Dr. Don, I am a 52-year-old single parent of a 17-year-old son, for whom I am the sole support. I was too conservative in my 401(k) investing for a long period of time, and about five years ago, I decided that if I did not want to end up eating cat food in my old age, I needed to get much more aggressive. About this same period of time I also began to have much more disposable income, which I have used for saving and investing purposes. Now that I am beginning to accumulate some significant balances in some areas, I find I could use some advice on future strategies and how to rebalance my investments. My goal is a comfortable retirement where I will be able to travel. My son's looming college education is not a big concern, as over the years I have purchased $42,000 in series EE Savings Bonds. (Face value -- I have not gotten around to determining current value.) Additionally, some good friends of the family set up a trust fund with $20,000 available for his education. Apart from a $63,000 mortgage, I have no debts. I invest 10% of my salary in my 401(k) plan, which is the maximum I am allowed due to salary levels. I participate in a yearly company stock plan outside of the 401(k) that currently allocates 8% of my salary toward company stock. I contribute to an IRA and I invest in a couple of regular mutual funds as well as some stocks either held with a broker or in dividend reinvestment plans. I am overinvested in my company stock, which is in the telecommunications area and which has recently taken a big hit -- I bid a sad adieu to early retirement as my 401(k) shrank by over a third. It would be difficult for me to save much more than I already do -- over one-third of my gross salary of $98,000 -- but I think I can better allocate and balance what I do have. How am I doing? Can you suggest an investment makeover? -- PF
Not to fear, the portfolio doctor isn't going to tell you that you have to start saving more than 1/3 of your gross salary. You're doing a great job of living within your means and investing for the future. Looking at recent performance hurts because these holdings have, in aggregate, declined by $238,000 (35%) over the past 12 months. You've had a rough year overall, but you've got some investments that have done well despite the downturn in the overall market.
As I've explained on these pages before, you've got enough at risk just investing your labor with a company. Investing the fruits of that labor is doubling the investment. You know you're overweighted in these stocks. Lighten up in the positions where you can and reallocate the funds.
Down the road, it would be worth the money to get professional tax advice concerning your holdings of company stock in your 401(k) before rolling any distributions into an IRA plan. Taking a lump-sum distribution can have some tax advantages.
makes sense of it all in this
article on rollovers vs. lump-sum distributions.
You're picking low-cost mutual funds with low annual expenses. That's great! Keep the money working for you. There's a nice split between value and growth funds. You could start shopping for a mid-cap fund to add some exposure to smaller companies. Start with a fund selector program like the one on
Morningstar.com and see what's out there. I also think you should increase your exposure to foreign stocks. You could continue to invest in
or shop for a second fund to add a new component to the portfolio.
You own five stocks through dividend reinvestment plans (DRIPs) that are owned in such small quantities that it's not doing much for your portfolio.
Johnson & Johnson
has had a pretty good year, but you only own 50 shares of it outright and the equivalent of a few more shares in your mutual funds, so it represents about 1.25% of your portfolio. In a world of $9 stock commissions, and with a six-figure portfolio, these investments aren't going to do much for you. Most of the arbitrage opportunities -- i.e. commission savings and price breaks on stock purchases -- that did exist have vanished from the DRIP market. (Readers who are enamored with holding stocks in DRIPs should write in and explain their passion.)
As for those Savings Bonds, the
Bureau of Public Debt
has a software program called
Savings Bond Wizard that you can download to keep track of them. They also have a
FAQ section on Education Tax Exclusion that's required reading for parents who invested in Savings Bonds for their children's education. (Savings Bonds purchased before 1990 don't qualify for that tax exclusion.)
Dr. Don has a position in the Vanguard Growth Index fund.