Retirement Planning and Trust Issues -- Advice Needed

I recently took about $50K out of two 401(k) accounts that I had and rolled them over into an IRA. Right now the money is sitting in the equivalent of a Money Market Account, but I know that it cannot stay there… it’s not earning nearly enough to beat inflation and I’ll have to be far more aggressive to meet my retirement goals.

I’m currently 38 years old. While the $50K isn’t all of my retirement savings (I have a fair amount of money in my current job’s 401(k)), it does represent the majority of my retirement savings. Since I’m at least 20-25 years away from retirement, I’m willing to go with a fairly aggressive strategy and invest more heavily in stock than bonds and cash equivalents.

My problems are twofold:

  1. I have some rough ideas as to what I would like to invest in. However, I have no financial expertise and while it sounds good to me, I have no idea if my ideas are good.

  2. I’ve heard enough stories about people who were “burned” by their financial investors that I’m leery of going with the advice of the people at the place where I have my IRA. How do I know that they have my best interests in mind when making suggestions and not their own (i.e. their commissions) or the interests of their employer?

Let’s try to tackle these one at a time:

  1. I’ve decided to go with mutual funds as opposed to individual stocks/bonds, simply for the diversification benefit and because it’s easier to manage four or five funds than a bunch of individual stocks.

The funds I’ve looked at are mainly in the Domestic Large Cap Blend, MidCap Value and/or Growth and International Large Cap. I’ve stayed away from Small Cap because even though I’m willing to accept a fair amount of risk, those sound awfully volatile to me. I will probably choose one fund from each of these groups, although I think that I will probably be a little heavier on the large caps than the mid caps.

I looked at funds that have returned over 10% over the lifetime of the fund (min. 10 years). I figure that if it’s done well for 10 years, then it has weathered both the dot com bubble and the current situation (to date) fairly well. I ignored the shorter-term numbers, since I’m looking at investing for the loooooong haul. (Yeah, I know that past performance is no guarantee…)

I also looked at funds that had an expense ratio below 1.00%. However, if the fund did particularly well, I was willing to go a bit above it.

I haven’t yet looked at bond funds (which will be a small portion of my portfolio), but I will probably follow similar guidelines.

Does any of this make sense? Am I making some fatal flaw in my preferences?

  1. I suppose this is really just a trust issue. The question is, how can I reassure myself that any advice I get is really the best advice for me? I suppose I can reassure myself somewhat by telling myself that the majority of investment advisers are professionals and will do their jobs faithfully, but do I want to gamble my retirement income on that?

Any and all advice is greatly appreciated.


Zev Steinhardt

It sounds to me like you’re doing everything you should be doing. You know your own risk tolerance, and you’re doing the research necessary to identify the funds that you’d be comfortable with.

I know that prevailing wisdom says bonds should be part of your portfolio, but frankly at your age (which isn’t that much younger than my age) I don’t see the point. I don’t have any bonds in my retirement accounts right now. I figure I’ve got another five years or so before I start migrating to them.

How often can you change your fund selections within your 401K?

I was where you are about 13 years ago. I thought, “I’m a pretty bright guy. I’m confident I can choose mutual funds that will beat the market in the long haul”. I did a ton of research and found the absolute best funds I could at the time. (Most of them, you’ve probably never heard of now, because they have sunk into obscurity, if not folded or been merged with another fund.)

After 5 years, none of the funds I chose had beaten the market individually, and in total they greatly underperformed the market. (Look up the phenomenon “regression to the mean”.)

My advice to you, learned from painful experience: forget trying to beat the market. Forget actively managed funds. And absolutely RUN away from load funds. Put your money in a Vanguard S&P 500 index fund, then forget it. My portfolio is many times larger than yours, and most of my investment money is in an S&P 500 index fund.

Wanting to take an active management role in your retirement money is understandable and laudable. But over the long term, almost NO mutual fund beats the market. The sooner you can accept “market performance” as your performance, the better off you’ll be.

That said, the stock market IS the best place for your money. The market earns 10% - 11% per year over the long haul, and is the best place to get an inflation-beating return.

Just as a side bar, I remember Peter Lynch, in one of his books, told a very interesting story. In the heyday of the Fidelity Magellan fund, in the period of time when it was going great gangbusters, FIFTY PERCENT of the investors in the fund lost money. This, when the long term performance of the fund was, what, over 15 - 20 % a year. Why? They bought high and sold low.

Anyway, S&P 500 index fund. That’s my advice, FWIW.

What he said! Excellent advice. Been doing this for 30 years.

This is exactly what I was going to say. I’ve pimped the Vanguard S&P index countless times on this board, but most any similar fund will do. The returns will not be stratospheric, but they’ll be excellent over the long-term and you’ll save a lot in management fees, since there really are none. A no-load market index fund is a great anchor for a mutual fund portfolio; I currently have about 75% of my savings in the S&P, and the other 25% is somewhat more aggressive growth funds, which have done OK over the past five years.

I’ll second what jharvey693 has to say.
A low cost index fund (like the Vangard S&P 500) is pretty hard to beat consistently.
The problem of beating it is two fold:

  1. Only 10% of all available mutual funds outperform the index funds.
    but more importantly
  2. Those 10% change every damn year.

So good luck finding those 10% and doing it every year.
I find people who like to brag about how much they earned with a single fund are like gamblers. They don’t like to tell you about their losses.

jharvey +5.

Vanguard Fund. Set it and forget it.

The only thing you can be guaranteed by any fund is the fees. Beating the market in the past is not an indicator that it will beat the market in the future. . .and that’s not just a platitude.

There is essentially not evidence that funds that have done well over the past will continue to do well in the future, but you can guarantee that a fee on a Vanguard fund will stay low.

If you want to me more aggressive, you could do something like a vanguard tech fund, ro a vanguard small cap fund (VISVX, e.g.), but a vanguard total market fund should suit your needs. VFINX, for example.

I agree with the others that finding a fund or combination of investments that will out perform the market is next to impossible for us mortals. Just because there are so many mortals trying to do it.

I would like to caution in the current environment that no one from the top to the bottom of the food chain has any friggen idea how to invest properly right now. Some of the things that are certain to make money require $100 million or more to get into. Any one else that tells you this fund or that stock is going to outperform is full of it. It is my belief that this will be true for the next six months at least.

I wonder if posters that are for buying an ETF would take a peek at the proshares such as SSO and comment on these. If you buy and hold an index wouldn’t it make sense to leverage that?

Some good comments above.

Anyone have any thoughts on the target-date funds that are out there? I’m a bit older than Zev and we’ve got a fair bit in funds that match or mimic the S&P 500 (though we have others as well), and I’m thinking of moving an old 401(k) into either a Fidelity (where we have other retirement money) or Vanguard target-date fund. They supposely do the balancing between bonds and stocks, and gradually move the weight from stocks to bonds according to the recommended ratios.

Right now the only target-date money we have is a very small amount I had set aside from a recent bonus.

Oh - and Zev, when I saw your subject line I was thinking you meant “trust” to refer to things like a revocable trust - something a lot of people use as an estate planning tool (reduces probate hassles, can reduce estate taxes somewhat). Anyone here used such a thing? We were advised to do so some years back when we set up our wills; didn’t do so at the time because we were looking at a house move and didn’t want the hassle of selling a house owned by a trust.

I’ve moved a chunk of my 401K into one, because I’m getting reasonably close to retiring. It hasn’t been in long enough for me to get a good reading on how it did.

As for Zev, I’d think about diversifying into overseas funds also (though this probably isn’t a good time to start.) Though you don’t have to worry about this now, when you get into your mid-50s it is good to start to move some stuff into things that generate income. Even index funds go down, it is good to have some very stable investments that will keep paying no matter what the climate.

We’ve had a few advisers, one terrible, mostly pretty good. The big advantage is in pointing out areas to invest in that you might not think of, and in keeping you from making common mistakes. One convinced me to buy Google at $175 which I thought was way too high. :smiley: I can’t really say how to find one, except to interview a bunch and run from any who tell you that what makes you feel comfortable with in terms of risk is wrong.

Can you elaborate on what kind of investment “generates income” which is “stable” and “keeps paying no matter what the climate”?

Thank you, everyone, for your helpful advice. I had thought of putting most of the money into an S&P 500 Index Fund (Fidelity’s version of it, since that’s where my money is). However, I was concerned about the lack of diversification. Aren’t all the S&P 500 Domestic Large Cap stocks?

Mama Zappa’s question was actually going to be my next one. I was also looking at one of the “target date” retirement funds. However, since I wanted to be a bit more aggressive in my investing, I was going to take one that had a “target date” of five years after I plan to retire (and maybe move into the “correct” fund as I approached retirement.

Zev Steinhardt

Leveraged ETF’s are just like leveraged anything else.

You’re borrowing money to invest, paying it back with interest, and increasing risks while trying to increase your return. If we were all SURE the market was going up, we’d all leverage ETFs. That’s done people a lot of good with houses.

Are you just trying to grill him, or looking for real advice?

I assume he’s talking about bonds, bond funds, treasuries, etc, and is playing a little fast & loose with the language.

I’ll have to go look at my portfolio, but there are some companies that manage lots of apartments where the value of the property isn’t nearly as important as the rents. These things are basically high dividend kind of stock - the exact opposite of tech stocks. They are things I had never heard of or read about, but I don’t have time to immerse myself in financial planning magazines etc.

I don’t feel I’m being grilled - and these are not bond funds. They are stocks in sectors which are more stable than the general market. They do go up and down, but are less volatile than average, and pay higher dividends then average. They are clearly riskier than treasuries, of course.

Sounds like you were talking about a REIT, maybe.

Yes, the S&P 500 consists entirely of domestic large cap stocks. That’s the idea. And since all S&P 500 index funds are the same, the only reason to select one over another (Vanguard vs Fidelity vs whomever) is to buy the index as cheaply as possible. So I think that an S&P 500 ETF is even cheaper than the Vanguard S&P 500 fund. But I think if you’re regularly buying into the index, you’ll have to pay commissions to buy the ETF but can buy into a mutual fund without doing so.

I’m about your age and have my rollover IRA money in the Vanguard Target Retirement 2035 Fund (although I’ve heard the criticism that it’s not aggressive enough).

Thanks. But what about diversification? Isn’t it a bad idea to have everything in one category (domestic large cap)?

That’s why I was thinking about putting the money into a fund with a target date further off (2040 or 2045) and then moving it to the 2035 fund in 2025 or so. Does that make any sense?

Zev Steinhardt

I would try and get at least some of it out of dollars and into Euro, Swiss Francs, Czech Crowns, Yen and if at all possible Yuan. The Fed is doing nothing to help the dollar. Just having Czech Crowns sitting in a bank earning zero (well 0.1%), I have earned 40% in dollar terms in the past 2 1/2 years.

Earning 10% in USD is meaningless if the USD loses 20% in real value.

If you were to buy stocks, common wisdom says that owning 15 - 20 stocks is sufficient to give diversification. The S&P 500 has 500 stocks, so it’s highly diversified. Regarding whether it’s only one category, I don’t really believe in those categories. Take for example Coca-Cola. Would you call that a domestic large cap? After you do, look up how much of its sales are actually generated internationally. What about GM or Ford? Ditto. Categories are a way of classifying funds in a way that is essentially meaningless, especially when it comes to indexes. The S&P includes many stocks in almost all of the artificial “categories” that the investment world has created. (This point could be argued in regards to small cap stocks, I guess.)

[Curmudgeon mode]
Uh, sorry, no, it doesn’t. Of course, IMNSHO, target data funds themselves don’t make any sense. They seem like a way to earn extra money for the investment company. Typically these funds have much higher expense ratios than other funds. Some target date funds are actually “funds of funds”, so you get hit with expenses TWICE, with one set of expenses “hidden” in the lower return of the included fund.

Looked at another way, what is your investment horizon on the day you plan to retire? Do you intend to die within just a few years of your retirement? If you do, then shifting to bonds within in a couple years of your retirement date might make sense. But if you expect to live 10, 20, or 30 years after retirement, principal fluctuation isn’t your biggest risk, inflation is. And the stock market is the best vehicle we have for beating inflation.

Another bit of common wisdom: any money you think you will need in the next 5 years shouldn’t be in the stock market. You could argue the complement of that statement, also: any money you don’t need for 5 years SHOULD be in the stock market. But that’s another discussion.

Here’s a way of managing your money in retirement that takes that common wisdom into account: On the day you retire, have 20% of your money in cash and 80% in index funds. Divide your cash stake by 5 (i.e., 4% of your total portfolio value): this gives you the amount of money you have to live on this year. At the end of this year, you sell 4% (of your total portfolio value) of your index fund and put that money in your “cash” portion. Divide that new cash portion by 5: that gives you the amount of money you have to live on THIS year. Repeat until the reaper comes.
[/Curmudgeon mode]