Q. My husband and I have about $1.5 million in assets with a financial planner – we’ve been with him for about 15 years. His fee is one percent a year. We have a few bonds, but all of our stock holdings are with him at a major brokerage firm. He doesn’t do very many trades, so we are paying what seems like a lot to “manage” the account.
My husband (age 64) plans to retire at the end of the year. I’m 60 and will continue to work for several more years. We have discussed eliminating our financial planner and putting our money in some of your suggested Vanguard or Fidelity index fund portfolios. My question: how would we go about selling off all the current holdings without creating a huge tax problem with the capital gains? —N.R., Plano, Texas
A. A relatively inactive account may be a sign of good management, not lazy management. This is particularly true if it leaves you with “a huge problem” with capital gains. Remember, Warren Buffett says the ideal holding period for an investment is “forever.”
An active manage could have done a lot of trading and lost a lot of the gains (if there were gains) to higher taxes on short-term investments. So don’t just leave him, willy-nilly, because he “doesn’t do much.” Most of the time, for most people, the best course of action is inaction.
What you might do is ask him to develop figures on the internal rate of return compared to several benchmarks such as the S&P 500, a balanced index portfolio, and a bond market index fund over the same period. Then you will have a measure for how your account has done over the last 15 years.
If you find that you would have been better off in Treasury bills over the last 15 years, moving would be a good thing. But, as I have suggested in other columns, advisors deserve a fair trial.
One way to have a casual reality test of any advisor is to create what I call “the escape road account.” This is a small account at a firm like Fidelity, Schwab or Vanguard in which you create a balanced fund (60/40 stocks/bonds) of low cost index instruments— mutual funds or exchange traded funds. Then see how it does relative to what your advisor suggests. The other advantage of having an escape road account is that you will have a ready alternative.
Q. I recently retired and did a 401(k) rollover to Fidelity. I am placing half of the amount in a 5-year certificate of deposit. I want to get the other half, which is $400,000, back in the stock market. I want to invest in the Fidelity fund FUSVX, the Spartan 500 Index Fund. What is the best method to do this? —R.C., by email
A. The best method to invest depends entirely on when you are looking back from. Looking back at stock, housing and other prices from 30 years ago, the immediate message would be to invest every dime ASAP because early is good. But looking back from six months, a year, or three years from now might give a very different message. Why? Because you could be investing at the time everyone fears— the brink of a major market downturn. If, for instance, we were back in 2007 and you invested every dime at once, you would have been filled with remorse for years.
That’s why the best method of investing, in practice, is to invest over a period of time. Most bear markets are over within two years, so it would be reasonable to invest one-sixth of the money every six months over the next 3 years. That way, if stocks slump or crash, you’ll be scooping some up at lower prices and you’ll come out ahead faster. If stocks don’t slump or crash you’ll have lost some of the opportunity of a rising market. But research has shown that people find actual losses far more painful than reduced opportunities.