Q. Your article advocating simple index fund investing at a 50/50 mix of stocks and bonds intrigued me. I have been retired for a year and currently have a managed account with a major discount brokerage firm. The account has a 30/70 stocks/bonds mix with a management fee of $735 per quarter. The discount brokerage firm buys and sells stocks to accommodate my request of $1,500 per month and pay their management fee. So far, my account has grown almost 7 percent from the original starting amount, while paying the management fee and taking my requested monthly draw.
How could I, with limited financial skills, manage my money (meaning buying and selling stock) to derive my $1,500 per month draw without jeopardizing my retirement savings? The advisor wanted to go 50/50, or 40/60, but I am still spooked from 2008 and wanted to be more conservative, hence my request of 30/70 mix.
You reference to yearly rebalancing with equal amounts invested in each fund, at an insanely low cost. Obviously, index investing seems the way to go. Or, it would be if I had any financial skills. It could also save me the quarterly management fee I'm now paying. But how do I get to a position of knowledge and confidence to do what you advocate? —A.R., by email
A. That sounds like a personalized portfolio service account, one where your portfolio can be a mixture of individual stocks, bonds, mutual funds and some separately managed accounts. Whatever kind of service you have, there is no magic to getting a monthly income payment. You can, for instance, arrange to have a fixed monthly payment from a mutual fund holding.
So here are three lower cost possibilities, using a major discount brokerage firm like Fidelity:
First, you could put 30 percent of your money in Fidelity Four in One Index Fund (Ticker: FFNOX), a 4-star rated Fidelity fund with a recent net expense ratio of 0.08 percent. Invest the remaining 70 percent in the commission-free iShares Core U.S. Aggregate Bond ETF (Ticker: AGG) with an expense ratio of 0.08 percent. Arrange to have monthly distributions for a total of $1,500 from these funds. Doing this will do two things. First, not paying the quarterly fee will cover two of your $1,500 monthly payments. Second, the additional reduction in cost will give you a running start, year in and year out, over the costs of skilled management.
The second alternative is even easier. While on the Fidelity platform, buy Vanguard Wellesley Income Fund (Admiral shares), which is 40 percent equities, 60 percent bonds. You’ll pay a commission to do this through Fidelity but the commission is small relative to the size of the transaction. Arrange for a monthly draw of $1,500 a month.
Second, buying this 5 star fund will get you an annual expense ratio of only 0.18 percent if you buy the Admiral shares, which require a $50,000 minimum. So you would be getting proven management, but it would cost no more than index investing. The ticker for this fund is VWIAX.
The third alternative is a bit more complicated, but it uses managed funds inside the Fidelity family of funds. Invest half your money in Fidelity Puritan (Ticker: PURX, expense ratio 0.58 percent) and half in Fidelity GNMA Fund (Ticker: FGMNX, expense ratio 0.45 percent). The latter has a 5 star rating from Morningstar while Puritan has a 4 star rating. The combination of funds will give you about the same 30/70 mix that you have now. Make the same monthly distribution arrangement.
Are these suggestions guaranteed to “beat” your current management arrangements? No. But the expense reduction, whatever your choice, is significant. It will go a long way toward improving the odds that a new choice will serve you better.
The most important thing for you to understand is that if you keep your investments simple— similar to the Couch Potato portfolios— you don’t need any of the knowledge you feel you should have. What the financial services industry has failed to do, for as long as I can remember, is demonstrate that their knowledge buys superior performance or safety— and that’s without considering what they charge for it.