Insider Jeff Fleming

Tweaking Your Portfolio

You've worked hard to achieve the right balance between stocks and bonds in your portfolio, but don't stop there. Scrutinize your holdings to maximize your wealth.

Dear Jeff:
I am an 80-year-old, active, healthy retiree with a wife. I have approximately 60 percent of my portfolio in fixed assets and 40 percent in equities including growth, capital appreciation, income and small-cap. Fixed assets include Vanguard GNMA, Wellington, and Loomis Bond Fund. Would appreciate any comments on the above.

Jeff Says:
What can I say about your portfolio? It really looks like you have done your homework. The 60 percent of your portfolio that is invested in debt instruments can generate a nice income to you from its dividends, while the remaining 40 percent in equities allows you to experience some growth. This will help to extend the period that your portfolio will last.

You also have further diversified your equities into several asset classes, which is fundamental to managing a portfolio using an asset allocation strategy. The only piece of the asset allocation pie that you are missing is international stocks. This type of investment, however, is subject to a little more volatility and risk, so I understand why you might not own any.

Looking more specifically at the funds that you listed in your question, the Vanguard GNMA is an intermediate government securities fund and has a five-star rating from Morningstar, an independent rating company. It has also outperformed its category average over the last 10 years. The Loomis Bond fund is a long-term bond fund that was established only recently in January of 1997. In its short existence, it has slightly underperformed the long-term bond category average. You should watch this fund carefully as it owns a broad spectrum of differently rated bonds and has an average credit quality of BBB. This is the highest category of the "B" ratings, but falls below U.S. government and three levels of "A" rated bonds.

Finally, the Vanguard Wellington fund is considered a hybrid fund because it owns both stocks and bonds. It has certainly outperformed its category average, but it would be unfair to compare it to the S&P 500 because the bonds drag down the overall performance. One final word about this fund in your portfolio: You should review your annual report to analyze the stocks owned by the portfolio and compare them to the stocks owned by the other funds in your portfolio. All too often, fund owners believe they are properly diversified because they own more than one fund when, in fact, they own many of the same securities in their funds. Nevertheless, I think you should be congratulated for the overall design of your portfolio.

For more information on picking the right assets for your portfolio, check out Pointers for a Positively Perfect Portfolio and the ThirdAge Asset Allocator.