This investor needed help transitioning a stock-heavy portfolio to a more age-appropriate asset allocation.
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By Christine Benz | 05-18-11 | 06:00 AM | Email Article

Susan, a retired finance executive, has put together an enviable portfolio. She has chosen her investments with care, and it shows. Rather than opting for a portfolio of funds run by household-name firms (though there's not necessarily anything wrong with that), her holdings largely consist of mutual funds overseen by topnotch boutique investment managers such as Royce, Wasatch, and Amana. And even more important, she has been an avid saver and a successful investor, amassing a total of more than $2.8 million as of early May. Given her reasonable living expenses, she's in a good spot, even though she could be funding 30 or more years of retirement.

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz and on Facebook.

So what's the problem? Simply put, Susan's current portfolio is out of sync with her life stage. Although she is 55 and recently retired, she currently has a minuscule bond position (2% of her total portfolio) and an only slightly larger cash stake (13% of assets). Susan is cognizant that her asset mix is more appropriate for someone in accumulation mode than a person who is actively tapping her portfolio to meet living expenses. "I recognize the need to reduce the volatility of my portfolio as well as to create a steady stream of income to live off of," she wrote.

As a single woman without kids, Susan has the freedom to enjoy the fruits of her years of hard work. "I want to spend retirement enjoying all the money I have saved," she wrote. "My goal is to die with one penny left in the bank!" In addition to making sure that her portfolio can fund her living expenses and also cover travel and other leisure pursuits, Susan would like to purchase a new townhome within the next year, with an expected purchase price of $400,000-$500,000.

The Before Portfolio
Apart from its equity-heavy stance, Susan's portfolio has a lot to recommend it. It consists of three separate components: a rollover IRA, a Roth IRA, and a taxable brokerage account that is her largest pool of assets (more than $2 million). In aggregate, her portfolio leans slightly toward small- and midsize firms and growth stocks over value, but is generally very diversified by investment style, company size, and geography.

Holding
Market Value ($)
Weight (%)
Star Rating
IRA: Cash
9,500
0.34
N/A
IRA: Amana Trust Income 
260,000
9.26
IRA: Cohen & Steers Realty Shares 
72,000
2.56
IRA: Driehaus International Discovery 
22,000
0.78
IRA: Perkins Mid Cap Value 
11,500
0.41
IRA: Wasatch Large Cap Value 
7,000
0.25
Roth: Allianz NFJ Small Cap Value 
18,000
0.65
Roth: Amana Trust Income 
44,000
1.56
Roth: Artisan Mid Cap Value 
21,000
0.75
Roth: William Blair Small Cap Growth 
33,000
1.18
Roth: Royce Value Plus 
46,000
1.64
Roth: Third Avenue Small-Cap Value 
43,000
1.53
Roth: Wasatch Large Cap Value 
3,000
0.11
Taxable: Amana Trust Growth 
329,000
11.74
Taxable: Artio Global High Income 
19,000
0.67
Taxable: DoubleLine Total Return Bond 
34,000
1.21
N/A
Taxable: Fairholme Fund 
153,000
5.45
Taxable: Fidelity Contrafund 
33,000
1.18
Taxable: Harbor International 
490,000
17.46
Taxable: Meridian Growth 
442,000
15.75
Taxable: Neuberger Berman Guardian 
188,000
6.7
Taxable: Royce Value Plus 
24,000
0.85
Taxable: T. Rowe Price Small Cap Value 
299,000
10.65
Taxable: USAA Precious Metals and Minerals 
6,000
0.21
Taxable: Cash
200,000
7.12
N/A
Total
2,807,000
100.01
 

 

Among Susan's anchor holdings are  Meridian Growth ,  Harbor International ,  Amana Trust Growth , and  Amana Trust Income , and  T. Rowe Price Small Cap Value . Susan acknowledges that she put a considerable amount of time and effort into selecting her current investments, noting that she constructed her portfolio based on "diversification, allocation, asset location, risk factors, manager tenure, fees, tax efficiency, turnover, and performance against the relevant index and category." Phew!

At the same time, her portfolio is arguably more busy than it needs to be, with more than 20 separate fund holdings, some of them relatively small positions. Susan also has about 20% of her assets riding on a single manager--Nick Kaiser at Amana Growth and Amana Income. Kaiser has done a phenomenal job at his two charges. However, his shop is a small one, and the two funds may have similar biases because both are run in accordance with Muslim principles.

Last but not least, though she has ample cash to draw upon to meet living expenses as well as significant equity exposure to provide long-term growth, her portfolio doesn't include an intermediate portion, which should include core bond funds or even conservative- and moderate-allocation funds that meld growth with stability.

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Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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