What are the best strategies when building a retirement portfolio

Post on: 19 Июнь, 2015 No Comment

Strong work!

Let me start by congratulating you on being thoughtful and responsible about your future! You seem to be very well-positioned for your presumably decades-away retirement, given your age and current savings. ING CompareMe is a good site to see where you stand in comparison to your peers, in terms of attitudes, goals, and current savings and spending habits.

I'm not going to give you a yes or no answer to your question; not only am I not an investment advisor nor financial planner, but, I don't have enough information about the management team you're thinking about hiring, the terms of the contract you'll execute with them, and the types of ETF's you're on about. Most importantly, I don't know enough about who you are, what your real risk tolerances are, and what your expertise and interest in the markets and investing in general might be.

What's most important for you is that you identify what would make you anxious and what makes you feel secure; and how much of that kind of tension, with respect to your retirement plan savings, you can handle. You may own a home; you may be heir to a vast fortune; you may decide that you want to be financially responsible for the college education of a whole class of second-graders — and how your retirement planning fits and works with your other goals is critical to any decisions you might make regarding the investment of it. Those decisions and circumstances will change over your 30 year time horizon, and your retirement portfolio will be rebalanced throughout your life. Nothing's set in stone, so whatever decision you make now can be adjusted — but take care that you understand the impact of your exits and transitions for whatever option you choose (i.e. check to see if there are termination fees or time constraints on when you can exit your relationship with your manager; select a band where you sell your ETFs, say +/- 30%; or decide to double up if it goes down 20%. develop a disciplined strategy to try to limit your natural emotional reactions).

Some people look at their retirement savings as untouchable; some look at their IRA as a form of rainy-day savings (and rules on Roth retirement accounts allow you to access those funds for first home purchases and other plans). What is your approach towards these assets? That should be reflected in how you invest them. The structure of your accounts should be taken into account too, whether you've got a Roth or a traditional IRAs (you indicated in your question that you are in an IRA, and not a 401(K)) and how they work with your other savings vehicles.

Finally, you've limited yourself in this question to ETF's, stocks, bonds and traditional investment securities; what many people don't realize is that they can also purchase and hold real estate or similar less conventional assets through IRA's. It's complicated but it's an option that you could look into at a future point in time, depending on your needs and interests.

Although I can't make or recommend a particular choice for you because I don't have enough information, what I can do is identify some of the issues relevant to your question.

Your investing style and experience:

I very much appreciate your comment: I like the idea of using the management team as I know enough about investing, and myself, to question my judgement . Based on that alone, I can assure you: your judgement is sound.

The most experty-experts are not infrequently wrong. I had a boss once (back in the day where investing seemed to more about fundamentals than trading patterns and strategies) who said that a star analyst was one who was right 60% of the time. Reasonable expectations, diversification and moderation in all things helps you sleep better at night.

Your immediate options:

With respect to option one. the issues are not just about your judgement and expertise in asset selection and allocation, it's about your time.

You say: . diversifying through 5-10 ETFs and making allocations to keep things weighed properly seems easy enough . And it is, mostly, but that's not all that you will be doing. You'll be reevaluating your choices, rethinking, restructuring and rebalancing your portfolio, based on performance, enivornment, market activity, changes in your contribution levels and plans, and other factors; and learning more about the ETF's, the markets, and trading. You'll be rethinking whether or not you really want to be in ETF's, or try your hand at individual stock picks. You should be willing to commit at least an hour a week and usually more to check in to your portfolio, looking at trends over time, reviewing your strategies and their implementation. You'll either love it and be addicted to it, or hate it and want someone else to take it off your hands.

I have to admit that your statement: I make a yearly contribution which I will allocate based on the past year's performance makes me a little worried. Never look back, except as an indication of how your process (brokerage fees, how often you look at the portfolio, etc.) is working. Always look forward . Past performance truly is NO indication of future results. If one of your investments has been doing well, it might be time to sell it; or it might be time to double-up. You might have an ETF that is now $10 whereas last time you checked it was $20; Apple bounced in that range for a long time before it went up to $700; and I've owned shares that gone from $2 to $24 with all indications of continuing success, and then tanked to worthless in two weeks. Do NOT allocate based on the past year's performance.

With respect to option two. with a management team running your portfolio, your primary monitoring and time commitment will be to pay attention to what the managers are doing with your account. You will be paying an annual management fee, and, even though you say there are no transaction fees there absolutely are. Perhaps what's happening is that you are investing in a commingled stock portfolio where brokerage, custody fees and other charges for the pool of assets are embedded in the fund expenses or management fees and deducted from the pool overall, or perhaps you will have an additional brokerage and custody agreement. However it works, you are definitely paying transaction fees; it's just that they're not fully transparent to you right now .

The world of investment management fees is really messy and complicated, and without looking at the specifics of the program they're offering you, it's impossible to make any suggestion other than to ask for more information and transparency regarding overall fees, expenses, and charges.* Here's an interesting article about investment management fees: Investment Management Fees Are (Much) Higher Than You Think. The problem with the article is that it doesn't talk about the different types of services you might be getting from your investment manager, bundled into that overall investment management fee category, and it doesn't address the other kinds of fees and expenses that are customary for fund administration and operations. *(see my note below on fees). Generally however, trading costs through an investment manager are typically significantly less than the transaction fees you pay directly through your own brokerage account, so it's not as if it adds that much to your costs with a manager (unless they churn or have a poor record of best execution or internal allocations among clients, but those are different issues).

You will be responsible to monitor the activities and performance of the investment manager and advisor you choose; conduct your initial due diligence (i.e. is the advisory firm stable or a start-up, is it regulated, does the parent have deep pockets, do you trust the person you will be working with, does it provide the kinds of services you want, what kind of performance and investing outlook do they have, and how expensive is your account management agreement for realz, is this a fee-only or commission advisory business, etc.) and watch how it plays out, including understanding how performance is calculated.

The asset selection and allocation process is almost secondary with option two — you need to feel you can trust your manager to be putting in the time and serving your interests, in the way that a prudent investor would. It sounds like some part of your assets will be discretionary (meaning you give the advisor the ability to buy and sell at their discretion) and some will be non-discretionary (meaning they might make recommendations, but you will make a decision on each investment (with respect to the ones with transaction fees). Ask the manager you are talking with if they are a fiduciary on your account, and what that means for you, in terms of how they treat your account vs. a brokerage account that you would have, if you chose option one. When you get your first statement, call them up and ask them to walk you through it, so you fully understand what everything means and how everything is calculated.

The choice:

Most importantly, be honest with yourself about deciding whether or not you want to spend the time and commitment to figure out what you want to trade and when: or how much your time is worth to you (in both dollars and cents and in terms of anxiety) versus what you might pay to an investment manager (who you can always terminate, if you don't like what they're doing) to look out for your retirement savings.

You could select a third option: split the portfolio.** Put perhaps 30% into a self-directed IRA with a major financial services provider, like a Fidelity or a Schwab who provides education and a broad variety of resources for small investors, and give the other 70% of the IRA to managers to work for you. As you continue make contributions, contribute to the IRA that's advised, so you can more easily determine your investment performance. Even if you do not actively trade or rebalance your ETF portfolio, (5-10x a year as in your initial details is a lot of rebalancing, perhaps much of it unnecessary) you'll be able to compare your overall performance to those of your investment managers, without the anxiety you might have about your investment acumen with respect to the entire portfolio.

At 30, you've got a lot of time to learn, make up for any mistakes you are bound to make either on your own or in hiring your manager, or change your mind.

Once you decide how to proceed, make sure to do complete due diligence on your investment manager. Get more information about fees and fee transparency, as well as information as to how they measure performance and what kinds of services are included in your account management agreement. Ask lots of dumb questions. It's important that you be educated, and a good advisor will make sure you are, as much as you want to be.

Your best option is to be an informed investor, and understand the risks — areas of uncertainty, including potential losses, costs, and opportunities — of your investments and your relationships with advisors. The only way to learn is to take the risk and dive in.

Now is a good time for you to try your hand at being aggressive and try to make some money; but chances are that you won't lose as much money with an investment manager as you would on your own. Your experience running the money on your own and analyzing and comparing your performance will give you a better understanding of how to gauge and understand your managers' performance, and whether the additional expenses associated with active management is worth it to you in the long run, as well as understanding more about how the professionals do it. You've already got a great start.

*More on fees: Customary fees and charges include annual account fees through the custodian on your IRA, for required annual tax reporting; brokerage fees; a management fee; perhaps additional fees associated with account administration and reporting, or other operating costs. Some of these might be bundled together, or embedded in the stock portfolio that your manager advises, depending on your account agreement.

By the way, even though this is an IRA, with no tax implications until you take distributions, some tax advisors claim that investment management fees paid on an IRA are tax-deductible, some say they are not; or that they are, but only if they're paid with money that comes from outside the IRA. You should check with your tax advisor to see what they recommend.

For examples of how advisory, brokerage, and investment management arrangements might be structured with respect to fees, this is the small print fee disclosure from Morgan Stanley: Individual Investors — Understanding Our Fees .This is the SEC's description of the different types of fees that are part of a mutual fund Mutual Fund Fees and Expenses (ETF's can be structured like open-end mutual funds, or SEC- registered investment companies, as well as UIT's, grantor trusts, limited partnerships, or exchange-traded notes — each one of these has different implications for how the funds might trade, how liquid they might be, how they might address and calculate expenses, and your participation, as a unit holder or shareholder.) And here's an article from Money Magazine, addressing someone who is in a similar situation. What is a reasonable investment management fee It's complicated.

**FYI, this is a variation of what I've done over the years, with my retirement monies. I've got a combination of mutual funds in my retirement accounts and individual securities, segregated into international and domestic sub-accounts, that I actively trade. Or not so actively trade, as the case might be. Biggest lesson learned? If you pay attention, use discipline, and don't freak out, you make a little money. If you don't, you fail.