Transcript:
Easan Arulanantham:
When you review, like someone’s overall portfolio, what do you look for? And what are some red flags that you can see or notice?
Tom Vaughan:
Well, one of the interesting things, of course, in our valley here that we see all the time is high concentration, specifically in a single stock, the company that they work at currently or used to work at. And oftentimes, because the valley here is so successful, those are pretty good stocks, you know, you worked at Google, you worked at, you know, Cisco, or Intel, or whatever these stocks have done quite well. And so it’s an interesting conundrum. Because, you know, theoretically, in the, you know, overall thought process of financial planning, you know, concentrations are danger, right, because you can have this scenario, you know, rule of thumb that we always see all the time is, shouldn’t have more than 10%, in that, in that concentrated position. I’ve seen a lot of people with more. And so that’s one thing we do look at, I try to talk, I’m a big believer in wealth creation, by keeping those stocks, and I’ve had a lot of people be surprised that I’ve said that, because every other advisor trying to get them to sell it, because that’s how they make money, put it somewhere else that they get paid on, I look at it a little bit differently, you know, there’s all kinds of things you can do to try to protect that, you can sell some covered calls and put in some stop losses, you can do all kinds of little pieces on parts of the portfolio.
But one of the ways I look at is sort of like a fruit tree. So let’s just say you know, a million dollars is the number we’re pretty happy with. And even though it’s a little bit high concentration, and it grows to a million to maybe we sell 200,000. And then every time it gets above a million, you know, we sell some and basically then we put that into other diversified portfolio pieces. So I would say concentration is one big issue. But then past that, if I’m looking at just kind of the rest of the portfolio, or a normal portfolio, I’m really interested to see how that portfolio did in different environments. So take different downturns had to do in that pandemic downturn, how did it do in the big bounce back from the pandemic? How did that portfolio do just recently September, you know, October? How did it perform on the downside? How did it perform in this bounce back. And so because you can get a portfolio, it’s amazing, sometimes you see, they did worse on the downside, and worse on the upside, right. So that’s a pet portfolio, or one that you know, did a little bit better on the downside, but really, really loses on the upside, right?
So I kind of look for that balance, because when we compare portfolios to the market, we’re using, I think, really good index, we’re using the Vanguard Total Stock Market Index, which is basically most of the stocks here in the US. And the Vanguard Total bond market index, which is a whole bunch of bonds here in the US. And so if you’re in a 70%, stock, 30% bond, we’ll take that mixture, 70%, total stocks, 70%, total bond, and compare, because honestly, anybody can go out and buy that anybody can go to Vanguard and buy those two indexes. And so if you’re not beating those, you know, and you’re losing on a regular basis, and you’re not winning on the upside, you’re not winning on the downside, you know, and so then we can kind of compare that to what we’re doing in terms of, you know, our performance over the last, you know, three, three years or so, you know, dealing with that. So that’s one of the things that I look at pretty heavily is just kind of that performance in these different markets cycles in different situations.
Then ultimately, it comes down to some of the diversification, although most people are, you know, once we get rid of that concentrated position, look at the rest of the portfolio. Most of the times I see a pretty decent mixture in today’s world. It’s not too far off of all of the different pieces. The last piece would be expenses, and I don’t see this as much as we used to, but still see it. Sometimes people have internal expenses, they just don’t realize they’re there. They’re hard to see that are super high. And so it’s very difficult. You know, if you buy those Vanguard funds, they’re, you know, almost free. They’re point zero 3% internal costs. If you’re paying 1% and turtle cost or something crazy. It’s very difficult to keep up to that. So anyway, though, those are some of the pieces that I would look at in kind of a portfolio analysis.