Dear Dr. Don, I was out browsing around on
for the first time today and ran across your column. I am a single, 36-year old woman who needs help with my finances. About 10 months ago, I quit my corporate job that I had for almost 14 years and went into my own consulting/coaching business. In a nutshell, this is an almost polar opposite lifestyle than the one I was living previously. Now it's up to me to buy my own health insurance, pay quarterly income taxes, manage my own retirement contributions, etc. When I rolled over my 401(k) to an IRA, I left it with Vanguard, although I'm not sure that was my best choice. I would love some help trying to figure out what to do with my money. K.K.
We're glad you found
. Congratulations on venturing out on your own. May the rewards outpace the risks. My first piece of advice is, if you don't have a good accountant, then find one. It's likely that he or she can find ways of helping you structure your business to reduce your taxes and maximize contributions to tax-advantaged retirement savings.
Because you're self-employed, ready cash becomes an even more important component in your portfolio. You've got 10% of your portfolio in liquid funds in your taxable account. If that's not three months' worth of expenses, you should increase your cash allocation until it gets to that point. Overall, you have about 12% of your portfolio in cash and 6% in bonds. That means 82% of your portfolio is invested in stocks. Given the risks you're taking with your human capital, that's a little excessive. I'd like to see the combined allocation to cash and bonds increase to 25% of your financial assets.
fund is a hybrid fund investing in stocks (64%), bonds (34%) and cash (2%). With a portfolio in the six figures, you don't really need a hybrid fund to provide stock exposure as much as you need additional bond exposure. I suggest you go shopping for a bond fund to replace Wellington in your portfolio. The
Vanguard Total Bond Market Index
should be one of the funds you consider.
There's no need to second-guess your decision to roll your 401(k) money with Vanguard. They have a reputation for keeping annual expenses low, have a stable of experienced fund managers and a wide array of fund choices. Vanguard has about 120 mutual funds and the ability to invest in about 2,600 other
no-load funds in a Vanguard brokerage account. (Transaction fees may apply.) But if you find something outside this selection that you feel you have to own, you can always do a trustee-to-trustee transfer and open a second IRA Rollover Account.
funds have higher annual expenses than Vanguard's, and the Class A shares that you own charge a
front-end load of 5.75%. That's not a reason to leave the funds, but it's something to remember the next time you're shopping for a mutual fund. You've already paid the loads, so as sunk costs they're not relevant to future investment decisions. The
Putnam Voyager II
OTC Emerging Growth
funds are considered mid-cap growth funds by
. Mid-cap growth funds tend to have higher annual expense ratios than large-cap funds, so the funds' annual-expense ratios aren't out of line just because they're higher than the Vanguard funds that you own.
launched in June 2000, so its hard times have matched those of the technology sector. It's such a small part of your portfolio that you really don't need to focus on it, but don't forget about it when managing your taxable gains and losses toward the end of this tax year.
Electronic Data Systems
is too big a part of your portfolio. I don't think that any investment in your portfolio, except perhaps a no-load index mutual fund, should ever represent more than 20% of your financial assets. Traders might bet the ranch on what they consider to be a sure thing, but investors shouldn't be looking to take on that kind of risk. If your EDS position was funded in part by company-contributed stock, rolling that stock over into an IRA account may not have been your best decision. See my colleague
reporting on the topic for additional information.
Also, there's a lot of stock overlap in your Vanguard funds. That's to be expected when you are invested in two overlapping indices. The
index is a subset of the
Vanguard Total Stock Market Index
. The other Vanguard stock funds will overlap with the Total Stock Market Index, and any
S&P 500 holdings will be in both index funds. What's important is how stock overlap influences your portfolio weightings in individual securities and sectors. Your portfolio is overweighted in technology stocks, but your individual stock holdings are the culprit, not stock overlap in your mutual funds. Exchanging your
fund shares for index fund shares would reduce the technology emphasis but not as efficiently as reducing your EDS holdings.
In your mid-30s, you've got a portfolio worth six figures that's working toward meeting your future financial goals, and you're making your mark in your own business. Sounds pretty good to me.
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Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. At the time of publication, he owned shares of the Vanguard Growth Index fund, though positions can change at any time. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at