One of the things I found most challenging at the start of my financial journey was simply keeping track of all my different accounts. I had a 401(k) account with company A, a brokerage account with company B, a Roth IRA with company C, an HSA account with company D, an employee stock plan with company E, and so on. In addition to remembering 10 different login credentials, this made viewing my overall financial picture quite difficult.
Luckily, I had a wise uncle who referred me to an incredible free tool called Personal Capital…
What is Personal Capital?
Think of Personal Capital as a giant melting pot for your finances. You drop in all your financial accounts and Personal Capital melts it down into a smooth and easy to digest picture. Essentially you get a bird’s eye view of your financial situation. This can be valuable for several reasons, but ill get to that in a second.
First a quick note on the sign-up process: as mentioned above, Personal Capital is free. They do offer financial advising services for a fee, but we will not cover that here. Today we will just focus on how to derive maximum benefit from the free version.
Pro Tip: before signing up for Personal Capital, make a list of all the places you have money or debt. This includes 401(k), savings accounts, brokerage accounts, student loans, car loans, mortgages, etc. For each item, jot down your log-in credentials. For example, if you have a credit card with Chase, make a note of the login credentials you use to access your account on Chase.com. This will make linking all your accounts in Personal Capital much faster and less painful.
So now for the million-dollar question, how does the Milk Man use Personal Capital?
1. Viewing Net Worth
Net worth is calculated by subtracting your liabilities (ex: credit card debt, student loans, etc.) from your assets (ex: savings, investment accounts, etc.). Put more simply, how much money do you actually have when you subtract off all the money you owe to others? The key here is that the focus is not solely on your salary income. You could be making $250,000 per year, but if you spend every dime of it then your net worth will suffer, even with that high-flying income.
Viewing your overall net worth is a scary proposition for most young millennials. However, when it comes to your finances, ignorance is NOT bliss. Your debt will not magically evaporate if you ignore it long enough. Constantly reminding yourself that you owe money is a great way to prevent yourself from splurging on yet $300 Drake concert ticket.
Personal Capital creates a nice graph for you displaying how your net worth has changed over time. Simply seeing this graph trending upwards or downwards provides a quick gauge of how you are doing financially. Think of your net worth as a snapshot of your financial health at any given point in time. If your net worth is constantly decreasing month after month, you need to sound the alarm. Figure out what is dragging down your net worth and make changes to address the problem.
Think of your net worth as a snapshot of your financial health at any given point in time.
This investigation becomes quite easy when using Personal Capital. The “Net Worth” section provides a breakdown of all your linked accounts and enables you to drill further into each individual account. So, you can drill down into your credit card statement and quickly see that your monthly credit card bill has been steadily creeping upwards since you moved into that new Lower East Side apartment.
2. Reviewing Portfolio Allocation
This feature appeals mostly to the Do-It-Yourself investor. If you are currently using a financial advisor, robo-advisor, target date fund, or some other managed portfolio approach, then they will be monitoring your allocation and readjusting it over time. But for the DIY investor (or for the curious and eager to learn), this feature of Personal Capital is extremely powerful.
Your investment allocation directly influences your risk and return. Allocating your investments across different asset classes, geographies and company sizes is the key to building a diversified portfolio. Most DIY investors have an idea of their target allocations when building their portfolio and choose their investments accordingly (see mine here). For example, a 22-year old who is just entering the workforce may be comfortable holding 95% of his portfolio in equities and 5% in fixed income.
However, over time as certain investments grow and others falter, your portfolio allocation will change. You may unintentionally be overexposed to certain asset classes or geographies. For example, imagine you invested 10% of your portfolio in International Emerging Markets. If this investment was to skyrocket, it may suddenly compose 20% of your portfolio. If you are only comfortable holding 10% of your portfolio in International Emerging Markets, then you are now overexposed to this investment and need to rebalance your portfolio. Additionally, as life progresses, you may want to de-risk your portfolio and change your allocation. For example, if that same 22-year old were to now have a child, he may want to retool his portfolio a bit and increase the percentage allocated to fixed income.
Okay so where does Personal Capital come into play? Personal Capital takes all your investment accounts, aggregates them and provides the allocation percentages for your entire investment portfolio. This is extremely helpful if you have multiple investment accounts (401k, Roth IRA, Brokerage, HSA, etc.). Without Personal Capital, determining your overall portfolio allocation across several different accounts would be a nightmare. You would have to manually combine all the investments from each account into some hulking excel spreadsheet. Bye-bye Friday night.
Personal Capital breaks down your portfolio into high-level categories such as US Stocks, International Bonds, Alternatives, etc. For each high-level category, you can drill down deeper and see the allocation within that category. For example, within US Stocks you can see your allocation to Large Cap Value, Small Cap Growth and so on.
3. Investment Fee Analyzer
When choosing investments, fees can have a huge impact on your portfolio results. At first glance, investment fees seem marginal. After all, a 0.75% expense ratio on an investment is only 75 cents of every 100 dollars, no big deal, right?
The problem is these fees cut directly into your investment return. When compounded over a long period, these “small” fees can really make a dent in the value of your portfolio. For example, let’s compare two investments over a 40-year period, a low-fee index fund and an actively managed mutual fund:
So that small 75 cent fee results in a final investment value that is roughly 25% smaller than its low-fee counterpart. In summary, fees matter and should not be taken lightly!
Personal Capital combines the fee information from all your individual investments and calculates the expense ratio across your entire portfolio. This tailor-made expense ratio is used to forecast how fees will impact your investment earnings over your future lifetime. Additionally, Personal Capital lists the expense ratio for each individual investment you hold. This is quite convenient as it saves you the hassle of digging through the individual Investment Prospectuses.
4. Benchmarking Investment Portfolio Performance
The final thing I use Personal Capital for is to compare my portfolio performance to well known benchmarks (S&P 500, DOW, US Bond, Foreign Markets, etc.). This is especially useful for those with several different investment accounts. Personal Capital allows you to view the return of your entire portfolio over any date range that you input. This makes it very easy to compare the performance and volatility of your portfolio against some standard benchmarks.
A word of caution: this tool has strong potential to lead to emotional investing. For example, if you see that your portfolio has lagged the S&P 500 for the past year, then you may be tempted to sell and reinvest all your money into the S&P 500. Do not fall into this trap. You chose your portfolio allocation and diversification strategy for a reason, stick to it and be patient.