ALL THIS MARKET turmoil has me thinking about my portfolio—and the things I’m a little hazy about.
One of my stock mutual funds just paid me a capital gains distribution of more than $5,000. I sure wasn’t expecting that. In fact, I wasn’t expecting any capital gains this year. It seems the net gain on the sale of individual stocks within a mutual fund are distributed to shareholders, no matter how the overall fund has performed. It was an a-ha moment for me, but I bet most HumbleDollar readers already knew about such things.
A friend recently asked if I owned any Apple or Tesla stock. My instant reply was no. But that wasn’t accurate. I looked at the top 10 holdings in one of my mutual funds, and both of those stocks are there. So are Chipotle Mexican Grill and dozens of other well-known companies. Who knew?
Actually, I did know, or at least assumed, that large companies would be in a large-cap mutual fund, but I never gave it much thought. When I checked the holdings of my other mutual funds, I found I owned the same stocks but in different proportions across my various funds.
One fund calls itself “balanced,” another “large-cap value” and a third “total stock market index.” Oops, there’s a “large-cap growth index” as well. Am I a major Apple shareholder? I wish.
It would appear I’m not as diversified as I thought. In my defense, there are significant differences in my funds’ investments when you go further down the list of holdings, and I also do hold various bond funds.
Am I a skilled investor? Not even close. Am I an obsessive saver? You bet. Devoting more time to investing might—I emphasize “might”—have given me a higher net worth. But along with my pension, it’s been saving every month since I began working in 1961 that’s assured my financial security and, I hope, a legacy for my family.
When it comes to investing skill, or the lack thereof, I bet I’m more typical than not. When I managed 401(k) plans, I monitored the investment choices of the 11,000 participants. With few exceptions, it appeared that throwing darts at the list of investment options would have rendered better results. Many employees who owned a target-date mutual fund—which is meant to provide a complete portfolio in a single fund—also owned several other mutual funds. Other employees had all their money in company stock.
I’m guessing the reluctance of many Americans to invest is due to both fear of losing money and the complexity of the process. Not investing is a shame because it takes very little to get started. Opening an account for your children, and then funding it with birthday gifts, babysitting money or whatever, can pay lifelong dividends—no pun intended. Yet, as of 2019, just over half of Americans (53%) directly or indirectly owned stocks, according to the Federal Reserve’s Survey of Consumer Finances.
I can hear the wheels turning. Why hasn’t this guy used an investment advisor? I could make up several excuses. But I suspect the truth is, I’ve always been too cheap. When I recently consolidated all my investments with Fidelity Investments, I asked about hiring an advisor. I was quoted a fee of about 1% of assets. My internal calculator instantly rejected the idea. We’ll never know if I made a mistake.
Morningstar has a tool which eliminates the guessing. If you have a premium membership one you enter your portfolio just click on the stock intersection tab and you can see your overall allocation to each stock, as well as your allocation per fund
Dick, I can relate. My wife had an account, I was not monitoring close enough and got a 24,000 capital gains statement last year. And, it was a money losing mutual fund. It cost me extra taxes that I had not planned for (my bad) and I hope it does not kick in IRMAA for MY 2023 Medicare premiums. I sold that loser and transferred all the money in her account to her TD Ameritrade account. Then I put that mutual fund money in the SPGM ETF, a global fund that does not hit you with year-end capital gains statements. After the transfer, I closed that account at Morgan Stanley (MS) and called the broker and told her she should be ashamed of herself for selling a MS mutual fund with high fees to my wife. What could she say, she was just a broker (VP) and not a fiduciary or RIA.
I suggest you do your research and move your money to Fidelity, TD Ameritrade or Schwab (Schwab now owns TD Ameritrade) or Vanguard; although, Vanguard customer service sucks, big time. Even the Boogleheads will bear out my angst with Vanguard and my employee 401k money is still with them even though I am retired.
You do not consider yourself to be a skilled investor, but are an obsessive saver. And that is OK! Jonathan wrote in 2009: “Give me a choice between some savvy investors and some diligent savers, and I’d bet on the savers every time”. (See “The Little Book of Main Street Money” by Jonathan Clements). I think he meant that having the discipline to be a good saver means that you have learned to live below your means, and it is an easy next step to invest those regular deposits in a suitable mix of index funds. Someone more knowledgable but less disciplined may not do as well over the long term.
You can hire an advisor that charges an hourly rate. They can review your short term and long term plans and give you advice. You can do this whenever you think it’s necessary–maybe one time while still working and again when you are close to retirement, or maybe once a year.
I completely agree that a 1% AUM fee is ridiculous for anyone that has made even a modest amount of effort to understand personal finance, as most who frequent this site have.
Those who understand the basics would surely be better off not paying 1% per year, as that amount compounded year over year throughout retirement would make most of us sick and vastly outweigh any savings an advisor would bring during the same timeframe.
But for those out there that refuse to learn the basics, it’s been suggested that turning over your finances to an advisor could be valued at a 3% return over not having one, at least according to Vanguard.
Spot on, to the chagrin of the Financial Advisors and RIAs of the World. Those folks are not worth it, unless they are also offering tax advice, financial planning and some estate planning, and/or at least point you to a reputable estate planning attorney.
Anyway, they only put you in cookie-cutter type portfolio(s) based on some risk assessment test that you take. It’s a bunch of BS. Think about it, they can’t provide superior effort to tailor specific portfolios to all of their clients.
Another issue is, and it really irks my A$$, they charge and collect quarterly that annual fee for any cash balances in your portfolio…ridiculous! And, no one should be 100% in stocks, bonds or commodities much less cryptos or other Alternative investments. Def: Alternative investments include investments in five main categories: hedge funds, private capital, natural resources, real estate, and infrastructure.
In addition, they take discretionary control of your assets without discussing or requesting your approval before investment decisions are made. I know, I interviewed about 15 of those folks and only one said he would discuss investment decisions with me before investing the money. However, I think he was just trying to win my business. Needless to say, I did not “hire” any of them and don’t regret it. Oh, and I told them all where they could go, in so many words.
PS-Am I cynical by experience? You bet, I hold a BBA, MS in Finance, worked for a Wall Street firm (stockbroker), also worked in corporate cash management (Treasury department as a financial analyst), negotiated and solicited bids for services contracts for 35 years, as well as, supervised and mentored contract representatives for over ten years before retiring in 2016.
This is the first article I wrote for HumbleDollar over four years ago. It seems not much has changed. https://humbledollar.com/2018/04/choosing/
And it appears that you received NO comments to your article! Is that possible?? You are a comment magnet these days…
A few years, the site changed the software used for commenting and, as part of the change, all prior comments got deleted, alas.
This is why I pick the stocks I own. I know what the companies are, and i can examine their financial statements online. The portfolio I have built up is designed specifically for me and my circumstances.
You don’t want an investment advisor, just add up how much a 1% AUM would cost you over 20 years, never mind the lost compounding and the fees on the funds/stock trades s/he recommends.
You just need index funds – a total market US, a total market world ex/US (or a total world fund) and one or more bond funds. In addition to Humble Dollar, recommend spending some time at https://www.bogleheads.org/
It is easy. 3-Fund Portfolio (or 2-Fund, if you’d rather). No overlap, full diversification, maximum exposure.
In my experience the most valuable service an investment advisor renders is helping their client from making rash investment decisions. That does not seem to be a problem for you or most involved with Humble Dollar.
A blog I formerly read summarized the 3 main financial goals with the acronym ESI: earn, save, invest. Easy way to remember the big levers, and all 3 are certainly helpful on the long road to financial security. The most critical is arguably saving, however, because regardless of the size of your income or investment acumen, there is nothing to start the process for most of us scratching out a living in the workforce without savings.
Not sure what you are saying regarding starting the process.
Dick, as you said, you’ve done a good job where it counts. You’ve done a good job saving. Without that trait, there would be little discussion about the fine points of investing.