X-Ray Your Portfolio (if you really want to know what’s inside)

Monday, March 8, 2010   

Do you know what’s in your investment portfolio?  Don’t answer too quickly.  If you’re like many people, your portfolio isn’t made up a few neat and tidy accounts; it’s a hodge-podge of IRAs, past and present 401(k)’s, inherited accounts, personal savings, and more.  Complicating the matter further, your accounts are held at multiple investment firms.  How can you make sense of it all?

Morningstar’s free Instant X-Ray Tool is a great place to start.  After entering your account holdings, the tool spits out your overall asset allocation, including style (small vs. large cap, growth vs. value) and region exposure.  You may be surprised at what you find.  If you’re invested in a lot of actively-managed mutual funds, you’ll probably find more cash than you expected, as active fund managers like to keep cash on hand (typically at least 5%) so they can quickly respond to perceived investment opportunities.  You may also find that a particular fund isn’t invested as its name suggests; funds that are labeled “Small Cap Value,” for instance, vary greatly in just how small and “valuey” they really are.

One thing to be aware of is that REITs aren’t recognized as a distinct asset class, so I’d leave any individual REITs or REIT funds out of your analysis.  You may also want to run the analysis a few times with smaller pieces of your portfolio, so that you can get a better idea of the makeup of individual funds.  With a little bit of effort, the Instant X-Ray Tool, armed with Morningstar’s comprehensive mutual fund database, can give you a much clearer idea of exactly how your money is invested.

Why go through all this trouble to discover your overall asset allocation?  Well, asset allocation is the primary determinant of investment performance.  A study by Ibbotson Associates concluded that over 90% of investment returns can be attributed to asset allocation decisions.  After taking a look at your portfolio’s X-Ray, you’ll have a much better idea of where you stand.  Next time I’ll tell you what to do about it.

Reminder:  Need an opinion on a risk-appropriate asset allocation?  Get a FREE portfolio recommendation today!

Posted by George | DIY Investing | Comments (0)

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