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Go online to asses portfolio diversification

Updated: May 3, 2013 12:14PM



Originally published: Jan. 6, 2002

The year just ending was filled with lessons for investors. And one of the most painful lessons was the importance of diversification. The first insight came early in the year, with investors suffering a hangover from the collapse of tech stocks. Many people who thought they were diversified by investing in several different growth funds learned that the funds had all purchased the same few technology companies. When the sector collapsed, so did their entire investment portfolio.

The year ended with an even more painful lesson in the importance of diversification. The bankruptcy of Enron might have been just another corporate disaster, if it hadn’t been so personalized by the thousands of Enron employees who loaded their retirement funds with company stock.

They weren’t alone in this practice. Many telecom company employees--those who worked for Lucent, Nortel, and Global Crossing, for example--were caught in the same trap. Those are just the most visible and recent examples of the dangers of concentration.

The diversification problem

A new study by the Employee Benefits Research Institute shows some scary statistics about the concentration of company stock in employee retirement plans:

* 19 percent of all 401(k) plan assets are invested in company stock. (That statistic includes many smaller companies that don’t have publicly traded stock.)

* 32 percent of plan assets at large companies (5,000 or more employees) are in company stock.

* 53 percent of the assets of plans where the company matches in stock are held in company stock.

Another group analyzed 219 of the largest company plans and found that 25 of them had plans with more than 60 percent of assets held in company stock.

This kind of concentration totally violates all the principles of sound investing. Yet, who’s to blame? A new generation of novice investors was given the task of managing retirement portfolios previously handled by investment professionals. It’s not necessarily the employee’s fault that holdings are overwhelmed by company stock. Many companies require you to hold their match in stock until you reach age 50.

To work through the diversification problem, you’ll have to use your computer. And it requires some sophisticated help. But it’s easy to use--and free!

The diversification solution:

Step One is Analysis.

Just log on to www.Morningstar.com --the site of the Chicago-based company that is known for analyzing mutual funds and stocks. When you get to the home page, click on “Portfolio.” You’ll be prompted to create a name and password to establish your portfolio online. Don’t worry--it’s secure. And you have to input your entire list of stocks and mutual funds to get their analysis. (You don’t even have to know symbols of stocks or funds; they’ll do that for you.)

Once you’ve listed your holdings, locate the button that says “X-Ray this Portfolio”--and click. In seconds, the computer looks inside the mutual funds you own and lets you know how your portfolio is diversified by stock category. You’ll see a pie-shaped chart of your asset allocation. And you’ll get the famed Morningstar “style-box” analysis of how your investments are weighted between large companies and small cap, between value and growth. You can see how your portfolio stacks up against the categories in the S&P 500. And you can even see how your annual fund management fees stack up against the benchmarks.

This service is free and easy to understand. It will immediately show you where you’re out of balance. You’ll be analyzing your portfolio--what’s inside your funds and how it balances with your individual stock holdings--just as a professional financial manager would do.

Step Two is Financial Advice.

Morningstar’s Clear Future section goes one step beyond analysis. It is one of several services that analyze your portfolio and offer personalized and computerized modeling for your investments to make it more likely that you’ll reach your goals. You can get similar advice tools at: www. FinancialEngines.com, www.MoneyCentral.com, using the mPower portfolio tool and at www.Fidelity.com, using the Portfolio Planner tool.

If you put all your eggs in one basket, and then sit on that basket, your nest eggs may scramble. And that’s The Savage Truth!

Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail to savage@suntimes.com



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