Portfolios gone wild
Question: My husband and I have had jobs in the non-profit and for-profit sectors over our careers (we're both in our early 40s) and we are now managing money in several kinds of retirement accounts -- IRAs (Roth and Traditional), 401(k), Roth 403(b), SEP, and Rollover IRAs. Despite my best efforts at trying to "keep it simple" by investing in a handful of mutual funds across our portfolio, over time the investment options in certain accounts have changed and we now have our retirement savings in close to 20 different funds across 10 accounts. I do keep an eye on diversity and try to keep our investments balanced among types of funds, but do you have recommendations for paring down retirement accounts and (more importantly) the maximum number of funds one should invest in? Thank you! Liz, Hailey, ID
Answer: This is a common problem in the era of 401(k)s, 403(b)s and IRAs. There is no magic number of funds. It's a practical pain to deal with, but I do have a starting point: It's 3 to 4 funds.
Your email makes me think you're a believer in my savings mantra: Keep it simple, keep costs low, and diversify. With that mantra in mind, the baseline portfolio is a broad-based U.S. equity index fund, a broad-based high quality bond index fund or a Treasury Inflation Protected Securities portfolio, a broad-based international equity index fund (including emerging markets.), and a blue-chip short-term money fund. That's pretty much it. (You could keep the short-term money--the jargon term on Wall Street iscash--in taxable accounts.
You can get more details of a retirement savings portfolio model like this from two wise long-term investment advisors, Burton Malkiel and Charles Ellis. They combined their formidable intellects and judgement to write, The Elements of Investing. It's a very short, straightforward book modeled after The Elements of Style by William Strunk, Jr., the indispensible guide for writers. You could also check out the chapter on keeping investing simple in my book, The New Frugality.
Problem is, not all retirement savings plans offer such plain vanilla options. (Perhaps that's another task for Elizabeth Warren, the champion of plain vanilla finance and czar of the new Consumer Financial Protection Bureau.) For instance, in order to get an exposure to emerging markets you might have to invest in a separate fund. Still, you should be able to get your 20 funds or so down to 6 to 7 even with limited options. Theer has to be alot of investment overlap.
I would recommend a two-step process. The first step is to look at your retirement portfolios as a whole. Most of us segregate and think about our money in separate categories, the 401(k), the IRA, and so on. Question is, do you have the right asset allocation for your needs and goals? You may want more, less or the same percentage in stocks and fixed income securities.
Once you've decided on your overall asset allocation, then I would look at the particular retirement plans and mutual funds. It's sounds as i you've tried this before, but maybe one stab at it? For instance, can you invest in the same broad-based funds in your IRAs (traditional, Roth, and SEP)? You have a lot of control with this money and mabe it should all be placed with one major mutual fun company?
What can you do to eliminate investment duplication in your 403(b) and 401(k)? At the very least you may be able to invest in mutual funds that "mirror" one another in the different plans. Are there some funds that are really too narrow in focus? Maybe you can consolidate the investment into a broader based fund within the plan.
How much of he overall portfolio you want in stocks and bonds shoul help you pare down the mutual funds you have right now.