“Since my husband’s death—now a year ago—I have been a bit at sea financially (as well as emotionally). When his estate is finally settled, I will need to make decisions about a host of topics. Investment advice is not what I need, but an objective financial advisor that I could pay by the hour to work through this transition with me would be a godsend. I’d be very grateful for whatever ideas or referrals you might have.
“Here is a list of my holdings at TIAA.”
Shauna, New York
I opened the Excel file you sent listing your funds. It’s appalling.
Excluding duplicates (evidently your husband owned some of the same things you do in your own university retirement plan), I count 55. That’s quite the junkpile.
Most investors, I think, are well served by a retirement portfolio that contains just four positions. The four-fund solution covers people with a net worth up to $100 million. Above that amount, maybe it pays to get more complicated. Below, no.
You should have some of your money in a U.S. stock fund that is well diversified (with a few thousand positions), some in a diversified foreign-stock fund, some in a bond fund that holds Treasury Inflation-Protected Securities and some in a fixed-income fund that is not inflation-protected.
That’s it. Four funds are enough. Consolidate. Get rid of 51. Redeem all of the expensive stuff. I define a fund as expensive if it costs more than 0.1% of assets annually. You have a lot in that category.
For a second opinion I sent your list to Allan Roth, a Colorado Springs, Colo. financial planner who is an enemy of clutter and an enemy of expensive funds. I expected him to suggest that you walk out, taking all your assets to a discount broker. His response surprised me.
Roth’s advice: Stick with TIAA. It’s a great firm.
The reason this answer makes sense illustrates a fundamental principal of investing:
All the big asset management firms have terrific deals, if you know how to ask for them. If you don’t ask, you’ll get a lousy deal.
This is my idea of a good deal: Access to dirt-cheap index funds. No-fee custody. No-fee automatic monthly transfers to your checking account. Commission-free trading. The commission-free trading matters because sometimes the best index fund is an exchange-traded one that you buy in the same way you’d buy shares of McDonalds.
With deals like this, which are quite common, it’s possible for somebody to have $10 million lodged at a slick Wall Street firm and to be delivering not even a nickel of revenue to that firm.
How can the asset managers be so generous? How do they pay for the office on Madison Avenue and the free coffee?
The answer is that a lot of the customers don’t stick to cheap and simple investments. They get lured into complicated and expensive things: actively managed funds, options, variable annuities and separately managed accounts. Those SMAs are bespoke portfolios that do no better, on average, than index funds but cost 20 times as much. Variable annuities are, most of the time, just mutual funds with an extra helping of fees.
Here’s one of the complicated things you own: the AQR Managed Futures Strategy Fund. What’s that?
From the fund’s description: “We invest in over 100 liquid futures and forwards contracts, both long and short, across global equities, fixed income, currencies and commodities. Trades are executed based on trend-following signals that aim to go long rising markets and short falling markets.”
Wow. Make money in bull markets and make money in bear markets. Index funds can’t do that.
This kind of sophistication costs you. The expense ratio for the AQR share class you own is 1.24% a year. That’s 41 times the 0.03% expense ratio on the iShares Core S&P Total U.S. Stock Market ETF, which is one of the cheap index funds I would recommend if you want stocks.
Since the managed futures fund doesn’t have stock-market risk, it might be fairer to compare it to something safer. Consider the Vanguard Short-Term Treasury Fund, which is about like keeping your money under a mattress, except that you get a little bit of interest. The Vanguard Treasury fund costs 0.1% a year.
So, how have these funds done? Over the past decade, reports Morningstar, the risky stock index fund has averaged 14.9% a year after expenses. The safe Treasury fund has averaged 1.2%.
The fancy futures fund from AQR has averaged 0.9%. You can do without it.
Someday soon, perhaps after you have consulted with a financial planner, you will be telling TIAA to clear out all the junk, using the proceeds to buy cheap index funds.
Among the various TIAA-branded products you own, there’s one little gem that is a keeper: something listed on your spreadsheet as TIAA Traditional. Allan Roth says that this is probably a fixed-income option that can serve as your core bond fund, and that it may have a terrific guaranteed minimum interest return. Inquire.
Your situation is considerably simpler than it is for most savers in that all of your TIAA assets are tax-sheltered. Thus, you can move money around without incurring a tax bill on appreciated positions. Many of Roth’s clients, in contrast, come to him with complicated, expensive products held in taxable accounts, and extricating them is not painless.
You say in your letter that you do not need investment advice. If by that you mean you aren’t looking to pay someone to construct a portfolio for you, your instinct is spot on. Constructing a portfolio, in the sense of selecting a prudent list of stocks and bonds to hold, used to be the main way that wealth managers earned a living. That kind of investment advice is now worth nothing at all. The activity of securities selection has been replaced by index funds.
But there are other pieces of advice that are worth paying for. A financial planner can answer these questions:
—When can you retire and how much can you safely spend?
—When should you start Social Security?
—Should you use retirement assets to pay off your mortgage? (The answer is probably yes; see this column.)
—Should you do Roth conversions on any of those retirement accounts? (Probably yes, but in small doses.)
—What’s the best way to make charitable donations?
—What should you tell the lawyer redoing your will?
You mentioned hourly planners. Again, I say: Amen. You should no sooner pay a wealth manager a percentage of your assets than you would pay a dentist that way. See the Forbes Hourly Planners Directory.
Do you have a personal finance puzzle that might be worth a look? It could involve, for example, pension lump sums, Roth accounts, estate planning, employee options or selling appreciated stocks. Send a description to williambaldwinfinance—at—gmail—dot—com. Put “Query” in the subject field. Include a first name and a state of residence. Include enough detail to generate a useful analysis.
Letters will be edited for clarity and brevity; only some will be selected; the answers are intended to be educational and not a substitute for professional advice.