I have invested in different mutual funds -- some in tax-sheltered accounts and some in regular accounts. I am currently trying to do some financial planning. How many separate goals -- retirement, college, etc. -- do I need? Should I follow an asset allocation for each goal or invest all the money as a whole? How do I get advice on my current holdings, like whether they are properly allocated or not? -- Sanatan Datta
Identifying your goals is like deciding how many little Dattas you want running around the house. This decision is entirely up to you. And no academic egghead or financial planner can tell you exactly how you should compartmentalize your life's objectives.
Your financial goals should be based on what you want and need out of your money and your life.
Two of the most familiar goals are your retirement and your children's college education. But maybe you want to leave behind a large sum of money to charity. Perhaps you're determined to buy a vacation home in 10 years. Or travel might be paramount.
Start by making a list of all of your objectives and then rank them in order of importance. That should give you a distinct picture of which goals are priorities and which are mere aspirations. Then you should attempt to quantify these goals. How much money are you going to need for education? How much will you need every year during your retirement?
This exercise will give you a sense of how much money your portfolio will have to earn over time and a starting point for the asset-allocation process.
Asset allocation simply means that you are dividing your assets among various asset classes to ensure that you boost your returns while reducing your portfolio's volatility. Broadly, you can think about stocks, bonds and cash. More specifically, international stocks, small-caps and sector-specific funds might be part of your equity allocation.
Any asset allocation depends on numerous factors, including your investment time horizon, your monetary goals and risk tolerance. You're trying to determine what level of return will get you to those goals compared with the amount of risk you shoulder. You might take on more risk through a big allocation to the stock market or more aggressive securities like small-cap stocks.
To keep it simple, you can look at your situation as long term vs. short term. With money that you will need in five years or less, you shouldn't have a lot of it in stocks -- if any at all. If you have 10 years or more to invest, you can be more aggressive with your investments and may be able to tolerate heavy exposure to the stock market. One way to approach it: Keep separate portfolios for long-term and short-term goals.
But does it make sense to split your investments even further into separate portfolios for each goal? Or is it better to have one sweeping asset allocation for all of your money?
Plenty of professionals will tell you that you need just one, and you should look at your portfolio as a whole. Here are some reasons.
Creating separate portfolios for each goal might add up to too many funds. You could achieve more economies of scale by investing your money in larger pieces and in fewer funds. For example, when you buy funds that carry a transaction fee from
, your fee is reduced if your transaction exceeds $15,000.
If you are using a single allocation for all of your assets, you can use your tax-deferred accounts to shelter less tax-efficient securities and funds. Instruments that produce a lot of dividends and capital gains are better held in 401(k)s and IRAs. If you have different allocations for each goal, you may wind up with tax-efficient instruments in your retirement accounts or less-efficient securities in your taxable accounts.
Lastly, a single allocation model may help you avoid the danger of investment overlap. The more funds you own, the greater the danger they'll own the same stocks. With a manageable number of funds, it should be easier to keep track of exactly how much money is in large-cap stocks at any time, or more specifically, how much you might have in
or other widely held issues. What's a manageable number of funds? See Senior Columnist Brenda Buttner's
story on that subject.
But a financial plan is like the perfect diet. It's of no use if you can't stay on it.
You might feel more comfortable having separate allocations for each goal. If this is one thing that will help you adhere to your financial plan, then so be it.
"How you arbitrarily slice that up gets down to personal appetites and behavior," says Weston Wellington, a vice president at
Dimensional Fund Advisors
in Santa Monica, Calif.
But if you take this multipronged approach, it will be harder to rebalance your allocation each year or when the market makes a dramatic move one way or another.
By trying to manage a handful of different asset allocations, you might get consumed with the minutiae. But if you're that detail-oriented, this approach might very well work for you.
The Starting Line
You've got a variety of places to go for advice. You can use the Internet to get started. Many fund company Web sites, like
Fidelity's, offer interactive asset-allocation tools.
Or you could check out
Financial Engines, which will run your 401(k) portfolio (and soon, your other investment accounts) through a variety of forward-looking financial models and suggest ways to adjust your allocation to meet your goals. The site was developed by Nobel Prize-winning economist William Sharpe, among others. See our recent
story about it.
I would also buy a comprehensive book about financial planning. My favorite:
Ernst & Young's Personal Financial Planning Guide
. It will easily walk you through the entire process.
If you start thinking about hiring a financial planner, you should first read our
guide to picking a planner.
A Personal View of Personal Trading
Securities and Exchange Commission
announced it had approved stricter disclosure requirements for fund managers who trade for their personal accounts. The new rules will require managers to disclose their personal holdings to their employers each year. Managers will also have to ask for an employer's permission before investing in initial public offerings or private placements, where trading abuses could be a bigger problem. (The rules go into effect in late October.)
I think personal trading among fund managers should be banned altogether. Managers should be perfectly content with investing all of their money in their own funds or the funds of their employers. Frankly, a manager's focus should be running that fund and nothing else. Plus, the potential conflicts are innumerable.
doesn't allow any of its fund managers to trade for their own personal accounts. If Janus can do it and hang on to its talent, then other fund companies can do it as well.
Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.
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