transition to retirement portfolio

[Martha]

Our portfolio is about 60% in individual stocks, 30% real estate partnerships, and the rest bonds and cash. We own no mutual funds. Husband is retired and watches the stock market. I am working and going to retire shortly. Does anyone know any resources that discuss transitioning a portfolio that takes a lot of watching, to one that is less work, such as mutual funds? The one financial planner we talked to said sell the stock, buy funds. It seems not advisable to sell all the individual stocks and pay big taxes all at once.

Martha

 

[charlie]

Martha,

The only thing I can think of to avoid tax is to offset
sale of winners with losers, if you have any. If you
have a favorite charity, you could donate some of
your winners and get the tax write off. I did that
a few years back when my church was having a
building campaign. If you want to leave an estate
you could keep some of your big winners. The
cost basis for the new owner is the value of the
stock on the day you pass on.

I think you are on the right track but it may take a
few years to get there. Please read Burnstein's
"4 Pillars of Investing" and Bogle's book on mutual
fund investing. They explain the concept of index
fund investing very well.

Good luck!

Charlie

 

[Cut-Throat]

Martha,

Charlie is right on with his advice to read Berstein's - Four Pillars of Investing Book.

I am faced with a simialr position of selling stocks. But, the good news is that Capital Gains taxes (long term) are now 15%.

I am selling all of mine, and converting to mutual funds in separate asset classes. When I say "all" , I mean all that will not put me in higher tax brackets. I'll try to shed them all in the next few years, before the Gains taxes are raised again.

 

[cute fuzzy bunny]

I guess my basic advice would be to not do something because someone said so, or because it sounds good, or for any other reason than its a great idea and you can see why.

If your current stock mix is reasonable in volatility and returns, comparable to or superior to a particular mutual fund you might buy with the proceeds, then there really isnt any reason to change, is there? At least your management fees are pretty low...

Or if you feel like getting out of the daily job of managing your own money then sell your stocks based on the same criteria you would for any other reason, slowly and over time shift your assets into funds. That minimizes any single year tax implications.

 

[unclemick]

Martha

I watch the markets every day - but that's usually it -I don't trade. Try this exercise - multiply your portfolio by 1% and then by 3% - keep the $ amounts in mind and then go to The Retire Early Homepage - read the articles on financial advisors.

Mutual funds even for a balanced index Boglehead like me aren't free. Cheap perhaps - but not free.

Along with the tax implications mentioned - doing your own watching versus 'maintenance' free mutual funds has costs - ie you may opt to pay yourself.

Books by Bogle and Bernstein as mentioned on many posts are worth a read.

You may end up staying with individual stocks - there's more than one way to ER - ask John Galt.

 

[Martha]

We are now leaning towards selling the most risky stocks ( and the risk paid off this time, in contrast to Enron and Asia Global Crossing) and keeping the other stocks. I told my husband I wasn't interested in taking the retirement risk when his stock portfolio has about 50% volatile and risky stocks. The next issue is going to be where to put the money. I will get Bernstein's book. One basic problem is my husband really dislikes mutual funds, even index funds. He says the problem with index funds is that you follow the crowd into the ground when times are bad.

 

[unclemick]

You can't fight biology(male hormones). The best I've been able to do is to hold 70-80% in balanced index and putz with my hobby stocks.

Hindsight - my girlfriends portfolio was kept in balanced index for at least ten years while I was trying hard to 'beat the market' with individual stocks and carefull selection of asset classes/fund sectors. When I was dumb enough to measure performance after reading Bogle's 1994 book she beat me hands down.

Still have my 'hobby stocks' and I'll let the passage of time take care of my ego/hormones.

 

[Cut-Throat]

He says the problem with index funds is that you follow the crowd into the ground when times are bad.

Only, if you sell them! - When the crowd is selling theirs, if you have an asset allocation plan, you will be buying them at cheaper prices.

 

[charlie]

Martha,

My investment history sounds a lot like umclemick's.
I would have been better off in a 50/50 mix of
Vanguard's Index 500 and Total Bond Market with
annual rebalancing. After 15 years of buying individual
stocks, bonds and managed funds and maintaining a
rough 50/50 balance, I have learned from experience
that the market is tough to beat and far smarter than
I. I am now totally invested in Vanguard's Target
Retirement 2005 (60/40 mix with 12% international
stocks). That is taking passive investing to the max
but at my age (69) I don't want the stress anymore
and can't afford to "guess" wrong. If the market
tanks, I know the computers at Vanguard will rebalance
to 60/40 automatically ..... buy low and sell high!

I am glad you are going to read Burnstein's book. Try
to get your husband interested as well.

Best of luck,

Charlie

 

[charlie]

Martha,

My fund is the 2025 fund, not the 2005. Sorry for
the typo.

Charlie

 

[cute fuzzy bunny]

Fundwise perhaps he'd be more comfortable with Vanguards Wellington fund. Its an actively managed balanced fund (60% stock, 40% bond) with an attractive price (under .25% for investments over 250k). Its performance is comparable to many of the balanced index funds at a comparable cost, but that someones "hand is on the wheel" may be more palatable to the hubby. I'm well ensconced in this funds sibling, the Wellesley fund.

Another option via vanguard is their STAR fund. This is a fund of funds, all actively managed. It owns stock, bond, mortgage debt, foreign, small caps, etc. One buy gets you a fairly diversified managed portfolio with a reasonable cost.

If you arent excited about vanguard, Dodge and Cox's actively managed Stock and Balanced funds outperform most of their peers and have done better than most indexes for a reasonable price (about .5%). Oakmarks balanced fund is also a decent choice but the management fee exceeds 1% and I dont see anything in it that would make me want to pay that.

That having been said, over long periods of time not many active managers beat indexes, especially when the costs are factored in. But there is some truth in that an index has no conscience, it just follows the path. However, very few "hands on the wheel" funds do any better. The ones I mentioned are competitive with or superior in returns over most periods, and dont charge too much.

 

[Martha]

Thank you all for the great comments. Now the big risk. Do I fess up to my spouse and tell him about this site? Or hoard it for myself so I can get ammunition on occassion for philisophical arguments with the spouse.

Martha

 

[cute fuzzy bunny]

For a small monthly fee we wont tell...

 

[John Galt]

Hello Martha. Keeping information from your spouse
is not a good idea. I'm not suggesting you necessarily
reveal every inner thought. Just be honest unless
what you have to say would hurt others or your
relationship.

John Galt

 

[cute fuzzy bunny]

Thats true. Kidding aside, we've had a few folks here, lay out the finances, get some ideas and say they were off to tell the spouse. An hour later all their posts were gone with an explanation of being concerned about having their personal information "all over the web".

Some folks are more paranoid than others. Speaking of which, I have to get the dogs in the car and get out to the grocery store, i'm out of tin foil for my hats...

 

[wzd]

That sounds careless TH, you should always keep a spare Aluminum Foil Deflector Beanie around. You never know who is trying to listen in or trying to control you

 

[Martha]

I am not worried by spouse would be disapproving of this site. We each tend to be head-strong and opinionated, but are always respectfull of the other's opinions. As the other Martha says, "this is a good thing". Anyway, he has his websites he goes to for feedback; the one that amuses me is a yahoo group called "investorsexchange" It looks like "investor sex change" to me, rather than "investors exchange". As I approach retirement, I am finding my resources as well.

Martha

 

[ganda]

...we've had a few folks here, lay out the finances, get some ideas and say they were off to tell the spouse.  An hour later all their posts were gone with an explanation of being concerned about having their personal information "all over the web"...

Hmmm. I did that and my spouse does not know about this site AFAIK. I took the information away because *I* didn't want my personal finances on the web for security/paranoia/commonsense reasons, and because I have made a lot of money for someone my age and it seemed a bit 'braggy'. Other's mileage does indeed vary.

 

[cute fuzzy bunny]

That sounds careless TH, you should always keep a spare Aluminum Foil Deflector Beanie around. You never know who is trying to listen in or trying to control you

No problem, I had a spare Wok to wear.

Ganda...I actually had forgotten about you because you havent been around in a while...you werent one of the examples I was thinking of, and in fact I dont think that was even on this site!

No worries about bragging anyhow, my recollection of your posts (which is all we have!) is that you were fairly straightforward. Plus you have less money than me, so hence cant effectively brag

 

[TheFIREman]

and because I have made a lot of money for someone my age and it seemed a bit 'braggy'. Other's mileage does indeed vary.

No worries. There are quite a few young millionaires here and I don't think anyone on this board will harbour any ill will to someone who has acheived FI/RE at an early age (right, Ted?). Actual end amount does not matter anyhow as long as it is sufficient. What matters is how it is allocated and for that people here use percentages of the whole rather than exact figures.

 

[ganda]

Aussie or pom?

Good point. I'll be posting the first draft of my allocation plan soon, looking for feedback. Couple of books to digest first...

 

[TheFIREman]

ex-wannabe pom

 

[ganda]

Ah, a Canadian, eh.

 

[TheFIREman]

Very astute!