Rich Habits Podcast - Episode 91: How to Conduct a Portfolio Performance Review

Release Date: November 18, 2024

Hosts:

• Austin Hankiewicz: A dynamic entrepreneur in his late 20s with a background in finance and economics. Since leaving his corporate finance role, Austin has built a seven-figure media business and advises prominent fintech companies globally.
• Robert Croak: A seasoned entrepreneur in his 50s, Robert boasts over 30 years of business experience with lifetime revenues exceeding $300 million and over $200 million from company exits.

Introduction

In Episode 91 of the Rich Habits Podcast, Austin and Robert delve into the crucial topic of conducting a portfolio performance review. Inspired by a revealing CNBC statistic that 46% of 401k investors are unclear about their specific retirement plan investments (00:46), the hosts emphasize the importance of understanding where and how one's retirement funds are allocated.

1. Deciphering Your Employer's 401k Match

Understanding the Match Structure

Robert introduces the concept of the 401k match, highlighting common misconceptions surrounding it. He explains the two primary types of matches employers offer:

• 100% Match Up to a Certain Percentage:

  • Example: "If you contribute 3% of your $100,000 salary, the company matches $3,000, doubling your annual contribution to $6,000." (04:02)
  • Benefit: This is essentially a free $3,000 investment, providing a 100% return on the matched amount.

• Partial (e.g., 50%) Match:

  • Example: "If you're contributing 3%, the company contributes 50% of that amount, totaling $4,000 from both sources." (07:33)
  • Complexity: Partial matches can be more confusing, especially when tiered (e.g., 100% up to 2% and 50% thereafter).

Vesting Schedules

Robert emphasizes the significance of understanding the vesting schedule, particularly the four-year vesting with a one-year cliff. This means:

• One-Year Cliff: Full matches begin after one year of employment.
• Quarterly Vesting: After the first year, contributions vest gradually over the next three years.

Austin shares a personal anecdote about the confusion and potential financial loss due to not fully understanding the vesting terms (10:03).

Key Takeaways:

• Read and Understand: Always review your company's 401k match details.
• Vesting Awareness: Be mindful of vesting schedules to avoid losing matched funds upon leaving the company.
• Diversification: Avoid over-concentration in company stock to mitigate risk.

2. Analyzing Your 401k Investments: Weightings and Performance

Assessing Investment Platforms

Austin discusses the variety of 401k investment platforms available (e.g., Bank of America, Fidelity, E*TRADE) and the options they offer, ranging from preset investment strategies (conservative, medium, aggressive) to individual stock selection.

Strategic Allocation Based on Time Horizon

• Aggressive for Younger Investors:
  • Quote: "If you're in your 20s, 30s, and 40s, you are not going to retire for at least 20 to 30 more years... this money should be working for you aggressively." (17:57)
• Risk Tolerance: Robert underscores the importance of aligning investments with personal risk tolerance and market conditions.

Simplifying Investment Choices

Austin analogizes portfolio weightings to a pizza, emphasizing the need for simplicity and understanding:

• Quote: "Think about how this pizza begins to take shape. And that pizza, again, is your 401k." (20:52)

Benchmark Comparison

Comparing portfolio performance against benchmark indices (e.g., S&P 500, NASDAQ) is crucial:

• Utilize platforms like Morningstar and Seeking Alpha to evaluate total performance, including dividends.
• Quote: "Look at the total performance, which includes the dividends that get reinvested." (25:05)

Key Takeaways:

• Active Management: Regularly review and adjust your portfolio to stay aligned with market trends and personal goals.
• Benchmarking: Ensure your investments are performing relative to established indices to maximize returns.
• Simplicity and Diversification: Maintain a straightforward and diversified portfolio to optimize growth and reduce unnecessary risks.

3. Integrating the Roth IRA into Your Retirement Strategy

Importance of the Roth IRA

Robert and Austin passionately advocate for the Roth IRA as a pivotal retirement vehicle:

• Tax Advantages: Roth IRAs offer tax-free withdrawals in retirement.
• Flexibility: Allows for selecting specific ETFs and index funds beyond the limitations of some 401k plans.

Strategic Contributions

• Maximize Contributions: Aim to max out your Roth IRA annually.
• Investment Choices: Focus on stable, long-term growth investments like VOO, QQQ, VGT.
• Avoid High-Risk Investments: Treat the Roth IRA as a long-term, growth-focused account rather than a venue for speculative investments.

Mindset and Discipline

• Consistency: "Plugging away month after month... that is that comfortable retirement account." (31:24)
• Mindful Investing: "Don't treat this like a gambling account... ensure this money is guaranteed freedom in retirement." (31:24)

Key Takeaways:

• Dual Strategy: First, take full advantage of your 401k match, then prioritize maximizing your Roth IRA.
• Long-Term Focus: Commit to disciplined, strategic investing within the Roth IRA to harness the power of compound interest.
• Risk Management: Maintain a balanced approach by allocating a majority to stable indices and a smaller portion to high-growth assets like bitcoin, if desired.

4. Conducting an Effective Portfolio Performance Review

Steps for a Comprehensive Review

1. Understand Your Current Allocation: Know where your money is invested and the percentage allocated to each asset.
2. Compare to Benchmarks: Use tools like Morningstar to assess how each fund performs against relevant indices.
3. Evaluate Performance Over Time: Look at 1-year, 5-year, and 10-year performance metrics to gauge consistency and growth.
4. Identify Underperformers: Recognize which investments are lagging and consider reallocating those funds to better-performing assets.
5. Adjust Based on Goals and Risk Tolerance: Ensure your portfolio aligns with your long-term financial objectives and comfort with risk.

Opportunity Cost Awareness

Robert highlights the concept of opportunity cost:

• Quote: "If a fund is averaging 6% a year and VOO or QQQ is averaging 12-14%, the opportunity cost suggests moving funds to the higher-performing asset." (25:05)

Utilizing Resources

• Morningstar and Seeking Alpha: Leverage these platforms for detailed performance analyses.
• Total vs. Price Performance: Focus on total returns, which include dividends reinvested, for a complete performance picture.

Key Takeaways:

• Regular Reviews: Conduct annual or bi-annual portfolio reviews to stay on track with your financial goals.
• Informed Decisions: Use data-driven insights to make adjustments, ensuring your investments continue to perform optimally.
• Continuous Learning: Stay educated on market trends and investment strategies to enhance portfolio management.

5. Listener Questions and Expert Advice

Q1: Starting a Latin Bar and Grill with Existing Debt

• Concern: Reenan B., 34, with a negative net worth and significant debt, seeks advice on whether to pursue a business idea amidst financial challenges.
• Advice:
  • Focus on paying off high-interest debt before committing to new ventures.
  • Gain industry experience by working in a similar establishment to build knowledge.
  • Explore alternative funding options like SBA loans or friends and family—with caution regarding personal relationships.

Q2: Allocating Increased Income Post-Side Hustle

• Concern: Lindsay, around 30-31, with a substantial increase in income and existing debts, seeks guidance on fund allocation.
• Advice:
  • Build a solid financial base: Invest up to $100,000 across various accounts and bolster the emergency fund in anticipation of starting a family.
  • Prioritize debt repayment: Focus on eliminating student loans and consider refinancing the mortgage.
  • Explore additional investment avenues: Allocate a portion to cryptocurrency for potential growth, but maintain disciplined investment strategies.

Q3: Managing Multiple Investment Accounts and Evaluating a Wealth Advisor

• Concern: Kate, 24, with a substantial net worth in varied accounts, questions the value of her current wealth advisor who charges a high fee and underperformed.
• Advice:
  • Evaluate Advisor Performance: If the advisor consistently underperforms compared to benchmarks, consider terminating the relationship.
  • Opt for Cost-Effective Alternatives: Explore platforms like Titan, Betterment, or Wealthfront for lower fees and automated portfolio management.
  • Simplify Portfolio Management: Maintain a straightforward allocation aligned with personal risk tolerance and investment goals.

Conclusion

Episode 91 of the Rich Habits Podcast serves as a comprehensive guide for individuals aiming to gain control over their retirement investments. By demystifying complex concepts like 401k matches, investment weightings, and the strategic use of Roth IRAs, Austin and Robert empower listeners to make informed decisions. The episode underscores the importance of active portfolio management, benchmark comparisons, and tailored investment strategies to ensure financial growth and security in retirement.

Notable Quotes:

• Robert Croak (07:33): "Performance review indices and all of that. But we're going to break it down in a really simple manner because I just think it's so important for you guys to actually understand where your money's going."
• Austin Hankiewicz (20:52): "Think about how this pizza begins to take shape. And that pizza, again, is your 401k."
• Robert Croak (22:32): "When you do this, you're always going to have this lifestyle creep scenario where you're never just going to set it and forget it."

Resources Mentioned:

• Morningstar: For detailed investment performance analysis.
• Seeking Alpha: For researching investment performance against benchmarks.
• Masterworks Art Investing Platform: For diversifying portfolios with fine artwork (49:37).
• Titan: Wealth management firm offering personalized investment advice.

This summary captures the essence and key insights from Episode 91, providing listeners with actionable strategies to enhance their retirement portfolio management without needing to refer to the original podcast.