READERS MAY RECALL Laura, my acquaintance who didn’t need life insurance but was sold a policy anyway. Alarmed by her ignorance, she vowed to manage her own money. As a first step, she parted ways with her financial advisor.
The advisor had her invested in 35 funds. She never fully understood what these funds owned or why she needed them. She had previously thought that investing had to be complicated and was best left to the professionals. She wasn’t so sure anymore.
After spending days researching her funds and still getting nowhere, Laura figured that there must be simpler ways to invest. She broached the idea with me.
What struck me about her investments wasn’t just the complexity, but also her overall asset allocation. More than half of her long-term savings was in cash and bonds. Why would someone in her 40s invest so conservatively?
Apparently, Laura’s former advisor had recommended a moderately aggressive asset allocation. Indeed, 70% of her managed investments were in various stock funds. But she also had a pile of cash in her bank account. Did her advisor overlook this uninvested savings?
Nope. It turns out that she was repeatedly asked to add the remaining cash to her investment accounts, but she declined. She didn’t want to pay yet more management fees. More important, she didn’t want to see her stable cash disappear into the mysterious jungle of managed accounts.
There was an alternative. Laura could’ve left her cash in the bank, while shifting the allocation in her investment accounts away from bonds and more toward stocks. Her overall stock exposure would then have been closer to her desired asset allocation. Laura couldn’t tell why this wasn’t done by her old advisor, but she saw no problem in doing it now.
Undeterred by the tax consequences, Laura sold all her previous holdings and replaced them with a few index funds. Between lower fund expenses and no more advisory fees, her annual investment costs fell almost two percentage points. The best part: She now understands her investments.