A Quick Check-up

By Brad Thomason, CPA
 
 The year is half over.  How has it been going?
 
Today I’ll describe a quick way to tell, a mid-year check-up of sorts.
 
Look back to your statements from a year ago.  Total them up.  Multiply by 1.07.
 
Take the product and compare it to your current balances.
 
Which is bigger, the number you calculated or the current size of your portfolio?
 
In other words, is your portfolio 7% larger (or more) than it was twelve months ago?
 
As we’ve discussed in detail a number of times, there’s a whole lot more to the world of retirement income than just what your portfolio earns.  That said, every one of those other parts is easier to deal with if your capital is doing its job:  producing more capital.
 
I suppose we should differentiate this question for those who have versus have not retired.  If you are already drawing money out of your portfolio, you can add those amounts back before you compare your balance to the bogey.  If you are not retired, and still making contributions (as to a 401(k), etc) then you need to deduct those amounts.  No credit on the earnings front for new principal.   
 
But big picture this is just straight math.  Either you beat the hurdle or you didn’t.
 
While there’s nothing magical about 7%, per se, it does represent what I think of as sort of being in the lower end of the range for a portfolio that’s really doing its job.  Languishing capital can be OK for awhile, especially if there are risk or asset selection issues.  But over the long run it needs to be deployed and working.  Otherwise, the lost potential that it represents is insanely expensive – maybe more so than you can afford.
 
I’ll close with a couple of obvious conclusions.  First, this is a useful test to run any time, not just at midyear.  Second, if your capital isn’t producing where it is, maybe you want to consider moving it around.  There are risk concerns to take into account, as well as matters related to diversification and timing of cash flows (especially if you’ve already retired).  Don’t just reallocate willy-nilly without giving it some thought. 
 
But yea, if it isn’t producing, do give it some thought; probably followed by some sort of prudent action.