Q. I have a small IRA that I have in certificates of deposit at a local credit union. The interest rates are low and I am willing to move the funds. But I need advice about where and how. I love your idea of low cost investing. Are there funds that will take my small contributions of $500 at a time? The total balance of my regular IRA is $22,300. I am still working and will be turning 60 this year. —J.H., by email
A. Many discount broker platforms now offer no-commission purchases on basic Exchange Traded Funds. So dealing with minimum starting and additional investment amounts has become a non-issue. Your account has enough in it that you could make initial investments in traditional mutual funds. You would have no problem adding $500.
You will need to transfer your IRA from your credit union to a firm that offers a brokerage “platform.” The platform could also be a mutual funds supermarket. If you are comfortable online, Vanguard will be the most flexible choice for low-cost investing. But if you would like some direct contact and help from a person you can see, you’ll feel better visiting a Schwab or Fidelity office.
Q. We have about $1,000,000 invested through a financial planner that we have done business with since the mid 1990s. Until the last couple of years we have had a cordial financial relationship with this firm. But I was not satisfied with the way our portfolio was going in light of a good market. I started asking why the lack of movement. The best response I received was…"what do you want us to do?" I told them to make money!
My perception was that they were sitting on the portfolio, afraid to invest, so there was little movement.
Having said all of this, we will be meeting with this firm for our annual review and I would like to have the right questions to ascertain what we are paying and what we have gained or lost through their oversight. They provide pretty graphs, etc. but I don't think we are being provided the true picture on fees, return, etc.
Your suggestions would be much appreciated. I have been reading "How a Second Grader Beats Wall Street" and it makes sense to me. I may need to go in a different direction with our portfolio. —B.R., by email
A. Having little activity in an investment account is more likely to be a good thing than a bad thing. Transactions can mean expenses and taxable events, such as capital gain realizations. This is a good time to remember Warren Buffett’s favorite holding period for an investment: “forever.”
You have two big assessments to make. Your adviser should have the information at his disposal to help you in those assessments.
The first is the risk assessment of your portfolio. Once you have that, you can measure your portfolio against a comparable risk peer group. This benchmark should be used to compare your net, after all fees, performance with that peer group or benchmark.
One peer group measure is to see how your portfolio did against mutual funds of similar risk. Morningstar divides its asset allocation funds into three groups: conservative, moderate and aggressive. So, if you have a conservative portfolio, how does its net return rank against its Morningstar category? This ranking should be over multiple time periods, not just the most recent quarter or year.
The second is the total cost of management for your money. The total cost includes the expense ratios of any underlying mutual funds or exchange traded funds. Then add the management fee you pay to the adviser. Some people like to believe that expenses don’t matter if your after-fees return is good. The reality is that performance is transitory, but expenses are forever. It doesn’t take much of a slip for high expenses to translate into far below-average performance.
Your adviser should be able to address these questions with patience and skill. The industry has standards for measuring performance. It also has professional-grade software tools to make such measurements easy to do.
Providing this information should not be a big deal. The questions you are asking are the kind of questions that any intelligent client can, and should, ask. If your adviser blows you off or makes you feel awkward, take it as his way of telling you he is incompetent and that you should find another adviser.