So you probably have an idea that your portfolio is made up of stocks and bonds, and you may know that it contains exchange-traded funds (ETFs). You’ve probably heard us talk about fees enough to understand that we favor index funds with lower costs. But are you curious what exactly you are invested in? Let’s take a few minutes and drill down to the most basic layer of your portfolio.
Here's an example to help understand:
- Your portfolio has three tiers of diversification. The first tier -- and simplest breakdown -- is a mix of stocks and bonds. (The specific mix is based on your age, years until retirement, and risk tolerance. Read more on the role stocks and bonds each play here.)
- We then sub-divide stocks into four categories: Domestic, Foreign, Emerging Markets, and REITs
- Within the Domestic category, we sub-divide again into Total Market, Value, and Small-Cap. (Our portfolio has a slight tilt to favor value and small-cap stocks, as supported by the Fama-French-Five-Factor Model.)
- FutureAdvisor uses a few ETFs to provide exposure to the US Total Market asset class (category). One of those ETFs is IVV, the iShares S&P 500 ETF. (Confused by ETFs? Don't be.)
- By owning IVV, an investor owns a small piece of each of the largest 500 largest companies in the US. This makes diversification inexpensive and easy!
- The S&P 500 is made up of 500 companies (no surprise there). General Electric (GE) is one of them.
- GE makes up 1.57% of IVV. Meaning, if you own $1,000 of IVV, you own ~$15.70 worth of GE stock.
Some investors prefer visuals, so here’s that same example explained with a diagram:
This same drill-down can be applied to each of the 12 asset classes you are invested in. For example, you could trace “foreign bonds” all the way down to the holding level, if you wanted to.
Want to see what percentage of your portfolio you have invested in each asset class?
- Log In to your account
- Click on “View Details” in your retirement dashboard
- Under “Smarter Investing,” expand the first best practice, which is labeled “Diversify your portfolio...”
- Click on "See details for my current portfolio vs. my recommended portfolio"
- The two donut charts and table appear. You can see here how your portfolio is invested. Notice a difference between your current and recommended allocations? This article may explain why.
It’s also important to remember how FutureAdvisor keeps you diversified across the three tiers and 12 asset classes. Just as important as the diversification is the ongoing maintenance and monitoring of the portfolio. This article on “How we Rebalance Your Portfolio” explains it in detail. Another interesting feature of our algorithm is that it can take existing positions in your account, such as locked stocks, and build the rest of your portfolio around it. For example, say John previously worked at GE and has $15,000 worth of GE stock in his portfolio that he doesn’t want to sell because of a high unrealized capital gain. The algorithm would recognize GE as part of his Domestic Total Market allocation and reduce his exposure to that asset class accordingly. 13% of John’s portfolio will still be allocated to Domestic Total Market, for example, but 5% of that may come from GE, while 8% comes from IVV. As John is able to work himself out of that concentrated GE position over time, the algorithm will pick up IVV (or another equivalent Domestic Total Market ETF) to keep the balance.
Notice that in your FutureAdvisor dashboard it isn’t apparent where to find a listing of your individual ETF holdings. Instead, we focus on goal-based investing by getting you the right exposure to each asset class. We’d rather help you achieve your financial goals and show if you’re on-track for retirement, than show you if IVV went up or down 0.12% today. Furthermore, whether we purchase IEMG (the iShares Emerging Markets ETF) or SCHE (the Schwab Emerging Markets ETF), each ETF has been selected for a specific reason. In fact, there may be circumstances where it makes sense to hold both IEMG and SCHE in your account (more on that later). Holding information can be found in your FutureAdvisor Premium Dashboard by clicking on the Portfolio tab.
We hope this gives you a better idea of how your portfolio is invested and the breakdown from stocks and bonds all the way down to individual holdings. As always, if you have any questions about your portfolio or our strategy, we’re here and happy to chat!
The views expressed are for informational purposes only and are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by FutureAdvisor. All expressions of opinion are subject to change without notice in reaction to shifting market, economic, or political conditions. The investment strategies mentioned are not personalized to your financial circumstances or investment objectives, and differences in account size, the timing of transactions and market conditions prevailing at the time of investment may lead to different results. Clients may lose money. Past performance is not indicative of future results. Investments in securities involve the risk of loss. Any tax strategies discussed should not be interpreted as tax advice and do not represent in any manner that the tax consequences detailed will be obtained. Clients should consult with their personal tax advisors regarding the tax consequences of investing.