How to Manage Multiple Retirement Accounts

Dr. Don,

I'm in my late thirties and my wife is in her early forties. We are just starting to get serious about investing for our retirement. We both opened Schwab IRA accounts earlier this year for the 2000 tax year. Last November my wife also moved money from a prior job's employer-sponsored plan into an IRA rollover account.

She can also contribute to a Simple IRA this year with her current employer. The employer will match contributions up to 3% of her salary. If we manage to contribute 3% of her income, this will represent about $750 this year and $1,200 next year in total contributions.

For 2001, I intend to invest $2,000 in (BRAGX)Bridgeway Aggressive Growth for my IRA and $2,000 in (TBGVX)Tweedy Browne Global Value for her IRA, using lump sum investments to minimize transaction costs. Since the mutual funds available through her Simple IRA are limited to Class C shares of MFS funds, I plan to invest in (OTCCX)MFS Mid-Cap Growth C in that account.

I have treated the two IRA accounts as a single portfolio for asset allocation purposes. Now I am concerned about maintaining the asset allocations since our IRAs are unequal and from here on out the yearly contributions will always be the same. I'm not a style purist concerned with maintaining an exact allocation. Instead, I pick interesting funds based on their past excellence and future promise. I'm comfortable with 40%-50% large-caps, 40%-50% medium- to small-caps and about 20% in foreign stocks, assuming some overlap. I plan on limiting our retirement investments to seven mutual funds, but actively monitoring these funds.

Regards,

MP

MP's IRA Account
Name	Shares	Market Price	Market Value	% Total Value	YTD Return	Morningstar's Stock Industry or Fund Category
(VFINX)Vanguard 500 Index	18.887	111.85	2,113	23.2%	-7.7%	Large Blend
Account total:			2,113	23.2%
MP's Wife's IRA Account
(BUFSX)Buffalo Small Cap	55.047	18.22	1,003	11.0%	19.6%	Small Growth
(DODGX)Dodge & Cox Stock	24.446	102.75	2,512	27.6	8.7	Large Value
(RYLPX)Royce Low-Priced Stock	89.803	11.13	1,000	11.0	19.0	Small Value
(UMBIX)Excelsior Value & Restructuring	75.853	32.72	2,482	27.2	-3.1	Large Value
Account total:			6,996	76.8%
Portfolio total:			9,109	100.0%

MP,

Congratulations, you've cleared the first hurdle by opening these IRA accounts. A Treasury Department study found that 93% of taxpayers eligible for deductible IRAs made no contribution in 1995, and only 4% of those eligible made the maximum $2,000 contribution. With so many choices available, it seems impossible to make the right decision about where to put your money. The right decision is to get started. You can always make changes to how your money is invested if your initial investments don't perform. Although the stock market doesn't provide a guaranteed return, not investing for a future goal is a guarantee that you won't meet that goal.

You're paying for convenience by investing in the mutual funds through Schwab vs. dealing with the mutual fund companies directly. That extra layer of account management adds another annual fee plus the commissions paid on the mutual fund transactions. If you like the convenience of one-stop investing, then keep things as they are; otherwise, look to manage these fees.

Start contributing to your IRAs at the beginning of the tax year rather than at the last minute. That way, you'll gain over a year's worth of investment returns. If you put aside $4,000 every year and your portfolio averages a 10% annual return, that's an extra $400 every year. Alternately, consider dollar-cost averaging the investments over the year by setting up an automatic investment plan directly with a mutual fund.

Contribution limits are increasing over the next few years for IRAs and Simple IRAs. You'll be allowed to put more money to work in these plans, so now you need to find a way to afford to make those additional contributions. Look to your household budget for ways to increase your contributions up to the new limits. TSC's retirement calculators can show how those increased contributions help build up your portfolio.

I understand your frustration with the limited selection of investments in your wife's Simple IRA. It's a common problem. She can lobby her employer for additional choices, but it's unlikely that she'll be successful unless she can rally some of her co-workers to the cause. (You might want to rent the 1979 film Norma Rae for inspiration.)

You're no slouch at fund picking, but you need to consider how the funds all go together. According to Morningstar, you have a large-value portfolio. As the table below shows, all that means is that type of investment predominates your portfolio.

MP's Portfolio Allocation
	Portfolio Breakdown	Wilshire 5000 Index	Vanguard 500 Index
Large-Cap Value	33%	32%	40%
Large-Cap Growth	20	41	49
Mid/Small-Cap Value	29	14	6
Mid/Small-Cap Growth	18	13	6
	100%	100%	100%
Morningstar data

An investor that invests in value funds believes in stock picking over index investing because he believes that a fund manager can identify undervalued stocks. Your comment about how you select your mutual funds puts you in the value camp, and except for your investment in the (VFINX)Vanguard 500 Index, your portfolio is consistent with your comment. Your plan to add two new funds -- Bridgeway Aggressive Growth and Tweedy Browne Global Value -- with your 2001 IRA contributions, and MFS Mid-Cap Growth C in the Simple IRA account, will continue to add emphasis on the mid- to small-cap stocks.

My concern is that your portfolio is a little too trendy. Value stocks and mid- to small-cap stocks are currently outperforming the large-cap growth stocks. Whether this is a correction of past undervaluation or the start of a new era won't be evident any time soon. While the trend can be your friend, it can also turn on you when you're not looking.

Also, planning on limiting all future investments to the seven funds listed in your letter isn't likely to work for the long haul because some of these funds probably won't perform to your satisfaction. Additionally, your plan to have 20% of your retirement money allocated to foreign stocks is too heavy an emphasis for that sector -- especially for a small portfolio like yours.

Finally, trying to manage transaction costs by investing in one fund per account each year is going to cause your investment allocations to bounce around. There's no avoiding it unless you renounce your bent toward value stock funds and switch to an index fund. Limiting your investments to the seven funds named in your letter will also cause some volatility in your asset allocation.

Remember that stock pickers, even value fund managers, can and will reshuffle their portfolio in their quest for return. Still, you should be able to rotate your annual IRA contributions among the seven funds to get where you want to be for investment allocation. Continue to look at the accounts as one portfolio and make investment decisions based on the portfolio as a whole, though, and not the individual accounts.

Send In Your Portfolio

If you would like to submit your portfolio for a makeover, send it to [e-mail]. Give us enough details -- dollar values or percentages -- so we can determine how your assets are allocated. Also tell us a little about yourself and your investing goals, and let us know how we can contact you if we have further questions. Though we'll use only your initials publicly, please include your full name so we can verify your identity. Unfortunately, we cannot guarantee your portfolio will be selected for a makeover, nor can we promise to respond individually to everyone who submits a portfolio.

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