| |
| |
If you're a bit uncertain about managing your long-term savings, you should make a clear distinction between three things: your nest egg, your investment accounts, and your financial planning advice.
Nest Egg. Your nest egg (total retirement savings) should be diversified to reduce risk and ensure reasonable growth. Portfolio diversification refers to the practice of spreading your investments across a broad mix of asset types. There are many excellent resources to help with this task, which is often referred to as asset allocation. One of my favorite books on the subject is the William Bernstein's Four Pillars of Investing, which includes some excellent illustrations of diversification using index mutual funds. See also my remarks here.
Investment Accounts. Portfolios with fewer accounts are easier to manage than portfolios with many accounts. By "account" I'm referring to separate Traditional IRAs, Roth IRAs, 401(k) accounts, taxable investment, savings etc. For this reason it generally makes sense to consolidate accounts of the same sort. The key concerns here are that you observe the tax implications of the various accounts in any consolidation. For example, if you have traditional IRA funds, life is much simpler if those funds are in a single IRA rather than spread across a dozen accounts. I have a friend who actually opened up a separate IRA account each tax year! What a nightmare! (Thankfully, she's since realized that was not a good idea and has consolidated to a single IRA.)
Financial Planning. For investment planning, too many cooks can spoil the stew. If you feel you don't have the skills (or interest in developing the skills) to self-manage your nest egg, it's important to shop carefully for financial advice. You want a financial planner who has no vested interest in any of your investment products (mutual funds, brokerage accounts, etc.).
For example, you should be wary of financial planners who get a fee for selling you a particular mutual fund. In addition, you should also think twice before hiring an advisor who charges a percentage of your portfolio in payment. Such people will claim that this arrangement works to your advantage because their income is based on the success of your portfolio. But since a broad market index rises two years out of three, you're paying major bucks for performance that would largely occur if you invested in an S&P 500 or Total Market index fund. When approached by such an advisor, you might ask if he or she will give you a refund for years when the market is down. Another alterative would be to calculate the fee as a percentage of portfolio performance that exceeds the return of a total market index. It's a safe bet you'll have no takers on such a counterproposal.
If you're really interested in fee-based financial advice, look for someone who charges by the hour or quotes a flat rate for setting up a sustainable investment strategy.
To summarize:
|
|
