By John Wasik
CHICAGO, April 29 (Reuters) - Whether you need to invest a tax refund or simply want to see if you’re on track with your investments, spring is a great time to get out the broom.
I needed to make a large contribution to my 401(k) to offset some taxes recently, so I took the opportunity to see that my portfolio is meeting my objectives.
In my case, I needed to do some rebalancing and check returns of the funds I owned against benchmarks. Then I checked to see if my funds tracked my long-term investment policy.
When I first opened my 401(k) about a decade ago, my main objective was broad-based global income and growth. Then I added a little gold for inflation protection last year. Now I’ve drifted off course, so it’s time to ask some questions.
In my global search for a combination of income and appreciation, I need more exposure to natural resources, the staple commodities of developing countries.
When I check the International Monetary Fund forecasts, I see that the “advanced country” sector, which includes the United States, Canada, Japan and Europe, is only expected to grow 1.4 percent this year and 2.2 percent next year. That probably won’t beat the rate of U.S. inflation, so I also want to add more “emerging and developing” countries from Asia, Africa, Eastern Europe and South America. This group is forecast to grow from 5.5 percent to 6 percent over the next two years, barring a worldwide downturn.
After reviewing my portfolio, I see that I need growth from underdeveloped countries and lower volatility companies that benefit from global commodity demand. So I‘m considering adding the IQ Global Resources ETF (GRES), which holds energy, mining and food companies; and the iShares Frontier Markets ETF (FM), which holds stocks from countries like Kuwait and Vietnam. Each fund would make up 10 percent of my portfolio.
Not only do I need to rebalance my holdings to about 10 percent per fund and add the two new funds, I need to make some substitutions to find better-performing, lower-cost funds. Here’s a thumbnail review of what I own:
-iShares Core Total US Bond Market ETF (AGG) - This has been my all-in-one U.S. bond market fund. I’ll keep the allocation because it’s a cheap way to own a big slice of the U.S. bond market, even though it’s been my second-weakest performer with a 7 percent return over a decade.
-American Century International Bond Fund (BEGBX) - A global bond fund that invests in high-quality corporate and government securities. It has not been beating its peers over the past three to five years. It’s rated “1” and “2” in its Lipper Leaders rating (Lipper is owned by Thomson Reuters), the lowest marks on a scale of 1 to 5. I‘m looking for some substitutes.
-Fidelity New Markets Income (FNMIX) - An emerging markets bond fund rated an overall “5” by Lipper. This has been my best performer, returning an annualized 11 percent over the past 10 years through April 26. Its portfolio is invested in 80 percent emerging markets bonds, which gives me a hedge against U.S. bonds and the dollar. Because the dollar amount of the fund has grown to nearly 20 percent of my portfolio, though, I‘m going to sell some shares to get back to a 10 percent stake.
-Fidelity Capital & Income (FAGIX) - This corporate junk bond fund is the riskiest of all of my bond funds, but it’s almost 20 percent of my portfolio and the second-best performer. I’ll sell half of it and invest the proceeds in a inflation-indexed bond fund (see below). It’s rated “4” overall with a 10 percent annualized return.
-Fidelity International Real Estate Fund (FIREX) - Owns stocks that hold global real-estate investment trusts (REITs). This relatively new fund is not pulling its weight, only returning 0.52 percent annually with a “3” Lipper ranking. I‘m looking for a better-performing substitute, so this one is on the block.
-Fidelity International Stock Fund (FIGRX) - This international stock fund includes some non-U.S. dividend payers. It is rated “4” with a nearly 11 percent annualized return for the decade. It has been propelled by a diverse mix of companies like Orix Corp (ORXCF) and Royal Dutch Shell B (RDSB). It’s a keeper.
-Schwab Dividend Equity Fund (SWDSX) - Focusing on dividend-paying U.S. stocks, this fund makes up about 12 percent of my portfolio. It’s a mediocre fund - rated “3” - so I‘m going to replace it with the Vanguard Dividend Appreciation fund (VIG), which has better three- and five-year returns at roughly 12 percent and 6 percent, respectively, with a 0.13 percent annual expense ratio. The Schwab fund has returned 11 percent and 5 percent, respectively, with a 0.89-percent expense ratio.
-iShares Gold Trust (IAU) - Following the recent slide in gold, this fund is down more than 5 percent this year. Luckily it only represents about 2 percent of my portfolio. I‘m going to sell it and exchange it for a Treasury Inflation Protected Securities fund like the iShares TIP ETF (TIP), which will offer less volatile inflation protection.