A Look at the Most Popular Securities in Investor Portfolios

Infographic: Most popular investments by age | SigFig

Warren Buffet’s “Circle of Competence” theory — which he explains in detail in his 1996 letter to investors — states that to invest successfully, you have to stick to buying companies whose industries and business models you know well. That’s the main reason why he avoided tech stocks during the late-90s tech bubble — in retrospect a smart move, even though it meant giving up some big gains for a while.

But, Buffett wrote in that same letter, buying individual stocks isn’t the best way to invest:

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.”

Knowingly or not, many investors seem to follow Buffett’s advice. When it comes to individual stocks, they buy companies they know. When it comes to funds, many turn to low-cost ETFs and index funds. That, at least, is what our recent analysis of the most popular holdings in SigFig users’ portfolios shows.

We started out with a simple premise: let’s find out if people invest differently based on their age. To do that, we split SigFig users into seven 10-year age groups and looked at the top five holdings – ranked by number of users who own those holdings in their portfolios – for each group.

Among our findings:

Everybody Loves Apple

The most popular holdings in younger investors’ portfolios seem to be the stocks of companies whose products they use every day, like Google (GOOG), Facebook (FB) and Apple (AAPL). Older investors seem to feel comfortable owning well-established, stable companies like AT&T (T), Johnson & Johnson (JNJ)… and Apple. In fact, investors in all age groups own Apple stock.

Even if you’re buying what you know, you should still properly diversify your portfolio. Yet, our analysis shows that investors under 40 are putting an average of nearly 15% of their portfolios in Facebook stock. That’s a big risk to take on a single company.

We can speculate that some of these highly concentrated investors might be Facebook employees who are getting stock as part of their compensation. But that might be an even bigger risk. If you both work for a company and own stock in it, you’re doubly exposed if something happens to the firm. The value of your stock would fall — and your salary would be at risk, too. Some financial planners believe you should keep no more than 10% of your portfolio in your employer’s stock. Others say no more than 5%.

In fact, some mutual fund companies will tell you that to be properly diversified you probably shouldn’t have more than 5% of your portfolio in any single company stock.

Mutual funds and ETFs are an easy way to spread your risk among a basket of stocks or bonds, across multiple companies or even industries. And just to be clear, across all age groups, investors own a wide variety of funds and ETFs as well.

In fact, investors in their 20s, 30s and even 40s seem to favor low-cost ETFs, some of which you can see ranked among the top 5 holdings per age group (again, calculated as number of investors who own the security, rather than assets invested). One reason why we don’t see more funds or ETFs in our ranking could be a matter of choice: investors who want to own a total stock market fund have plenty of ETFs and index funds to choose from; investors who want to own Apple… well, they go and buy AAPL.

Look at Your Overall Portfolio

If you’re set on playing with individual stocks in your portfolios, keep in mind: the index funds you already own may hold the same big-name stocks you are buying.

Take, for example, Millennials’ love affair with Apple. In our analysis, two of the most popular holdings for the under-30 age group’s are Apple and the Vanguard Total Stock Market ETF (VTI). The top holding in the VTI? Apple, at 2.57% (as of market close on August 19, 2014).

When you’re deciding whether to buy an individual stock, it’s worth doing the math to figure out how much exposure to it you already have.

A couple of notes about this research:

  • SigFig only tracks data for its users, which may not be representative of all investors.
  • As previously stated, we ranked the top five securities in each age bracket by number of investors who own this security – not by assets invested or average percentage of users’ portfolios.

The Takeaway:

We all have biases. And it’s all too easy to think to yourself, “Everyone I know uses this company’s products, therefore it can’t fail.” But trying to outsmart the market tends to be a losing bet for most investors, most of the time.

Where’d All the Bonds Go?

Oh, to be young! To eat all the junk food and not get heartburn; to dance the night away with not an inkling of a hangover the next morning… To buy ALL of the stocks or equity funds in your investment accounts without worrying a bit about market volatility.

Because let’s face it: you can afford to be an aggressive investor when you’re younger, but that aggressive manner should be mellowing with age. As you get older and your paychecks stop coming, you need to rely less on stocks and more on sources of fixed income — bonds, pensions, CDs — to pay your bills during retirement.

Does that mellowing really happen, though?

At SigFig, we analyzed the asset allocation of more than 30,000 investors across all age groups and compared that to their ideal allocation, based on their risk profile and investment horizon. The results surprised us. Across all age groups, the portfolios we analyzed were too heavy on equities — and too light on fixed income investments.

We found that 93% of investors aged 50 to 60 had too much of their portfolios invested in equities; more than investors half their age — the 20- to 40 year-olds — with 90%.

Bonds? What about ‘em?

Across all age groups, investors’ portfolios are simply lacking in bonds. And as they get older, a greater proportion of investors have far less of them than they should.

But don’t just take our word for it. A study released earlier this year by the Investment Company Institute, a mutual fund industry group, found that a third of investors in their 50s had 100% of their IRA accounts in stocks, and so did a quarter of those age 60 to 64.

For Boomers easing into retirement, having 100% of anything doesn’t make for a well-diversified portfolio. And on days like July 31, 2014, when the stock market plunged 317 points – erasing all of its gains for the year – owning just stocks probably doesn’t feel reassuring.

Why the love of stocks?

We’ve got three theories about this:

  • It’s the Great Recession, Stupid. Investors, especially those Boomer-age and up, are still feeling the effects of the market crash in 2008-2009. According to the Federal Reserve, Americans saw $1.3 trillion of wealth vaporize in the first quarter of 2009 alone. Older investors saw their retirement portfolios shrink so much, they’re still heavily invested in equities to make up their losses.
  • Bonds are Boring. Investing in Twitter is sexy. Investing in Treasury bills is just not. Stocks are easier to understand and to follow online. Bonds, with their multiple maturity rates, yields, prices and other factors to follow, can be head-scratchers. Most Main Street investors lack a deep knowledge of bonds.
  • Bonds are Boring, Part II. The yield on the benchmark 10-year Treasury is at a 14-month low, down to 2.4%. That’s due to factors ranging from tame inflation to slow global growth, and many investors end up chasing higher returns elsewhere.

Three Re-Investing Strategies for Retirement

  1. Readjust your stocks. If you’re over 50, your retirement nest egg probably shouldn’t be invested in 100% of any one thing. That doesn’t mean you should give up on stocks. Jane Bryant Quinn, a personal finance expert at AARP, says Boomers should stick with at least 50% in stocks because fixed-income investments alone won’t be enough to carry you through in what could be 30 or more retirement years.
  2. Get a fix on your fixed income. Take a look at all the guaranteed sources of money you can get, including Social Security, a pension, lifetime-payout annuities, inflation-adjusted bonds, short-term bond funds and certificates of deposit. All your essential expenses during retirement should be covered by these investments. Consider it your “safe” money.
  3. Rethink your expenses. If the “safe money” won’t produce enough income to cover your basic expenses, rethink and reduce those expenses. You can’t afford to gamble on stocks to cover them.

The takeaway:

Sure, stocks are sexy. And they’ve been on the rise for a while. But as the Great Recession recently showed us, one cannot live on stocks alone. With age should come wisdom, and that means building a smart portfolio that’s safe enough to keep you going through the many decades of your Golden Years.

Your Pricey Investments Will Outperform the Market Only in the Short Term — at Best

Recently, SigFig took a look inside dozens of 401(k)s and found that many employees overpay by choosing the more expensive investments in their retirement plans. And we reminded you that there’s no evidence that paying more for investments will get you better performance.

Well, it’s a good slogan. But is it true?

To find out, we looked at how the investments inside those 401(k)s performed. Do low-cost plans outperform high-cost ones? And what about the individual mutual funds inside those plans? Will paying more for a skilled manager help you outperform an index fund that simply tracks a market index in good times and bad?

The answer? Data from the past year, at least, confirmed our hypothesis: expensive investments didn’t consistently outperform cheaper ones.

In fact, we saw almost no correlation between price and performance — even when we crunched three-year cumulative performance for more than 8,500 funds and ETFs. Those are index funds, actively managed funds, cheap funds, expensive funds… As you can see, it’s just a big horizontal smudge.

Source: SigFig.

But wait. What happened to “cheaper funds to tend to outperform expensive ones” and “you get what you don’t pay for”?

Here’s the truth about paying too much for your investments:

Like many bad habits, it won’t hurt you much in the short term — but someday you’ll look back and wish you hadn’t bought that expensive mutual fund.

Why? Because investment costs are like negative interest: they compound. Over the course of one year, it doesn’t matter much whether you earn 1% or 5% interest. Over 30 years, it makes a huge difference.

That’s even more true for mutual fund expenses: in a single year, the difference between paying 1% (the cost of many active funds) and 0.07% (a low-cost stock index fund or ETF) is practically invisible.

Long-term, costs add up in a big way.

Source: Vanguard.

That’s not just theory. Several studies have found a strong relationship between lower costs and higher long-term performance using actual fund data, including a Morningstar study from 2010, which found:

“Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.”

So the next time a financial advisor hints at you that the expensive load fund he’s trying to sell will deliver better returns (or even guarantees), think of the charts we showed you above. The only guarantee is those fees and higher costs will benefit the person making the sale.

A quick note on our data: we didn’t analyze the effect of plan-wide administrative expenses in 401(k)s and other retirement plans. While active management proponents argue that it’s worth paying for better performance, nobody seriously argues that retirement savers benefit from paying, say, high recordkeeping fees.

The takeaway:

Investment costs matter, but they matter much more long-term than short-term. Getting stuck with an expensive 401(k) or bad investment options isn’t the end of the world now. But as your portfolio grows, it becomes increasingly important to invest on the cheap.

Why Do Google Employees Make Better 401(k) Choices Than the Folks at Fidelity?

Companies list 401(k) plans among their employee benefits. But who is your 401(k) benefitting more — you, or the mutual fund company that manages your investments?

To find the answer, all you need to do is look at your 401(k) expenses. And that’s easier said than done: many companies bury this expense data deeper than a dead body.

Paying too much for your retirement investments can force you to spend extra years chained to your desk, paying for some investment manager’s retirement.

What can you do about it? The standard answer goes something like this: Complain to your benefits department, join with fellow employees, sing “Kumbaya,” and tell your boss that there are now plenty of low-cost plans available to businesses of all sizes.

And good luck to you with all that. While good advice, it calls to mind a sort of Erin Brockovich vs. The Wolf of Wall Street scenario that few employees have the time, know-how, or motivation to undertake.

But what if we told you that, if you work for a large company or university, you probably already have access to a great, inexpensive 401(k)—but most of your coworkers aren’t using it?

SigFig recently analyzed its members’ holdings in retirement plans at over 150 corporations, universities, and government organizations and chose 20 representative plans to showcase on the chart above. The results were surprising:

Most 401(k) plans have good choices, but employees aren’t using them effectively.

Most large-organization retirement plans offer investment options ranging from excellent (index funds charging less than 0.2% in annual expenses) to abysmal (actively managed funds charging up to 1.8%). In investing, as Vanguard founder John C. Bogle put it, you get what you don’t pay for, so savvy investors should be choosing the cheapest funds and ignoring the rest.

Unfortunately, investors often ignore low-priced funds in favor of expensive ones. Investing this way is the equivalent of going into Best Buy and saying, “Hey, this TV is too cheap. Can you show me a similar one for triple the price?”

Many plans offer Vanguard index funds charging as little as 0.02%. A fund charging a 0.02% expense ratio will cost you $20 annually on a $100,000 investment. Pocket change. But the same plans also offer actively managed funds charging well over 1% annually—$1000 on a $100,000 investment, or 50 times the cost of the cheap index fund.

We don’t know about you, but we’d rather see that $980 grow into additional retirement savings or spend it on, well, literally anything other than the black hole of mutual fund management.

As you can see on the chart above, the average SigFig user participating in these large retirement plans is paying far more than necessary. Perhaps it’s because they’ve been invested in expensive funds by default, or because they split their money evenly among a dozen or more funds (a popular investment tactic for the indecisive).

That doesn’t let companies off the hook, of course. Plans with too many options (some offer literally hundreds) confuse employees and lead them to make bad choices. The best plans we analyzed offer a small number of inexpensive funds (Stanford University, for example) or a very cheap default option (Google). On average, SigFig members who participate in these plans pay low prices for their investments and keep more of their own money.

Finally, a few plans really stink: they offer no investment options cheaper than 0.5% — 25 times as expensive as the cheapest funds out there.

A few caveats about this research:

  • SigFig only tracks its own members, not all participants in a 401(k). It’s possible that SigFig members invest differently than the average plan participant.
  • We didn’t look at plan-wide administrative and record-keeping fees, which are charged to all participants regardless of what they invest in.
  • We used retail prices for the funds we analyzed. A retirement plan may charge more or less than the retail price of a fund when purchased through the plan.

The takeaway:

It pays (literally) to look at the investment options in your plan and select the cheapest set of funds consistent with your asset allocation. After all, you get what you don’t pay for.

OpenSSL Security Update

On April 7, a public announcement was made by OpenSSL about a vulnerability in their encryption software. Referred to widely as “Heartbleed,” the vulnerability affects over half a million websites, including many popular ones like Google and Yahoo.

Since many people use the same password across their accounts, our team wanted to bring this to your attention and make sure you stay protected. Our own engineering team immediately deployed the strongest fix to Heartbleed this past Monday, the same day the vulnerability was publicly announced. We have not found any signs of compromised data.

What you can do to further secure your SigFig account is change your password. Here’s how to do that:

1. Log into your SigFig account at sigfig.com
2. Click on your username in the upper-right corner.
3. Click Your Account/My Profile and then click Change Password.

A strong password for any service should:
* have a minimum of 8 characters
* include at least 3 of 4: uppercase letters, lowercase letters, numbers, punctuation
* not be based off dictionary words, e.g. Passw0rd

For accounts on our partner sites, go here for detailed instructions on how to change your password. Because of the widespread use of OpenSSL software, there is a chance that other online services you use are impacted by Heartbleed, including brokerages. Our recommendation for you is to:

1. Check the websites and blogs of online services you use for announcements on Heartbleed. The appropriate response is for companies to adopt the fix to secure your information and notify users the fix is in place. You can also use this tool to see if a website is vulnerable.

2. Change your password after the company has made the fix. Here’s more information on Heartbleed.

We will continue to monitor the situation actively. Please don’t hesitate to reach out if you have any questions or concerns; we can be reached at support@sigfig.com.