---S.Y., Dallas, TX
A. Mutual funds, like most everything, have multiple distribution channels. Just as you can buy a new coat from a specialized store, a traditional department store, or a discount store, you can buy mutual funds through different channels. The differences are in marketing and service. The "self-service" no-load fund industry saves investors sales commissions. It often, but not always, saves investors ongoing annual expenses as well.
In spite of that--- not to mention decades of no-load fund lauding by the financial press--- load products continue to dominate industry sales. This happens for two simple reasons: (1) a sales force is paid to sell them and (2) most people lack confidence in their ability to understand investments, let alone make investment decisions.
While it is easier to buy funds from a brokerage house than from a mutual fund company, whether you get objective advice for your transactions remains in doubt. Even if a firm doesn't give higher cash incentives to sell proprietary funds, the broker may still be influenced by the Hawaiian vacation he may win for reaching a certain sales volume.
The best arrangement, I believe, is to have an account with a major firm that supports a full mutual fund "supermarket"--- a Fidelity, Vanguard, Schwab, or T.D. Waterhouse--- if you are interested in making your own decisions. With such an account you will be able to buy a broad variety of traditional mutual funds, Exchange Traded Funds, common stocks, bonds, or certificates of deposit. Basically, you'll have complete freedom to structure your investment to suit your particular needs.
Q. I had few questions about asset allocation for retirement planning, when I am one of the fortunate few who also has a defined benefit company pension. Do I include the lump sum value of company pension as a fixed asset in calculating my asset allocation? Including the lump sum gives me the following allocation for a target of 60 % stocks and 40 % fixed.
---J.G., by e-mail from Houston, TX
A. A defined benefit pension is a lifetime stream of income. It is not an asset like a stock or bond. It, like your Social Security benefit, is an "implicit" asset. Your actual stocks and bonds are explicit assets. You can't treat them as identical.
Your explicit assets give you liquidity. You can sell them. If you need more than your current income, you can liquidate enough to meet your needs. You can't do that with an implicit asset. You get your Social Security check. Period. You get your pension check. Period.
One thing you might do, however, is use your pension income to reduce--- but never eliminate--- your fixed income commitment in your explicit portfolio. Suppose, for instance, that the lump sum value of your pension is $400,000 while your 401(k) and other investments total $600,000. If implicit assets were interchangeable with explicit assets and you invested all $600,000 in equities, your retirement portfolio would be a traditional 60/40. Unfortunately, it would have no cash reserves. One hundred percent of your explicit assets would be subject to the vagaries of the stock market.
The alternative is personal "tailoring"--- mold your portfolio to your actual liquidity and safety needs rather than an institutional abstraction. If, for instance, you count on $2,000 a month (4 percent) from your $600,000 portfolio, a fixed income fund of $74,000 in short-term securities would allow you to avoid any stock sales in a down market that lasted 3 years. Do it with a 5-year bond "ladder"--- enough to be very secure--- and you'd need a bond commitment of $120,000.
That's only 12.3 to 20 percent of your explicit portfolio.
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