Why Your Investment Portfolio May Not Be as Healthy as You Think

Even though personal investing is a topic that usually involves dry, technical features like spreadsheets, percentages, and basis points, one of the terms you often hear to describe a portfolio is “healthy.”

This is no mistake. One of the most important ways we can think about our investment strategies is in regards to their health, similar in many ways to how we think about our own physical health. It’s a handy metaphor — 20 and 30-somethings live in a golden age of healthy lifestyle thinking and op-eds. Everywhere you look you can find new information and theories about the best way to preserve and measure your body’s performance, to ensure its best potential future. Similarly, your portfolio’s potential health depends on its nutrition — or, the diversification, quality, and suitability of the assets you’ve invested in — and its fitness — the active role you take in making changes to optimize its performance.

There are all kinds of health, too. An office worker might drop into yoga three times per week and favor bountiful salads over gluten at all costs, while a triathlon Olympian might train at 4am everyday and gobble up 2,000 calories per meal. Both are, fundamentally, healthy. Your portfolio is similar — its health can be personalized to you, but the fundamentals of exercise and healthy diet are always present, and measuring change is vital to progress. In that sense, Mint itself is a financial health diagnostic tool — it lets you see the exact factors impacting your monetary system, and then tweak your habits, so you can achieve whatever your financial equivalent of a bikini bod might be. As the saying goes, “What gets measured gets managed.”

As the VP of Investments at Fundrise, a major real estate investment technology company, I’m not in the position to give you a regimen of daily protein intake and burpees, but I do regularly think about their financial equivalents. In this article, let’s look at what a typical 30 year old’s portfolio might look like, and discover where it might be thriving, where it’s ill, and where some quick changes could make it even stronger.

The Composition of a Portfolio

Let’s consider my fictional buddy Jim. On paper, financially, he’s perfectly average.

He studied computer science in college, and immediately after graduating landed a job at a local, medium-sized manufacturer of audio equipment, where he helps manage their online retail site and system’s database.

Now 30 years old, after eight years on the job, Jim has invested his savings in a few ways:

• An eight year old 401(k) in a Vanguard Retirement Trust, which invests in a variety of Vanguard mutual funds, including their Total Stock Market Index Fund, Total Bond Market II Index Fund, and others. Jim opened this 401(k) as soon as he was given the opportunity by his employer.

 

• A five year old Roth IRA through Schwab, invested in Schwab’s Total Stock Market Index Fund. Jim opened this account on the recommendation of an old friend who has a bit more experience in personal finance.
• A one year old account with Betterment, invested in the platform’s Bond ETFs, which Jim decided to open after he read about robo-advisors in an article on his favorite lifestyle website.

Overall, about 60% of Jim’s investments are in the 401k, 30% in the Roth IRA, and 10% in the ETFs.

He’s casually defined his diversification strategy on the “100-Minus-Your-Age” rule, which he’s heard in a variety of places. That rule dictates that his exposure to stocks should be a percentage equal to the difference between 100 and his current age; the rest should be bonds. At 30, Jim has tried to maintain 70% in stocks and 30% in bonds — an allocation of assets that’s possibly out of date, as it’s based on a theory invented (and last updated) in the 1950s.

Health Check

Jim is certainly on the right track — but ideal financial health would look considerably different than what he’s got set up.

The Good

• Just the fact that Jim started investing his savings as early as possible puts him ahead of most people. Compound interest is one of the most powerful tools of long-term investors, and any extra time you give it to work its magic can have profound effects.
• Jim’s impulse toward diversification is also correct, and an important part of long-term investor success. On top of having a reasonable split between stocks and bonds, he’s also diversified those assets geographically, with both domestic and international exposure. That means he’s less vulnerable to the vicissitudes of any single market. That’s a good foundation — but his big-picture diversification strategy is way out of date, and his portfolio is missing out on a lot of potential.

Big Opportunities for Improvement

• Jim’s diversification among stocks and bonds is great in spirit, but in practice, it’s dangerously obsolete. “100-Minus-Your-Age” is based on a time and reality when stocks and bonds were the only accessible options for most investors. Now, however, new markets and technologies have blown open old limitations, and there are other assets available that give diversification expectations a new dimension.
• In addition to stocks and bonds, Jim should also try to expose his portfolio to alternative assets, like real estate. Real estate has been a fundamental element of many of the wealthiest investors’ portfolios for decades — but, until recently, it’s never been available to most people. That’s why it’s been excluded from classic recommendations like the “100-Minus-Your-Age” rule. But that’s now outdated. Our company, Fundrise, has worked to bridge the gap, and we’ve made sure that someone like Jim can diversify more fully, as long as he’s got an internet connection and $500 he’s prepared to invest. We’ve observed many successful investors balance their portfolios with 50% stocks, 20% bonds, and 30% real estate.

• Looking at Jim’s investment history, it’s hard to identify any financial goals more specific than “retire someday.” While that’s a perfectly adequate goal for almost everyone, because Jim has been consistently, gainfully employed, I can’t help but wonder if he has interest in other forms of financial independence. Some of the most common goals for investors include supplemental income, balanced investing, and long-term growth — as these goals suggest, it’s reasonable for investors to have more varied and granular outlooks than just waiting for their retirement account to eventually mature. Sometimes that just means earning income while you sleep — nothing wrong with that.
• How do you integrate new goals to your investment strategy? I’ve seen some investors use private market opportunities, like real estate private equity, as ways to pursue discrete goals while also buffing up their portfolio strength overall. Private markets tend to see less frequent price fluctuations than public markets, and the changes they see are due to fundamentals, rather than sentiment. Because they often move separately from those other markets, private market investments can accomplish goals on different timelines. They have the potential for outsized, exceptional returns, and they can be potentially insulated from downturns when other markets suffer setbacks. Finally, they can help boost a portfolio’s current income, long-term growth, or both.

Portfolio Prognosis

Remember when I said that time was one of the most powerful tools in any investor’s toolbox? Well, one of the wonderful things about assessing the investment health of someone at age 30 is that there’s still plenty of that all-powerful time to optimize strategies. Jim was already in a good position — and now, by adding alternatives to his portfolio and increasing his diversification, he may be in an even better one. Health outlook? With all the right investment veggies and exercise, a very hearty financial future. (And before you ask, yes, Mint’s a vegetable.)

 

Kendall Davis leads the Investments Team at Fundrise, the first investment platform to create a simple, low-cost way for anyone to unlock real estate’s historically consistent and exceptional returns. Since joining in 2014, Kendall has built out investor relations for the company, focusing on all aspects of the Fundrise investor experience and furthering the company’s mission to democratize real estate investing. Stay up to date with the latest from Fundrise through their social channels: Facebook, Twitter and LinkedIn.

 

 

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