I have been in (VGHCX) - Get Report Vanguard Health Care, (FHLSX) Invesco Health Sciences and (FSPHX) - Get Report Fidelity Select Health Care for about the past 10 years. Needless to say, I have seen a great return on all three over the time period. I am considering taking about 50% out of each fund because of overexposure in one sector. Also, my wife has about 50% of her 401(k) in SmithKline Beecham (SBH) - Get Report, which is about 10% of our overall investment. We are under 5% in bonds and over 10% in cash. I am looking at the (VIGRX) - Get Report Vanguard Growth and (VIVAX) - Get Report Value index funds as a place to reallocate. Any suggestions? At age 42, do you suggest reallocating some of the money into other funds in the plan? -- David Crifasi
Although it sounds like you are too heavy on health care, you get my admiration for being a long-term investor.
For 10 years, you have held on to these three funds, probably the best-known health care funds out there, and have been rewarded copiously. Over that 10-year period, the Fidelity Health Care fund posted the highest annualized return of 24.2%, according to
. But the Vanguard and Invesco funds aren't far behind with 10-year average annual returns of 23% and 21.8%, respectively.
But these funds have grown to command too much of your portfolio, especially when another 10% of your money is invested in a pharmaceutical company, SmithKline Beecham.
I can't tell exactly how much of your total portfolio is invested in health care, but it appears to be a lot. If you need a reduction target, look to the broader indices as a guide. Twelve percent of the value of the
index is made up of health care stocks. "That would be considered a relatively normal weighting for a portfolio," says Jim Lee, a financial adviser with
Lau & Associates
in Wilmington, Del. There are no hard rules about how much is too much in any one area of the stock market, but this is a good target.
Once you have set an allocation goal for your health care position, you have to think about how you are going to reach it. "First of all, consider the tax consequences, but don't let that drive your overall decision," says Jay Shein of
Compass Financial Group
in Lighthouse Point, Fla. You have probably built up some beefy capital gains in these funds; however, most (if not all) of these gains are probably long-term since you have been investing over such an extended period of time.
You should consider starting your reduction within any retirement or tax-deferred accounts. Anything you sell within a tax-deferred account, including your wife's 401(k) plan, will not trigger a tax event. That doesn't mean that you have to unload all of your wife's SmithKline Beecham stock, but you may want to shave off some.
You also may want to consider limiting the number of health care funds you own. This certainly would depend on the tax consequences of selling. But some financial planners suggest that you should look at the underlying expense ratios of the funds to see which one is the least expensive to own. The Vanguard fund, which was recently closed to new investors, has the lowest annual expense ratio by far at 0.36%. If these three funds have an immense amount of overlap, why not just go with the cheapest one?
Once you decide how you are going to get some of your money out of the health care sector, you'll have to decide where to put it.
It sounds as if you can tolerate an aggressive stance. You are still young, and if you don't need this money over the next five years, then keeping it in stocks may be the right idea.
But where do you go? "Are there any particular asset classes that aren't represented
in your portfolio that might be attractive?" asks Lee. You may want to take a look at small company or international stocks. If you aren't wedded to any specific industry bets, then you may want to put your money in a broad index fund, such as a total stock market fund that invests in the
index. A total stock market fund like this will give you some exposure to small- and mid-cap stocks in addition to large companies.
You asked about the Vanguard Growth and Value index funds. If you are going to buy both of these funds, you may just want to invest in a single broad index fund like an S&P 500 fund. That is basically what you are going to get with this two-fund combo. However, if you want to create a bias to one style -- value or growth -- then you can use these funds to do that by overweighting one vs. the other.
One last caveat. You should look carefully at what's inside any fund that you plan on buying. The Vanguard Growth index, for example, had 21% of its assets in health care companies at the end of March. That heavy allocation may not rule this out as a choice. But you may not want this heavy exposure to the area after you have worked so hard to reduce your allocation.
Realigning your portfolio will surely take some time and thought. But if the next 10 years are as good as the past 10, it will be worth the effort. If you have any specific tax questions, send them to the Tax Forum at
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