Retirees: Check Your Worry/Asset Ratio

During the height of the dot.com bubble, one of my colleagues joked that a technology mutual fund had a high “ink/assets ratio.” Thanks to its aggressive strategy, then-booming performance, and press-savvy management team, the fund seemed to always find its way into the financial media, despite the fact that it didn’t have a lot of actual investor dollars in its portfolio.

I was thinking about that turn of phrase the other day, in the context of simplification strategies for retirees. Anecdotally, I’ve noticed that people sometimes have holdings with what I would call a high “worry/assets ratio” (or W/A ratio, for short). Even though these small positions won’t make or break the investor’s plan and may be there to provide a diversification benefit, they suck up a disproportionate amount of attention and oversight time and often cause real stress. In a very real sense, they’re more trouble than they’re worth.

Of course, the W/A isn't a real ratio. But homing in on small positions that stress you out can be a good starting point as you work to create a streamlined, livable investment mix. Prune or eliminate high worry/low assets positions and steer the proceeds into low-worry holdings that are so diversified that they could form the bulk of your portfolio. This exercise is especially important as retirement approaches and you have your hands full with more important jobs like calculating your withdrawal rate and deciding which accounts to tap for living expenses to reduce the drag of taxes.

As you eyeball your holdings, my guess is that you can readily separate those assets that cause you angst--and which might be small positions to boot--from those that you’ve owned effortlessly and added to for many years. When I think of the types of holdings that often have high W/A ratios, they tend to be the narrowly focused ones, not well-diversified options like Vanguard Wellington VWELX, total market index-trackers, or balanced funds.

Here are some common problem spots that cause investors undue worry even though they don't have a whole lot riding on them.

'Play' Portfolios of Individual Equities Many investors maintain smallish portfolios of individual stocks alongside much larger holdings in mutual funds and exchange-traded funds. There's nothing wrong with holding individual equities, of course; I've encountered plenty of serious enthusiast individual investors who have earned solid returns and/or derive much of their income from their exposure to individual stocks. But individual stocks can also be prime high worry/asset holdings. I'd guess that many of these individual-stock positions are a holdover from E-Trade days of the late 1990s, when we all got sold on the message that trading stocks was so easy that a baby could do it. Buying and selling stocks is simple, but researching and keeping tabs on them isn't. Many of us have since realized that we're not cut out for it. Moreover, individual stocks can be volatile on a stand-alone basis, causing investors angst over their big ups and downs. Finally, the individual stocks I've spotted in many investors' portfolios are often big, widely held ones, like Apple AAPL and Citigroup C; thus, they very likely overlap with the mutual funds in the investors' portfolios.

Specialized Stock and Bond Funds Yes, there are some good options of this ilk (looking at you, Vanguard Health Care VGHCX and various Asia-focused funds fielded by Matthews). Yet if you've built out adequate exposure to core, well-diversified equity and bond funds, you'll likely find that most of these narrowly focused investment types are duplicative. In other words, they magnify your portfolio's exposure to various market segments, often the volatile ones. Another issue is that specialized investments' focus can mean bigger performance swings, both for better and for worse, than you'd experience with more-diffuse holdings. That extra volatility tends to make investors jumpy and can undermine their take-home returns, according to Russ Kinnel's latest research into dollar-weighted returns.

I think you can make a case for more-specialized holdings in a handful of instances: For example, I like the idea of retirees holding dedicated allocations to Treasury Inflation-Protected Securities and short-term bonds, and I have included them in my model "bucket" portfolios for retirees. The former provides inflation protection that’s not typically present in conventional bond funds, whereas the latter provides a return edge relative to cash without a lot more risk. Moreover, neither category has an extreme risk profile--quite the opposite. That said, I’d put those additional assets into the “nice to have” category rather than absolutely essential.

'Hard' Assets The virtue of owning hard assets, meaning tangible items like precious metals or commodities, is the potential to earn returns that are different from what you get with plain-vanilla equity and bond funds. That's why professional asset allocators often recommend small positions in these assets. The trouble is, hard assets haven't been a slam-dunk to outperform in environments when stocks and bonds have slumped. For example, in 2018, when stocks sunk and many bond funds also dipped into the red, SPDR Gold Shares GLD posted a small loss and the typical commodities tracker lost more than equities. Of course, one year's worth of performance isn't enough to discount a whole category, but commodities, in particular, have looked pretty underwhelming in terms of their ability to diversify a portfolio's conventional exposures. Like the other categories, hard assets can be volatile, high-angst holdings, and investors often hold them in such small doses that they're unlikely to make a big difference in an Armageddon scenario for equities and bonds.

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