Scott Burns: Where to invest when there is nowhere to hide
Q: I’m one of many who have gotten so disenchanted with the stock market that I withdrew most of my money and sat on the sidelines. Is that a good idea in the “fiscal-cliff” climate, or not?
A: The problem the fiscal cliff presents is that no investments look good. The dollar could decline against other currencies. Interest rates could rise, reducing the value of bonds.
Reduced federal spending could put all expansion plans on hold, bringing down stock values. There is nowhere to hide.
Since the issue covers everything, the only reasonable (if entirely imperfect) response is to be widely diversified.
It also helps to have little or no debt as well as having income from multiple sources. That, of course, is easy to say, but lots harder to do.
Q: I am a public-school teacher. I will be retiring at age 66 in three years with 30 years of service. I earn $61,000 a year. In retirement I will have both Social Security and Teacher Retirement.
My husband has a civil-service pension of $1,700 a month and will also get $400 a month when he retires from his current job in three years. I am in good health and expect to live a long time.
I recently inherited $400,000 from my mother. I have no children, so I can use up the $400,000 before I die, or leave what’s left to my husband if he outlives me. I am in a quandary deciding what to do with the money.
We have had a broker in the past and have discussed the $400,000 with him. He offered two choices:
• Put it with a major investment-management firm. My broker says they are very adept at managing customer accounts and charge 1.25 percent a year. My broker will charge an additional 0.75 percent fee per year, making a total 2 percent a year.
• Invest in mutual funds with my broker instead. He charges 0.75 percent a year, but says my front-end load charge will be $7,500.
Which choice would you recommend?
A: Your broker has provided you with what he must — two ways of investing through his fat-clogged distribution system.
With total costs of 2 percent a year, it will cost as much, or more, to manage your money than it will earn in dividends and interest.
In other words, every dime of actual earnings will go to the broker and his firm. What you will get is the risk. Somehow that doesn’t seem fair since it is your money.
So allow me to suggest a third alternative that will give you some income to compensate you for the risk you’ll be taking.
Put that $400,000 in a low-cost index-fund solution such as Vanguard Balanced Index Admiral shares, ticker VBIAX. This fund is rated five stars by Morningstar, has no commission cost to purchase and has an annual expense ratio of 0.10 percent.
This traditional balanced fund beat at least 75 percent of its more-expensive managed competition over the last three-, five-, 10- and 15-year periods.
It also has a current yield of about 2.15 percent, so you’ll actually have some income from your investment instead of paying it all to the managers.
The Balanced Index fund is typical of moderate-risk funds. It invests 60 percent in domestic equities and 40 percent in domestic fixed income.
Is that too much risk for you? No. Here’s why: Between Social Security benefits and pension benefits that you and your husband have, a substantial part of your living expenses is covered.
If you have an issue, it is longevity, and that argues for owning more in stocks and less in bonds.
Copyright, 2013, Universal Press Syndicate