Give your portfolio a regular checkup

On Money

It's always easier to give others advice than to follow your own. Over my decades as a personal finance columnist, I've been so busy writing about how people Ñ other people ÑÊshould handle their money that I often neglected to adequately monitor our family investments. The result was a portfolio in desperate need of a makeover, even though it managed to weather the downturn of the last few years with relatively little damage.

Money manager Paul Merriman, head of Seattle's Merriman Capital Management, recently offered to analyze our holdings. It was an ideal time to get a financial checkup, since my husband retired a year ago and we're still in the process of re-examining our investments.

The good news is that Merriman, who held a public investment seminar in Portland last month, thinks we've saved enough so that we don't have to worry about outliving our money. This means we should be able to make it through our rocking chair years without becoming a financial burden to our children.

The bad news is that our portfolio had grown haphazardly and was due for some heavy pruning. Over the years, I've interviewed scores of mutual fund portfolio managers and was so impressed with some of them that I wound up buying their funds. (Unfortunately, I later discovered that a terrific interview does not always lead to superior performance.)

Now our portfolio looks like a poster child for the good investment idea of the month. We own about 40 different mutual funds, ranging from large-cap growth funds to small-cap value funds, high-quality Treasury funds to low-quality junk bond funds, health care funds, emerging markets funds, real estate funds and even (ouch) technology funds. This is in addition to a few dozen stocks and bonds, plus company 401(k) plans.

To help us streamline our portfolio, Merriman suggested we follow what he calls his 'ultimate buy-and-hold strategy.' It uses no-load index funds to create a sophisticated asset allocation model with worldwide diversification. Below is his game plan for putting this strategy into action, which can be adopted by a wide variety of investors of different ages and persuasions.

• Be honest about your ability to tolerate risk, and make sure your portfolio reflects this. We are fairly conservative investors, content to hit singles or doubles rather than to stretch for home runs and risk striking out. So, Merriman suggested a 50-50 split between stocks and fixed-income investments (bonds plus cash). If we were younger, or more aggressive, he would have recommended a larger equity stake. As it was, his suggested allocation doesn't differ much from our actual split of 55 percent stocks and 45 percent bonds.

• Unless you are willing to devote a lot of time to monitoring your investments, follow the KISS principle. In other words, keep it simple, stupid. Merriman suggested that we eliminate three-fourths of our mutual funds, concentrate our holdings in just 10 stock funds and put the fixed-income portion into a single short-term corporate bond fund.

He also recommended that we jettison our individual stocks and bonds. 'Winning with individual stocks is a random event, and you will have just as good a chance to make money with mutual funds,' he said.

• Recognize that asset allocation counts for much more than specific security selection. Merriman said individual investors tend to get it exactly wrong, agonizing over which stock or mutual fund to buy, rather than concentrating on the optimal mix of assets.

Merriman's ideal equity allocation ÑÊone that he said provides superior long-term returns with minimal risk ÑÊconsists of 50 percent U.S. stocks and 50 percent foreign stocks. The domestic and foreign portions are evenly split between large-cap stocks and small-cap stocks, and each category is further divided among half value stocks and half growth stocks.

According to this model, our portfolio was overweighted with large-company growth stocks, deficient in small-company stocks and anemic in foreign stocks. But we couldn't stomach more than a 20 percent allocation to overseas companies.

• For peace of mind, and to minimize taxes and expenses, stick with index funds for the equity portion of your portfolio. These funds clone the holdings in given stock market indices, such as Standard & Poor's 500 index of big companies or the Russell 2000 index of small companies. Studies have shown that index funds outperform most actively managed funds over long periods. Merriman recommends that do-it-yourselfers use an assortment of index funds from the Vanguard group, which is legendary for its low expenses and steady performance.

To implement Merriman's ideal stock allocation, investors would put 12.5 percent each into Vanguard's 500 Index, Value Index, Small Cap Index and Small Cap Value Index funds for the domestic portion of their stock portfolio; for the foreign portion of their portfolio, they would put 10 percent each into the European Stock Index, the Pacific Stock Index and the Emerging Markets Index and 20 percent into the International Value fund.

• Rebalance your portfolio once a year. Theoretically, this is sound advice, since it means that you wind up selling a portion of your best-performing funds and putting the proceeds into the worst-performing funds. In effect, this means you are selling high and buying low. However, I find it difficult to put this advice into practice, in much the same way that I neglect to follow manufacturer's instructions to regularly vacuum dust from the coils of my refrigerator.

Reassuringly, many of Merriman's suggestions were seconded by a Morningstar Mutual Fund computer analysis of our portfolio. The software program suggested that we reduce our holdings of big-cap stocks and beef up our holdings of small- and mid-cap stocks.

Will we follow Merriman's and Morningstar's suggestions? Probably, but not 100 percent of them and not all at once. For one thing, the tax bill associated with selling some of our holdings that have appreciated over the years is daunting. But we're glad to have that problem, rather than the opposite one.

Deborah Rankin, an award-winning former personal finance columnist for The New York Times, is based in Portland. Contact her at This email address is being protected from spambots. You need JavaScript enabled to view it..