Many readers ask me if I recommend that they hire a financial firm to manage their portfolio. I hedge on my answer to that question.
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The reason I hedge is because there is no simple answer. Obviously, if an advisory firm does a very good job of managing your portfolio, and the return is better than you can do on your own, taking into consideration the 1% (or more) annual fee you incur, then the decision to hire an advisory financial firm to manage your portfolio makes some sense.
However, you have other options. You can hire an advisory firm whose fees are less than 1%. Vanguard will manage your equity portfolio for 0.3%. Other advisory firms may offer fees that are less than 1%. Other advisory firms charge more than 1% per year. What should matter to you is the return you receive after fees. Ask the advisory firms you are considering what the average return has been for their customer base, after fees.
Another option is to manage the portfolio with the help of a financial firm that markets a monthly subscription that includes their recommended equity portfolio. Your fee would only be the cost of an annual subscription. For example, I have recommended the monthly subscription of Bob Carlson, “Retirement Watch.” In his monthly publication, he recommends a specific portfolio based on his research. He has an excellent reputation, and it is likely that the long-term performance of his recommended portfolio would do better than what you could do on your own.
Another option would be the portfolio recommended by Alexander Green, who publishes the Oxford Communique, a subscription which also is published monthly. Green also has an excellent reputation.
Both of these sources could provide you with a history of the performance of their recommended portfolios after fees.
Another option for you is to maintain an equity portfolio based on several index funds which have a very good history and a low average annual fee. In a previous column, I indicated that I have been retired for 31 years, and I have managed my equity portfolio for the most part using several index funds that have good historical performance as well as low annual fees. Following are the returns associated with the indexes I now hold that reflect the majority of my equity holdings, and that I have held for many years, in many cases for more than 15 years.
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–Vanguard 500 Index Fund (VFIAX): one-year annualized return, 19.5%; three years, 19.5%; 10 years, 15.0% ; annual fee, 0.04%
–Vanguard Morningstar Total Stock Market Index Fund (VTSAX): one year annualized return, 19.8%; three years,18.8%; 10 years, 14.5%; annual fee, 0.04%
–Vanguard Dividend Appreciation Index Fund (VDADX): one-year annualized return, 18.0%; three years,14.0%; 10 years, 13.0%; annual fee, 0.07%
When I retired, I chose to roll over my company-funded 401(k) account into an IRA account. I have managed the rollover account for 31 years, basically investing in Vanguard index mutual funds and index ETFs. At the time I retired, the value of the 401(k) account was several hundred thousand dollars. I estimated that if I had hired a financial firm to manage the IRA rollover, paying a 1% annual fee, I would have paid over $300,000 in retirement up to now. Fortunately, the value of my rollover, despite withdrawing living expenses for 31 years, is worth several hundred thousand more than the initial value when I retired.
I believe I made the best choice for myself because I felt that I could select index funds that would meet my objectives. I thought it was more cost-effective for me to manage the portfolio. At the time I retired, most portfolio managers underperformed index funds. At that time, fewer than 10% of portfolio managers did better than the average index fund performance. That has not changed.
Bottom line: My recommendation is that you should decide for yourself which option makes the most sense for you. I am sure that some of you will decide to manage your portfolio yourself, and others will hire a financial organization willing to maintain your portfolio at an annual cost of 0.3% or 1% or more. You can also use the portfolio recommendations of reputable investment analysts such as Bob Carlson or Alexander Green. You have several options, and I recommend you consider carefully which option makes the most sense for you financially, and for your peace of mind.
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Elliot Raphaelson welcomes your questions and comments at [email protected].