How to audit your own investments

I've hinted before that I was a passive investor. And by passive, I mean that I have always set up a 401(k) and IRAs, then promptly ignored them. But since 2013 is the year I want to learn more about investing, I knew I needed to evaluate our current investment portfolio.

  • Am I saving enough for retirement?
  • Am I diversified?
  • Is the risk of my investments appropriate for my age/circumstances?
  • Is my money in the best investment vehicles?

So first I needed to know what we had to work with.

1. List all your investable assets. Your investable assets may include things like an emergency fund, work retirement plan accounts, bank accounts, CDs, mutual funds, annuities, cash value of life insurance policies, stocks, bonds, and real estate (not including your primary residence or vacation home).

My list included our emergency fund, my work plan account, various savings accounts, and some individual stocks. This step didn't take long, because our list of investments is short. We had already rolled over some old 401(k)s a few years ago, we didn't have most of the assets on this list, and we had cashed out my husband's life insurance policy (because I am a term kind of girl).

2. Find the account value of each investable asset and total them up. Once you have a list of your accounts, find out how much money is in each one.

This was a relatively simple step. I dug through a few dusty folders in our filing cabinet to find some IRA statements before deciding that I needed to register an account to get online statements. Then it was easy to add up everything.

3. How is your investment portfolio invested? After you have the entire list of your investment accounts, it's time to get down to business. Dissect each account: Is it invested in mutual funds? Which kind? Individual stocks?

For instance, my husband's Roth IRA consists of 51 percent value funds and 49 percent global funds. My Roth IRA with another firm is 51 percent growth and 49 percent growth and income. Include the funds that are invested as well. One of my husband's accounts has Capital World Growth and Income Fund, among others.

4. How are your investments performing? You can find out how well your funds are performing by reviewing your statements. With the exception of my work plan, all our accounts were upfront about the funds' performance. I could find out how well it did from its inception, the past 10 years, five years, and one year, as well as since I had started participating in that particular fund.

My work plan's statements and website told me only that I had invested in Fidelity, but not which funds. I am sure I have a record of it somewhere, but thanks to my “ignorance is bliss” mode, I have no idea where. They did include the performance of each of Fidelity's funds, but I need to call our plan to figure out which funds I am invested in so I can properly analyze my investment portfolio.

5. How are your investments performing compared with other investments? By following the instructions in this post, you can evaluate an individual investment.

I plugged the ticker symbol (CWGCX) for the fund I mentioned earlier (Capital World Growth and Income Fund). If I am evaluating Morningstar's comparison correctly, its expense ratio is greater than the category average, plus it's performing in the top 72 percent of funds in its category in the last 10 years. Nice. I really mean not nice, of course. I tried another fund with a different firm. This time the fund was in the top 55 percent.

Answering the Investment Questions

So, have I saved enough so far? Some sites recommend that a 35-year-old (which I am not there yet) should have saved one time's annual earnings. I have saved more than that, actually. However, my husband has saved about half of what he needs. Because we consider all the money as our money, no matter who earned it, it averages out that we have enough saved in retirement so far to match our household's annual income.

To decide if we are diversified enough and whether our investing portfolio is appropriately risky, I need to determine which Fidelity fund(s) I have. But I can start with what I know now. Of our entire investable assets, 25 percent is in cash, 0.5 percent is in individual stocks, and the rest in mutual funds. Of the 75 percent in mutual funds, about 45 percent is in funds that have moderate risk while the other 55 percent is found in more risky investments.

For our age, I think that's too much in cash (although we have some significant expenses coming up). I suppose we could also invest in riskier options since we have a few decades to go before we need the money.

And is our money in the best investment vehicles? Yes… and no. Before evaluating our funds, I hadn't realized how varied fund performance is. We have some that make other funds look good (I hope you have some of those!).

Now I need to do more research to find better-performing funds. In addition, we don't have any index funds, so I want to allocate some of our cash to those.

Conclusion

Before researching this article, I would have told you that this stuff was too hard for a non-financial person to understand. And honestly, it wasn't easy reading. (They use too many undefined terms and acronyms, for one thing!) But I was surprised by how much I learned, just by reading through reports and statements and Googling terms when I had to. Several of the websites had excellent investor resources that were written in simpler terms.

After spending several hours on this information, I feel that I have made some progress in my investing education. I highly recommend this exercise to any investors who are afraid to tackle stuff like this.

Do you have any tips on how to analyze your investments?

More about...Investing, Retirement

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William @ Bite the Bullet
William @ Bite the Bullet
7 years ago

The more you read about investing, the more comfortable you get with the concepts and the lingo. And the more comfortable you get, you the better you become at it.

Just starting is the hardest part. In time, you’ll find yourself, just as in any other new endeavor, following the most sophisticated conversations without even trying.

Russell Matthews
Russell Matthews
7 years ago

William,
I agree! The starting point is very difficult and scary for most. The best advice is just to start reading and researching. It will take some time but educating yourself on anything before jumping right in is always a smart move!

Matt Becker
Matt Becker
7 years ago

Definitely some good information in here. With regards to totaling up your “investable assets”, I personally like to think of different chunks of money as part of different portfolios. For example, I consider our ER fund, our downpayment savings account, and our retirement savings to be three different portfolios. So I look at each portfolio individually when trying to do my analysis. If you do it that way, you (the author) may find that you really don’t have too much money in cash, it’s just that you need to contribute more future money towards retirement. I think this kind of… Read more »

Mom of five
Mom of five
7 years ago

With our individual investments, I like to make sure we’re spread out across sectors. Energy, technology, healthcare, etc. That way if one sector of the economy tanks, our personal risk is mitigated.

We’ve only been investing in individual stocks for about three years and really don’t have that much invested yet, but I have already seen this strategy pay off time and again when the market is having a really bad day.

Kurt @ Money Counselor
Kurt @ Money Counselor
7 years ago

You make a great overall point: “Passive” doesn’t mean ‘set it and forget it.’ All so-called passive investments require time and effort to get the most out of them. Best of luck!

My Financial Independence Journey
My Financial Independence Journey
7 years ago

I benchmark each of my investments against an equal amount of the S&P500 index bought at the same time. So if I purchase $1000 worth of KO today, the benchmark is $1000 worth of SPY (an S&P500 ETF) purchased today. This is a bit labor intensive but it’s a great way to measure capital gains performance. If I really wanted to be precise, I would add in dividend payouts as well.

Johanna
Johanna
7 years ago

The S&P500 is an index of large-cap US stocks. If you’ve got an investment in a very different part of the market (emerging-market stocks, say), benchmarking it against the S&P500 isn’t going to be terribly useful. All it’s going to tell you is that emerging-market stocks did better (or worse) than large-cap US stocks over some particular time period. I guess there’s nothing wrong with keeping track of that information for your own personal enjoyment – the question is what you do with it. If you keep wanting to move your money around, trying to chase asset classes that have… Read more »

nicoleandmaggie
nicoleandmaggie
7 years ago

You can set and forget if you get a Vanguard lifecycle (or Target-date index) fund. It will rebalance for you. Vanguard specifically has very low fees on their lifecycle funds. Most people who actively manage their portfolios do worse than people who passively match the stock market. They lose money from psychological mistakes that humans are prone to and from trading fees. You can avoid all that with a Target Date Index fund. One step, then forget about it. If you don’t have Vanguard available in your 401(K), the choices are a bit more difficult. Fidelity has some good cheap… Read more »

Babs
Babs
7 years ago

My 401(k) plan has some Fidelity Target Date funds.

nicoleandmaggie
nicoleandmaggie
7 years ago
Reply to  Babs

The Fidelity Target Date funds are overpriced compared to their Spartan Funds, but they’re not so bad compared to a lot of Target Date funds. For me, I’m young enough that I didn’t see the point in paying extra to match it (since it’s a long time before retirement, there’s not much change in my allocations).

Ely
Ely
7 years ago

I have my IRA and Roth IRA in Vanguard’s and T. Rowe Price’s relatively inexpensive target date funds. I love the set-and-forget feature. However my retirement account at work is with John Hancock, and their target date funds are ridiculously expensive. Instead I just picked a range of index funds – S&P, international, small-cap, etc. – and split my money among them. If I’m still with the company in another 5-10 years I’ll have to look at dialing back my risk, but till then I’m content to stay put.

Tom
Tom
7 years ago

You can set and forget if you get a Vanguard lifecycle (or Target-date index) fund. Ehhh I disagree here. I think that Target Retirement funds are nice investment vehicles, but it’s never smart to ignore any investments. Target Retirement funds can change their fees, be diversified in a way that doesn’t match your risk tolerance, be difficult to understand what exactly you’re investing in (typically they’re funds of funds) – making overall asset allocation more difficult to calculate, and just guessing – they may not be appropriate for people interested in retiring early. They might be a good starting point… Read more »

Marsha
Marsha
7 years ago

I agree about not actively managing your portfolio, but I’m not crazy about the target funds. As you note, they’re expensive when compared to index funds; but the part I particularly dislike is that they treat all people XX years old or retiring in 20XX the same. They err on the side of conservative, in my opinion, at least as far as our future needs are concerned. Since we will have two pensions and other investments to fall back on, we’re able to be less conservative with our long-term investments.

nicoleandmaggie
nicoleandmaggie
7 years ago
Reply to  Marsha

The Vanguard funds aren’t expensive compared to index funds.

If you want a riskier portfolio, you just choose a later retirement date. Not that difficult.

Nancy
Nancy
7 years ago

Thank you! Finally, an article with practical information I can use and not all emotion. I’ve been to two (2) certified financial planners in the last twelve months, asking them to review my investments and give me their opinion as to how I’m doing on my own. The results were the same both times – Get rid of everything you have now and buy our products instead (annuities, anyone?). One insisted that, if I wanted to keep my current investments, I’d be better off letting his firm “manage” my portfolio for a fee. Now if I could just remember all… Read more »

Marsha
Marsha
7 years ago

“performing in the top 72 percent of funds in its category in the last 10 years”

Don’t you just love how they say this instead of “performing in the bottom 28 percent of funds in its category in the last 10 years”?

Money Estate
Money Estate
7 years ago

Hi,

Some great tips! I just want to add something about financial education.

You mentioned about Googling for terms and so on… well, that CAN work out really well.

I have no background in finance and investing, but I self-learn investing basics, tips and tricks online. The web has so much 101s that we can access for free.

At the end of the day, learning how to audit your investments depends on how much you are willing to invest your most precious asset – your time – into your education.

Jim
Jim
7 years ago

Well written and well put article!

Robert Jacobs
Robert Jacobs
7 years ago

I try to keep my investment strategy and performance assessment as simple as possible. I review my investments every six months (6/30 and 12/31). I use the closest benchmark for the fund I am invested in and measure it’s performance against the bench mark. I usually do not get rid of a fund unless it has been below the corresponding benchmark for at least three periods (1.5 years). Nothing fancy.

Tina
Tina
7 years ago

I plugged all of my retirement investment accounts into Mint and then set a retirement goal(choose year you want to retire). It will send an alert to you if your investment funds are too low or show you if you are on target to retire when you want. It will say to reach your goal you will have to work until a specific year.

It really helps me decide how much to increase my 401k every year and helps remind me that in order to retire when I want, I need to save more and spend less.

Jake Erickson
Jake Erickson
7 years ago

This is a great idea. Even if you’re a passive investor it’s important to know how diversified you are and make sure that you’re in a good spot to reach your goals. One suggestion I would have is to not include your emergency fund in your investment portfolio. I agree with listing it, but you mentioned 25% in cash is too much for someone your age. This is so high because you are including the emergency fund. I don’t include mine just because I won’t touch that account unless it’s an actual emergency (it’s not an investment).

Robt
Robt
7 years ago

The toughest thing about investing for me is keeping a track of how my investments are performing. I still manage to do it, as I understand that leaving my investments unattended can leave a dent in my savings. This one is a good read on tracking performance of stocks http://bit.ly/119MVSe

Adrienne
Adrienne
7 years ago

Focusing too much on historical return is not necessarily the best plan. I second the reader above who recommended the bogleheads.org Wiki on Asset Allocation.

I would also recommend the Bogleheads guide to Investing or Bogleheads Guide to Retirement. Easy reads and lots of good info that will start to help you understand the differences between your asset classes. Most of the mutual funds mentioned in this article are likely overlapping in their holdings and that might not make sense.

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