Portfolio too diversified?

[ReluctantSonInLaw]

I am reviewing my mother in law's investment portfolio. She works with a large financial advisor, that shall remain nameless, and performance has not been good. My main issues are that the portfolio holds 23 funds, some fairly esoteric; seems to be a lot of overlap, and there's a lot of trading in the portfolio. Her time horizon is 10-15 years, doesn't have a lot of CF/liquidity needs (would like to use about 2.5% of the portfolio for income each year), and would probably fall in between conservative and moderate risk tolerance. Here is the portfolio. Any initial thoughts? Thanks, in advance.

Equity
-IShares EAFE
-S&P 500 Div ETF
-Aberdeen EM
-Causeway EM
-Maingate MLP
-Matthews Pacific Tiger Fund
-Principal SMID Div

Fixed Income
-BlackRock Muni Yield Quality
-Nuveen Enhanced Muni Credit
-PIMCO Enhanced Short Maturity
-Vaneck Vectors JP Morgan EM Local
-BlackRock Strat Income Opps
-DoubleLine Total Return
-Ivy Muni High Income
-Lord Abbett Floating Rate
-Lord Abbett Short Duration Income
-Nuveen HY Muni Bond
-Putnam Diversified Income
-Thornburg Limited Term Muni

Other
-Eaton Vance Tax Advantaged Div Income
-Eaton Vance Tax Advantaged Global Div Income
-JP Morgan Income Builder
-Principal Global Diversified Income

[Thecallofduty]

Hi.

Any chance you can let us know what type of accounts these are in specifically as there may or may not be tax implications with selling off/rebalancing the portfolio. Also can you list the expense ratio for the funds.
Lastly, is she managing these herself and does she want your specific advice on optimizing her portfolio?

[Flyer24]

Tread with caution when helping a family member with investments. It can come back to bite you. I hope she has specifically asks you for help. I do agree that her portfolio could be simplified.

[ReluctantSonInLaw]

Thanks for the response. She has two accounts, basically identical investments in each: one is taxable and the other is retirement/non-taxable. I will say that some of the activity is likely part of a tax loss harvesting strategy, but I don't know much more than that. On short notice, I don't have the expense ratios of all of the funds, but most of them are institutional share classes, so likely on the lower end of MF pricing spectrum. And lastly, the advisor has full discretion and is managing the portfolio for her. Given the mediocre performance, she is re-assessing the relationship with this office and looking at all alternative options.

[22twain]

performance has not been good

Compared to what? Make sure you're comparing similar mixes of apples and oranges (stocks and bonds).

[mighty72]

It is difficult to say how diversified is the portfolio without knowing the %age holdings but it does have too many different investments.
You say that she is conservative investor and yet she has 2 EM funds and one that invests in Asia. This is aggressive in my book.
She has 5 muni funds in her portfolio.
And then there is a MLP.
If she needs only 2.5%, wouldn't a simple 2 fund portfolio with 40% in equity and rest in a bond fund/treasury be more conservative & give her enough returns? Thanks

[bengal22]

I suspect she is not too diversified. She is too complicated and has too much overlap. One can be perfectly diversified with 3 funds.

[ExitStageLeft]

Welcome to the forum RSIL!

One thing you can do is compare the performance of the current portfolio compared to the desired portfolio using Portfolio Visualizer. To use the backtest tool you need to know the percentages of each asset and the ticker abbreviation. Some funds such as the Aberdeen Emerging Markets have different classes of shares that have different load and fee percentages.

https://www.portfoliovisualizer.com/backtest-portfolio

Many years ago my wife inherited her father's IRA that was held at Edward Jones and the salesman convinced her to transfer her IRA there as well. He put each IRA in the same set of 10 funds. Eventually we saw the light about the Boglehead philosophy and realized that the salesman wasn't putting our interests first. I did a comparison of the portfolio he had set up and surprisingly it performed well considering the average ER was about 0.75%. What killed the relationship was the ongoing 1% AUM fee over and above the high fund expenses.

[Wiggums]

I agree that a much simpler portfolio would be better. The savings alone would improve her performance. A target or life strategy fund would be easy to manage.

[dbr]

Hi.

Any chance you can let us know what type of accounts these are in specifically as there may or may not be tax implications with selling off/rebalancing the portfolio. Also can you list the expense ratio for the funds.
Lastly, is she managing these herself and does she want your specific advice on optimizing her portfolio?

Exactly. The issue here is what these funds are costing her and what the financial adviser is costing her. Active funds cost not only in expense ratio but in internal trading costs (for which turnover is an indicator) and in tax inefficiency as capital gains distributions are not managed effectively. It is almost impossible that this is a good portfolio or that the advisory fees are worth it.

It is also true that anyone is treading on dangerous ground trying to help someone else manage their investments. It could be better to have her post here on her own behalf.

[goingup]

Well most everyone had a disappointing year last year (through Dec. 31st). Bonds were down. Stocks were down. Cash (according to the Callan Table) was the best performing asset class.

I'm not a fan of big-name advisors, but I think your MIL would need to be very interested and determined in making a change. A passing thought that performance was soft after last year wouldn't be enough to muster the effort required.

If you want to help her examine this situation, there are a few things to find out. How much is the advisory fee. What is her desired AA. Does she rely on the bond income. Does she require individualized account attention and hand-holding when markets crater. I'd start with fact-finding before suggesting wholesale change.

[bloom2708]

That there is an Edward Jones portfolio.

Way too many funds high expense ratios, AUM fees or front end loads.

Try to write down the expense ratio for every fund. Taxable or tax sheltered or a mix?

There is virtually no scenario where staying makes sense. Other than change is hard.

[ReluctantSonInLaw]

Thanks for the thoughts and comments - this is helping me add more things to consider. I need to look into the expense ratios of the funds, that's a good call. And she absolutely asked me to dig in and give my thoughts. Otherwise, I wouldn't be going near this topic with a 10 foot pole - too much risk for me. I have been looking at calendar year and annualized performance of her portfolio versus a pretty standard balanced AA portfolio: 50(US)/50, 60(world)/40, 40(world)/60. Nothing looks good. And maybe this is not exactly apples to apples for her portfolio, but that kind of is proving my point. No reason to overcomplicate when she is somewhere between moderate and conservative. She also pays 1.25% for this guy!

I have been thinking about a laddered CD or Treasury portfolio for half of the assets to kick off the required annual income needs, and then a LifeStrategy or Target Date fund for the other half. Switching costs is my other question/issue: will selling and then buying again eat into her capital even further and also have some cap gain/tax implications?

Thanks again for everyone's help!

[dbr]

If this portfolio is in a taxable account then liquidating everything, or anything, will have tax implications. The thing to do is look on her account reports for the amount of unrealized gain in each position. A silver lining in the cloud of lots of trading is that there may be very little build up of unrealized gain. Once you have that data you/she can decide what to sell at least cost and also look for capital loss offsets that may exist. Also, the actual cost of capital gains depends on her total tax situation. If her total income is not high, then the tax costs may be minimal, especially if stretched over two years. You would have to make dummy calculations of different tactics.

In general other than massive tax costs are worth it to get out of paying fees. That 1.25% does not take many years in a row to add up to more than the taxes would cost, let alone the ERs. Whether or not you should move the funds and then sell them or sell them before moving is a discussion. A first step is to open an account elsewhere and plan to have them pull the investments over. Some investments may not be able to be pulled.

[ExitStageLeft]

Your MIL has many options, but the two I recommend are to either call Vanguard PAS for a consultation, or post all the details on this forum for an in-depth portfolio review. There's a lot of information needed in order to do it right, but she and you will gain significant insight by digging into the specifics. The format for a portfolio review is given in viewtopic.php?f=1&t=6212

[Thecallofduty]

Your MIL has many options, but the two I recommend are to either call Vanguard PAS for a consultation, or post all the details on this forum for an in-depth portfolio review. There's a lot of information needed in order to do it right, but she and you will gain significant insight by digging into the specifics. The format for a portfolio review is given in viewtopic.php?f=1&t=6212

Agree with above.