Post-401k

Re: What I have been saying about Index Fund investing. And more importantly, expenses and fees on funds.

I just found a link to a WSJ article from the summer that had some really interesting facts: http://online.wSportsJournalists.com/news/articles/SB10001424127887324442304578231851362953728

It's not as simple as "actively managed / money manager vs. passively managed / index."

But these things stuck out: Last year, 65 percent of U.S. large-cap stock funds trailed the S&P 500-stock index after fees.

This one was even more startling: Only 10 percent of the 1,991 U.S. stock funds that Morningstar (big mutual fund research company) tracks beat the benchmark, or index, they are closest to in investment style to in both 2011 and 2012.

So that means most of these professional stock pickers -- working at the retail level (hedge funds and institutional money managers are different stories, but most people on here don't have access to those money managers) just aren't very good at doing what they sell you.

The article goes on to say that if you do pick actively managed funds (and there are some fine ones), there are things to look for. Fees, in particular, what I have been suggesting.

The second thing it says, is to look for managers that aren't closet indexers. That is the dirty secret of mutual funds. You are paying fees to these guys to somehow know something and pick the right stocks. But the managers are mostly concerned with keeping their jobs. They don't want to risk trailing the indexes by too much by being wrong. So they just build portfolios that are really closet index funds. Except you are paying them a lot of money to do what you could do in an automated way.

Maybe most people on here don't care, or this is like a foreign language. But I clipped that article and have passed it along to a number of people who have asked for advice.

 

What you did is fairly common -- putting it in a few funds you had the choice of and forgetting about it. If it is retirement money (i.e. money with a fairly long time horizon, greater than 5 to 10 years), you shouldn't be looking at the performance of your investment choices every day. But you shouldn't stick it in a couple of funds and then forget about it.

Based on your age, you want to come up with an asset allocation plan that has the best chance to grow the money to reach your retirement goals, but also takes into account your tolerance for risk. You shouldn't be 100 percent in equities, or stocks, for example, if you aren't going to sleep at night worrying.

But you have to look at it every quarter or so (or at least 2 to 3 times a year) and rebalance it to keep close to the asset allocation mix you want in order to stick to that plan.

Let's say you decided to have this kind of portfolio based on your age and risk tolerance:

1) A Total Stock Market Index Fund (which gives you broad exposure to the U.S. markets)
2) A market-weighted International Stock Index Fund (broad exposure to the rest of the world)
3) A bond index fund (exposure to investment grade U.S. bonds)

And let's say you go 60 percent in the U.S stock market fund, 20 percent in the international stock fund and 20 percent in the bond index fund.

I am NOT suggesting that is what everyone should do or that it will be appropriate or comfortable for anyone in particular on here. But let's say that is the asset allocation you think can get you to where you want to be in TK years, based on how much you can put away.

So let's say at the end of June, you look at how your portfolio has done (either appreciated or lost), and you now have 65 percent in the U.S. Stock Fund, 17 percent in the International stock fund and 18 percent in the bond fund. You'd go in and rebalance -- get it back to 60, 20, 20. Move some money out of the U.S. stock fund and into the other two funds to get back to the asset allocation mix that is your plan. And do that anywhere from 2 to 4 times a year.

Intuitively, a lot of people don't want to take money from the thing that is doing well, and shift it to the things not doing as well. But this is long-term money, and the reason you came up with that asset allocation is to diversify your holdings and spread the risk. Not have all your eggs in one basket.

As you get older (less of a time horizon until retirement), you will probably want to change your asset allocation mix, to reduce the risk in your portfolio. Less in equities (or stocks, which are typically riskier) and more into safer investments, typically bonds (the shorter the maturity, the safer, but the less the returns).

Ideally, you can dollar-cost average in more money every month, as you go along. Add money to the funds at the same percentage of allocation to each asset class. Sometimes you'll be buying any one of the asset classes when it is expensive. Sometimes when it has gotten cheaper (because it isn't performing as well). But you are not trying to time the markets -- which is a game of luck.

If anything traumatic happens -- let's say there is another financial crisis and you see the value of your U.S. stock fund decrease by 30 or 40 percent. Just stay the course. Don't panic and sell. In fact, try not to look. The idea, again, was that this is money for the long-term, and historically (even though it tells you nothing about the future), these markets work their way back. Sometimes it takes years. Over time, though, on an annualized (and compounded basis), an approach heavy on equities would have served most people the best -- provided you start young enough.

That is also why if your time horizon is less than 5 years for ANY kind of investment money -- i.e., you are investing money you will absolutely need in the next couple of years -- you should be very careful about investing in equities, or stocks.

So the key is first coming up with a plan. But you can't just forget about it after that. You really do have to look at it a couple of times a year and rebalance your portfolio to make it keep adhering to your plan.

This is your retirement, though, and having to actively do something just 3 or 4 times a year to stick to a plan shouldn't be that big of deal for something that important.

That is about the only purpose a financial planner serves, in my opinion. They will stay on top of something people don't do for themselves. The question I ask is, for most people who are struggling to grow their money, is it worth paying say 1 percent of their assets on a yearly basis to get that when they are capable of doing it themselves?

If you decide yes, despite what I am suggesting, then I'd say the most important thing to ask and understand about a planner is. ... What they are charging you. The fees they take are what is going to most likely affect the growth of your savings the most. So you should understand clearly what their fee is (and really understand it) and what the expenses involved with the investment products they choose are, and how they relate to other possible choices. And then you have to stay on top of them to make sure that they don't in effect legally rob you of return by making changes to what you own that incur high fees.

The thing is, if you are really going to stay on top of them that way (and you should never hand over money to someone and NOT understand what they are doing with it). ... I think you might as well just stay on top of a simple portfolio yourself by looking at it a few times a year to rebalance. It's the same amount of work, but will invariably leave you with more money in retirement.

Again, my 2 cents (or $2 if you are going by word count).