Dear Dr. Taylor:
Following is a listing of 100% of my assets; they have dropped in value by nearly half over the past few months. I am 54, divorced, with no dependents. My present take-home pay is $631 a week. I have a studio co-op on which I pay $242 a month on the mortgage and $350 in maintenance. I can start saving $500 to $600 per month as of Jan. 1, but I don't know where to invest it. Should I spread it among the holdings I have, or put it into something safer in one lump each month?
I have a Roth IRA, but no retirement plan from work. When I retire, it will be solely my savings and Social Security, if it is still around. Would you please look at my portfolio and advise me. I'm lost.
Your portfolio did have a rough year in 2000. It's come back some with the new year, but your current holdings were worth $50,000 more 12 months ago. That's a decline of 25% for that time period. It had to be frustrating to watch your wealth erode over the past year. Avoid the temptation to double down to try to gain back that $50,000. That money's gone. Don't chase after it.
Of your 10 funds only one, Reynolds Blue Chip Growth, doesn't charge a sales load. I don't like investing in mutual funds that charge a sales load, or commission. Every time I say that in a column I get at least one email from someone in the industry telling me that I'm too myopic in my thinking and that there can be compelling reasons to invest in a mutual fund that charges a sales load.
The two most compelling reasons are to pay your financial adviser, and to gain access to a mutual fund. To the extent that investors are unwilling to pay explicitly for investment advice, commission-based products give them access to professional advice without writing a separate check for it. It's akin to paying for your banking services by earning 2.63% (the national average) on your checking account rather than earning a market rate of interest and paying for your banking services outright. I think there are too many talented mutual fund managers out there running no-load funds of every conceivable style for it to make sense to pay to gain access to a mutual fund manager. Not everyone agrees, but it's good to at least be aware of what you're paying and why you're paying it.
You're getting to a certain age when you should be thinking of adding to your cash and bond positions vs. investing almost exclusively in the stock market. I'd like to see your cash holding increase to the point where it represents about 10% of your portfolio. Find a good money market mutual fund and increase this allocation. I'd do it in your taxable account so that you can access that liquidity in a financial emergency.
Bond allocations are a little more complex. I like owning individual bonds, but you've got to have a brokerage firm with a good bond (fixed income) group to make this work. For most investors a bond mutual fund or CDs make more sense. Remember that high yield means higher risk and if you're uncomfortable with that higher risk you should stick to investment-grade corporate bonds, Treasuries, or government agency debt and avoid the high-yield bond funds. Regardless of which fixed income investments you choose, I think this allocation should represent at least 10% of your portfolio.
Keep funding that Roth, but find some new investments. Open a Roth IRA account with a no-load house. You can use the fund selector feature on
Morningstar.com to shop for no-load funds. I'd like to see you in an index fund, for its low expenses and broad diversification. For example, there are dozens based on the
Indexfunds.com can provide you with a list of the funds based on an index. I think you would benefit from having 20% to 25% of your investments in a no-load index fund based on a broad-based index like the S&P 500.
You'll find the money to invest in the index fund by reducing your exposure to foreign stocks and technology. You've got three funds, AIM Global Growth, Putnam International Voyager and Putnam Global Equity, that are classified by Morningstar as either World Stock or Foreign Stock funds, and foreign stocks represent 21% of your portfolio. Technology represents 54% of your portfolio vs. technology's 22% weighting in the S&P 500. Every fund you own save one, the Putnam International Voyager, has technology stocks weighted more heavily than any other sector, and it's a close second in that fund. Throttling back on both technology and international exposure will free up some room for the index fund.
Dr. 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. 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