Q. My husband and I have over $100,000 invested in two funds, Morgan Stanley Smith Barney ClearBridge Aggressive Growth Fund (ticker: SHRAX, expense ratio 1.29 percent) and ClearBridge Appreciation Fund (ticker: SHAPX, expense ratio 1.05 percent). We've considered moving the investment to a lower cost fund at Vanguard. If we sell the investment, we will owe quite a bit in taxes since the funds have appreciated substantially since purchase. How does one assess whether to sell and pay taxes versus staying put? —J.S., by email
A. The first thing to remember is that taxes are not a problem. They are a consequence of financial gain. Lots of people would love to face a “tax problem” but haven’t had the gains to create one. The second thing to consider is that the tax rate on long-term gains is relatively low. With that mindset, let’s look at the specifics.
Just because a managed fund has an expense ratio higher than an index fund doesn’t mean it should immediately be sold. In your case, for instance, one fund should be sold while the other should be watched closely, or sold.
Your Clearbridge Aggressive Growth shares carry a 4 star rank (above average) by Morningstar. The fund has been a top decile performer in the last year, 3 years and 5 years. Indeed, over the last three and five years it has ranked in the top one percent of its large growth fund category. It has blasted ahead of the S&P 500, by a margin of 4.81 percent annualized over each of the last 5 years.
That’s not something you casually throw away. Unfortunately, superior past performance doesn’t guarantee superior future performance. So I suggest watching the fund closely and being ready to replace it if performance falters for a sustained period of time. If it underperforms the S&P 500 for a trailing one- and three-year period, for instance, that’s a pretty good indication that the fund should be sold.
Your ClearBridge Appreciation Fund shares are a different matter. Over the last five years 62 percent of comparable funds have provided better returns. It has trailed the S&P 500 by an annualized 2.02 percent a year. While performance was better long ago, in recent time periods the fund has been disappointing. Selling this fund will realize less in capital gains. It will also give you an opportunity to start making your own decisions and buy a low-cost index fund.
Q. After years of relying on the experts to guide me on insurance purchases and advice, I got really burned by a so-called friend and church deacon. A night class in business woke me up! Since then I have been gun-shy of all insurance advisors, as they seem like legal thieves.
I did get involved with a fraternal program. The company has been rated as A++ (Superior) by A.M. Best for the past 39 years. The lowest policy return I have is a guaranteed 3 percent minimum. How would you rate this insurance?
I did check with some of the companies you write about but was not all that comfortable with their programs. I am 74 and my wife is 66. No debt, and house and cars are paid. I have Social Security benefits and a modest company retirement.
My wife has Social Security benefits. Her 401(k) took a 50 percent hit a couple of years back. We get about $3,600 a month between Social Security and company retirement pension. We also have $300,000 in savings and insurance.
Any advice on how to improve our status? — MJ in Austin
A. I’m not sure what kind of insurance products you are writing about so I can’t comment. But if any of your insurance policies are life insurance, you might consider either dropping the policy or converting any cash value to a life annuity. Life insurance is useful when we are young because we have big familial projects to complete. They won’t be completed if we die. But with Social Security and pension income, a debt-free home and no consumer debt, you’ve got the essentials covered and probably don’t need life insurance.
Your $300,000 is an emergency fund that can increase your annual income by $6,000 (assuming a 2 percent yield) to about $15,000 (assuming a 5 percent withdrawal rate that may deplete principal). This suggests investing in a traditional balanced fund and either spending the income only or withdrawing at a rate of 3 to 4 percent.