Don’t Get Too Lazy When Investing In Your Retirement Account
I tend to agree wholeheartedly with the views often expressed on this blog that nothing can beat a simple retirement portfolio. Investors aim for a complex portfolio in most cases because it makes things more interesting, because they do not know better or even sometimes because their financial advisor offers another solution. That tends to cost more in fees and is therefore less efficient than a simple portfolio such as those that have been discussed time and time again on this blog.
The fact is that with ETFs, it is now possible to have a diversified, efficient portfolio with less than 10K. Yes, I am a fan of ETFs as is ObliviousInvestor, they give almost unlimited possibilities. I know some investors believe that there are too many ETFs but frankly, I don’t see a problem with that, far from it. Lacking options is a problem. Having too many is not. You can simply use the ones that serve your specific purpose. For a retirement portfolio, we clearly need a very limited number of ETFs, perhaps less than 10. But investors that also have a speculative portfolio could very well use an ETF that tracks crude oil, the airline industry, or the Chinese retail sector. It’s all about having a clear vision.
The portfolio types that were presented as lazy portfolios are great guides to get you started, as are target date funds and other similar strategies. But I would still urge all of you to build your own portfolio.
Flaws of pre-set portfolios
These portfolios are great starting points and certainly provide great ideas but they are not the only answers. Every investor is different. Take target date funds, they use an asset allocation that gradually moves from an equity portfolio to a bond/fixed income portfolio. I would say that in most cases, that is probably what investors would do. But the proportions used should be different for every investor.
How much risk is involved depends on a lot more than just the year in which you retire. It also depends on your financial situation, your psyche, your background and your tolerance for risk. These factors are different from one investor to another and that would create different proportions even if you use the same assets. A wealthy or risk tolerant investor would be able to sustain a higher proportion of emerging market stocks than an investor that is cash poor and could not afford to lose 20-30% in one year.
What to do?
It really is quite simple. What I do is take a target portfolio. Any one of the lazy portfolios would do. Then, review the proportions of each asset according to your personal situation. For example, many analysts consider that we should own over 20% of foreign stocks because that is their weight in the world markets. Obviously, such a weighting would generally bring more return but also more risk.
If you consider your personal situation, you will be able to establish your starting target weights. Then, simply invest accordingly.
How much time is involved?
I personally review and revise the weightings every 3-6 months (or more often if your situation changes). It takes me about 20-30 minutes to review the portfolio and adjust according to my personal situation.
No active investing?
As a writer of an investment blog and a worker in the investment field, I do also have more complex strategies but those are done in separate portfolios of speculative nature. While I count on my passive retirement portfolio to insure a solid and early retirement, my active portfolio is destined to achieve higher returns while also adding more risk. I guess the philosophy is that I “count on” my passive account while my active count is something that I have high hopes for but would never count on for my retirement.
Thoughts?
Do you agree with such a philosophy or do you prefer sticking to the target portfolio without any modifications? If that is your choice, why? Because of the time involved? Because you do not feel like you would know where to start?
About the author
This guest post was written by IntelligentSpeculator, a blog that concentrates on technology stocks, passive income and ETFs! You can visit the blog here or subscribe to the RSS here.
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As much as I’m a fan of “lazy” portfolios, I’d absolutely agree that the first step needs to be tailoring the portfolio’s suggested allocation to fit your needs.
And while I like target date funds, I think the advice commonly given on the Bogleheads forum is sound: Ignore the date in the name and choose based on your personal needs. Just because you’re planning to retire in, say, 2030, doesn’t necessary mean the 2030 fund is going to be the best fit for you.
Excellent post. ETFs do provide great opportunities to build a simple low cost portfolio. They (along with index mutual funds) comprise over half of the client money on which I provide advice accross individual and institutional clients.
Mike I couldn’t agree more with your suggestion to ignore the date on the Target Date Fund and look at the underlying portfolio. Case in point, JP Morgan has a tool that looks at the allocation of over 40 2010 TDFs. The equity allocation ranges from about 20% to about 75%, a huge disparity in my opinion and very deceiving to potential investors.
@Mike – Thanks for the opportunity really! And good points about target date funds, I really am not a fan.
@Roger – Interesting! Where can we access that tool?
Your post should be headed “Read This and Save Yourself $000s!”. Wall Street thrives on presenting investing as a complicated process. People are finding that they have too little to retire on because a huge chunk of their nest egg has gone to the brokerage community. People still hand over their life savings to brokers who then put them into actively traded funds. In the process, in excess of 3% goes from what would be in the retirees nest egg to the over paid “advisor”.
Unfortunately this message is not easy to get across. I’m glad you pointed out that it doesn’t take much time. People are convinced that you need to put a lot of time, effort, and resources to manage assets properly. That used to be true but is no longer.
I have to say that my sense is that the movement to well diversified, low cost indexed etfs is growing.