Simple Investing

From Kiplinger's Personal Finance magazine, June 2009

When Sam Baldwin and Rebecca Cain got married last August, each brought to the union a smorgasbord of investments. Feeling overwhelmed by a jumble of securities that sprawled across ten accounts, they vowed to consolidate and simplify the unwieldy collection of stocks, funds and annuities. "We'd been talking about how we needed to develop a coherent strategy toward purchasing a house, paying off our student loans and eventually retiring," says Baldwin.

To help organize their newly merged financial lives, the couple turned to Russell Wayne, a financial planner near their home in Stamford, Conn. In his 21 years as an adviser, says Wayne, he had never seen an investment plan quite so convoluted. "In a portfolio of $200,000, they had 34 different mutual funds, ten individual stocks, three exchange-traded funds and five annuities," he recalls. He was particularly disturbed by the number of funds with sales fees, including two Aberdeen funds and one Ivy fund that each charged more than 2% in annual expenses.

Trimming the number of accounts not only cuts down on paperwork, it also helps you keep track of everything you own. Plus, consolidating your assets into fewer accounts could save money on fees. E*Trade, for example, lowers its commission from $12.99 to $9.99 if assets in your account surpass $50,000.

If you decide to consolidate, choose the broker you want to stick with (Fidelity took top honors in Kiplinger's most recent survey of online brokers) and ask its customer-service department to send you account-transfer forms. The broker to which you're moving assets will contact the broker you're leaving to complete the transfer. You won't be able to transfer shares of mutual funds that are not included in your new broker's fund supermarket, so you'll have to hold on to the shares in your old account or sell them and transfer the cash. Watch out for low-balance or inactivity fees if you choose to hold on to the shares.

The ability to see all your investments on a single screen will allow you to gauge how your portfolio stacks up more easily. You can also get a bird's-eye view of your investments with MorningstarUs RInstant X-RayS tool, a freebie available by visiting www.morningstar.com and clicking on "Tools." It will give you a breakdown of your asset allocation, fees you pay and where your investments overlap.

In the case of Baldwin, 37, and Cain, 35, "the asset allocation wasn't actually that bad,S says Wayne. So rather than gut their portfolio, he devised allocations for the couple to target while cutting out redundant and high-fee investments. It's slow going, Baldwin reports. So far he's sold seven funds that overlapped with other holdings. And he's closed accounts at Vanguard and Bank of New York Mellon, but he opened a joint E*Trade account with Cain. That still leaves the couple with eight accounts, but Baldwin says the goal is to consolidate as much as possible into the joint account and to shed all but a core mix of funds and ETFs.

If you'd rather have a portfolio that requires less tinkering, you may want to start from scratch. You'll owe taxes on any capital gains you generate by selling existing investments. But with stocks near 12-year lows and the maximum 15% long-term capital-gains tax rate likely to rise in the next two years, at least for high earners, now is as good a time as any for an overhaul.

Index funds, which are designed to replicate an index of stocks or bonds, are low on headaches because you don't have to worry about your fund manager making any boneheaded bets. They're as close as you'll come to a guarantee of at least average returns, and expenses are typically rock-bottom. You can build a diversified portfolio with Vanguard index funds or iShares ETFs, but other lines of low-cost index funds would work just as well (for model portfolios, go to kiplinger.com/simplify). For example, a long-term portfolio that you won't need to tap for more than ten years might include 50% to 60% U.S. stocks, with a bias toward large companies; 30% foreign stocks; and 10% to 20% bonds, depending on your risk tolerance. you'll need to rebalance periodically and increase your allocation to bonds as you close in on the time you plan to tap your money.

For one-stop shopping, look to target-date funds, which are designed to be the only investment you own. They handle asset allocation and rebalancing for you, and they automatically increase their stake in bonds as they near their target dates. Vanguard's target-date funds invest in baskets of index funds and charge less than 0.20% in annual expenses. But our favorite is T. Rowe PriceUs line of funds, which invest in collections of actively managed Price funds and generally hold a higher stake in stocks than competing target-date funds. Fees typically run about 0.7% a year.

MORE WAYS TO SIMPLIFY YOUR LIFE

Make Money Tasks Easy
Streamline Retirement
Benefits With Less Stress
Lower Maintenance
Help With Home Tech
Goodbye, City Life
Take a Service Sabbatical
SLIDE SHOW: Zap the Clutter
SLIDE SHOW: Let the Pros Handle It
QUIZ: Lighten Your Financial Load

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