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Less Funds More Gain

Sanjib Saha, 12:58 pm ET

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.

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Carl Book
Carl Book
6 months ago

Advisors like complexity for a number of reasons. More complication tends to make them look busier and smarter. Unsophisticated clients are more reluctant to quit if they think investing is so complicated. Complex portfolios also hide poor performance. It is much harder to assess performance when you have lots of funds. It’s very expensive to have someone else manage your money.

Humble Reader
Humble Reader
6 months ago

I had a very similar experience when after years of grumbling but taking no action about our retirement portfolio’s under performance I finally took over control of our investments from the “Money Weasels”. That is what I nicknamed our investment advisors after years of reading the reasons they listed in every quarterly report explaining why we made less or lost more than the market did. 
I found we were invested in 28 different mutual funds with no perceptible strategy. Total expense, including the advisor fee, was 1.9%. I recall my very first trade as I tentatively learned the mechanics of using the online brokerage software. I picked the very worst fund to sell. It had a whopping 2.14% net expense and had lost money or barely broke even in every year of its short history. By the end of the first month I had liquidated 20 of the funds, consolidating the investments into the remaining 8 funds. Since everything was in retirement accounts, taxes were not a consideration. Total expense was reduced to 0.33% and has held near there ever since, as I have learned a lot more, and continue to refine our holdings.
Within a year we were down to only 4 mutual funds but have since increased to 7 mutual funds and 2 ETFs. A third of the investments are in low-to-moderate expense managed funds and the rest are low expense index funds.
While our portfolio’s performance is now significantly better than we ever got from the Money Weasels, I must acknowledge that my timing was lucky. There has not been a recession and the markets have been mostly up since I took control. It remains to be seen how well my strategy works in bad times.

Mike Wyant
Mike Wyant
6 months ago
Reply to  Humble Reader

I’m in a similar situation. We’ve been with our advisor (Edelman Financial) for 10 years. After discovering Humble Dollar and Bogleheads forum I compared our 18 fund portfolio (60/40 AA) with the Vanguard 60/40 Lifestrategy fund (VSMGX). Over the 10 year period our portfolio has underperformed the Vanguard fund by approximately 2% after accounting for AUM fees of 1.2%. I’ll be dropping our advisor shortly for either Vanguard PAS or lifestrategy fund.

Humble Reader
Humble Reader
6 months ago
Reply to  Mike Wyant

After I took control I did not immediately make decisions about what to invest in so much as what to not invest in. I gathered the stats for all 28 mutual funds and created a spreadsheet. For the initial evaluation the focus was on net expense and 5-year return. I set thresholds for these and color coded the spreadsheet. The 20 funds with net expenses greater than 0.70% were sold. Interestingly 16 of these would also have been sold for having low 5-year returns. This left 4 managed funds with expenses between 0.50% and 0.70% and 4 index funds with expenses south of 0.05%. These 8 funds all had acceptable 5-year returns. And the portfolio remained diversified. This rudimentary analysis and change left our investments in much better state than they ever were when professionally managed. I am still mystified at the investment choices made by the Money Weasels.

An
An
6 months ago

Now she should get an understanding of how taxes relate to her finances.

Sanjib Saha
Sanjib Saha
6 months ago
Reply to  An

Thanks, An. Yes, taxes are important too.

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