“Should I sell now, before all my money is gone?”
“If I fire my money manager, as you suggest, what do I do next?”
Those two questions dominate my e-mail. I don’t think I need to explain why. So let’s talk this through. First, should you sell now?
I don’t think so. For one thing, most of the damage has been done. We’ve already experienced one of the worst declines in history. It could get worse, but the odds are against it. Jeremy Grantham believes we’re near a bottom, but not quite there. John Bogle makes a good case that stocks could return 10 percent a year over the next 10 years.
That doesn’t mean you can’t change investments. If you hold a domestic stock fund, you can exchange one domestic stock fund for another. Ditto international and emerging markets. My suggestion is that you sell your expensive managed funds and move to an inexpensive index fund in the same category or asset class.
Remember, the money you save will be your own.
Changing funds in the same category has an additional advantage if your money is in a taxable account--- you’ll be able to realize a capital loss. You will probably be left with a loss carryforward. For many, it will last for years. Second, your new fund is likely to have a loss carryforward itself, even if it is an index fund. Since equity mutual funds have been in net redemption (more people were selling shares than buying them), even index fund managers may have been forced to realize losses.
This means you won’t have any net capital gains distributions for quite a while. If the boneheads in Washington have any sense at all, they’ll change current law so that you’ll be able to charge more than $3,000 a year in capital losses against your earned income, providing an immediate tax break. (Just don’t hold your breath--- they didn’t exercise this option in the 2000-2002 bust.)
For most people, leaving a financial adviser is very difficult. You either find another adviser (think: frying pan/fire) or you become your own adviser (worry: more frying pan/fire).
This is why I believe absolutely every investor should start with an “escape road” account. This is an account with a firm that provides low-cost index funds and/or a low-commission brokerage account that will give you access to an entire universe of low-cost exchange-traded index funds. The account can be very small--- as little as $3,000. Or it can be a percentage of your financial assets, say,10 percent.
Once the account is created, you will always have the security of knowing where you can move your money. Better still, the firm that has the account will help you with the moving process. Even better, your new account will have a return that you can compare to the return of your more expensive managed account. (Note: Your escape road account should have about the same mix of equities and fixed income as your managed account. Otherwise, the performance comparison will be apples to oranges.)
So what do you put in your escape road account?
For the smallest accounts that desire extreme simplicity, I suggest Vanguard Balanced Index fund (ticker: VBINX). It’s one-stop shopping and, as I pointed out in a recent column, it has done better than 86 percent, 81 percent, 76 percent and 71 percent of its managed competition over the last 12 months, 3 years, 5 years and 10 years, respectively. Those are pretty good odds. According to Morningstar, the fund has a current yield of 3.82 percent--- enough to meet the income needs of some seniors.
Investors who want greater diversification can build one of my Couch Potato Building Block portfolios, with two to ten funds. My personal favorite is the Six Ways from Sunday portfolio. It has foreign equities, foreign bonds, energy and REITs in addition to domestic stocks and bonds.
Remember, you don’t need an MBA to do this. If you can divide by a number from 2 to 10 with the help of an electronic calculator, you can do this yourself.
Remember, this is just money. It is nothing compared to the gift of life.
Have a wonderful Thanksgiving.
On the web:Morningstar snapshot on Vanguard Balanced Index fund
Couch Potato Investing Columns
Couch Potato Building Block performance report
Sunday, November 9, 2008: Workers Unite!
Jeremy Grantham on stocks
Bogle on stocks: Keep Investing!