is part of Portfolio Makeover Week.

Jeremy Glaser: This week on Morningstar we are featuring five real-life portfolio makeovers by Christine Benz, our director of personal finance. She is joining me today to talk about how to do your own portfolio makeover.

Christine, thanks for joining me.

Christine Benz: Jeremy, it's great to be here.

Glaser: The first thing that you need to do to actually have your own portfolio makeover is to gather all the information, right?

Benz: That's right. This is something I put all of our portfolio makeover candidates through, I ask them to provide me with a lot of data. Account statements, the most recent account statements you can find; Social Security statements, so you can project your benefits; if you are someone who is covered by a pension, you want to gather those pension documents and get your arms around what sort of pension benefits you might be able to rely on in retirement. Definitely, data gathering would be the first step.

Glaser: Once you have that basic piece down, you should start evaluating your progress toward your goal?

Benz: Right. That's the key thing I think about when I'm looking at these portfolios is just, is this plan on track. For accumulators you want to gauge the adequacy of what you've managed to save so far, and here I really like the Fidelity benchmarks where they have different savings targets by age band. I think those can be a good starting point for people. I also think for accumulators this is a great place to turn to some an online retirement calculator to gauge the viability of your progress so far. One I have often recommended is T. Rowe Price's retirement income calculator, but a lot of financial providers have their own calculators and tools. Run through a few of them just to get a sense of whether your current balance plus your ongoing savings rate puts you on track to reach your retirement goal.

If you are someone who is already retired, you want to think about your withdrawal rate and think about perhaps the 4% guideline as a starting point for gauging your portfolio's withdrawal rate. I've written a lot about this topic over the past few years. People want to think about their own portfolio's asset allocation as well as where they are in their retirement trajectory. People who are young retirees, say, under 65, would want to be much more conservative than 4%, whereas older retirees maybe able to be a little bit more aggressive in their withdrawals. But that's definitely the key thing to think about for people who are already retired and drawing from their portfolios.

Glaser: The next step is to look at your overall asset allocation.

Benz: That's right. Here I like Morningstar's X-Ray tool. If you've gathered up all of your account statements, you can enter all of your holdings in Morningstar's Portfolio Manager or use our Instant X-Ray tool to enter those holdings. That way you can get a read on your total portfolio's asset allocation. Then you want to just gauge whether that's reasonable. If you are someone who is accumulating assets for retirement or already retired, you might use Morningstar's Lifetime Allocation Indexes, which are put together by our colleagues in Morningstar Investment Management. Or you might use a good target-date fund or two just to see, well, is my asset allocation, is it in the same ballpark as what these professionals are recommending. If it's not, and you might have a very good reason for it not to be--why not, and make sure that you are thinking that through.

Glaser: That gives you a sense of that broader asset allocation of stocks versus bonds, say. But there could still be allocations on sectors or style-box weightings that you'd want to take a closer look at as well?

Benz: That's right. This is something I certainly look at when conducting the portfolio makeovers. Here again, I think our X-Ray functionality can be super helpful. You are looking at sector positioning relative to the S&P 500. You are also looking at your portfolio's style-box exposure. Are you listing heavily toward one side of the style-box or the other? Are you listing heavily toward small stocks versus large? Not to say that you can't have some of those bets in your portfolio, if you have a good reason for positioning your portfolio that way. But just saying that you want to be aware of them and make sure that you are not making any big, scary inadvertent bets.

Glaser: This is also a time to check out to make sure you don't have too much overweight in any given security?

Benz: That's right. Here again, X-Ray has the stock intersection tool that shows you how much you have in various securities in your portfolio. You want to take a look at that, and make sure that you haven't inadvertently made a big bet on some stock by buying it outright when maybe a mutual fund in your portfolio also holds it. Watch out for very large individual stock bets. Certainly, if you have employer stock as a part of your plan, that can be a big risk factor for a lot of people because their financial wherewithal is also riding on the company. Watch out for that as well.

Glaser: If you are looking to streamline your accounts a little bit, streamline your portfolio, what would be some ways to do that here?

Benz: This is definitely something that should be part of any portfolio makeover process. Start at the account level. See if there aren't like-account types that you can collapse together. Maybe you have old rollover IRAs, multiple versions of them that you can put together into one large IRA, for example. That will reduce your oversight on an ongoing basis. Start with accounts, then move on to holdings. You may have holdings that are redundant with one another. Or maybe you have one large-cap growth fund that largely duplicates exposure that you are getting through your total market index fund. Look for opportunities to streamline, ideally at the same time, to lower costs and improve your overall holdings quality at the same time.

Glaser: How about taxes?

Benz: This is another great opportunity to look at improving your portfolio's tax efficiency. If you are making contributions, are you making them to your tax-sheltered vehicles? If you have taxable accounts, are those accounts as tax-efficient as possible? For a lot of people, this is as simple as holding equity exchange-traded funds as well as municipal bonds and bond funds for their taxable accounts. Finally, for people who are already in drawdown mode, it makes sense to think about tax-efficient withdrawal sequencing. That's a topic that I've written a lot about on Morningstar.com, where you are basically hanging on to those accounts with the best tax benefits, like Roth accounts, to last in your withdrawal queue and potentially tapping less tax-efficient accounts before them.

Glaser: What other risk factors should you be considering when doing a makeover?

Benz: You really want to look inward and think about your own personal risks. Some recent examples from makeovers have included people who haven't insured against long-term care. That's certainly a big risk factor for people later in life that they might incur these large unfunded costs. You want to think about, if I haven't insured against long-term care costs, do I have enough assets in my portfolio to cover those costs later in life. Another recent example was an individual who had a pension that she would be bringing into retirement, but the pension covered her life only, and there would be no benefit for her husband if she predeceased him. You want to think about problem spots like that that could arrive. In this case, the recommendation was that they purchase life insurance should she predecease her husband. Think about all of your individual-specific risk factors. I think that that should definitely be part of any sort of portfolio makeover process.

Glaser: Christine, thank you.

Benz: Thank you, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.