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BY WARREN BOROSON
NEWJERSEYNEWSROOM.COM
BOROSON ON MONEY
If your 401(k) plan (or your taxable portfolio) lost 40 percent last year, you did something wrong. Maybe you listened to bad advice. More likely, your 401(k) portfolio just wasn't diversified enough.
If you had fixed-income investments in your 401(k), along with stocks, you wouldn't have lost 40 percent, the way the stock market did (the Standard & Poor's 500 Stock Index). You might have lost only 20 percent.
And, points out Donald Humphreys, 41, president of Voyager Wealth Management in Harrington Park, losing 20 percent instead of 40 percent is not a "life-changing event." You can live with it. The message for investors: Own bonds in your portfolio – even if you have as many as 20 years to go before you retire. "Most people are more conservative investors than their advisers believe," Humphreys says.
In fact, that's one thing he has against those enormously popular "target-retirement plans": that they tend to be pretty aggressive, with a huge exposure to the stock market – which their investors probably aren't aware of. (But overall he approves of target-retirement plans.)Other complaints of his:
- Target-retirement funds tend not to be "transparent" – they hold their cards rather close to their chests.
- Some advisers that set up 401(k) plans push their own mutual funds. (Humphreys, who advises companies on pension plans as well as advising well-to-do individual investors, is independent.)
- Sometimes investors are given too many choices in their 401(k) plans. Some are so flummoxed that they buy a piece of every single fund.
Humphreys, who spent years with Merrill Lynch's banking department and with J.P. Morgan, believes in passive investing – in buying index funds, which mimic an investment market.
"I've seen how difficult it is for anyone to beat the market," he says. So for most investors, he recommends index funds. "But for high net worth investors, other investments may be suitable."
He's approved to sell DFA (Dimensional Fund Adviser) funds, which are no-load index funds with a bias toward "value" stocks (the underdogs) rather than "growth" (the favorites), and small-company stocks rather than large-company stocks. (Because value over the years has done better than growth, and small-company stocks have done better than large-company stocks.) He also favors the Vanguard Group, famous for its low-cost index funds. (I once told John Bogle, founder of Vanguard, that a special benefit of index funds is their continuity: the same guy who isn't managing them today won't be managing them tomorrow. I got him to laugh.)
Here are Humphreys' thoughts on some other investing subjects:
- Bonds. Stick with shorter-term securities, those that mature in three to five years. "You are taking enough risk with your stocks," he argues. "Why take a lot of risk with your bonds?" Still, he is a fan of TIPS (Treasury Inflation Protected Securities).
- Asset allocation --- how much of your portfolio is in stocks vs. bonds. Ask yourself, Humphreys suggests, how you would feel if the stock market dropped 50 percent. If you were 100 percent in stocks, you might have lost 50 percent of your investments. If you were only 50 percent in stocks and 50 percent in bonds, you might have lost only 25 percent.
- On how not to get slaughtered: "Stick with your investment plan," he suggests, "assuming that it's sound. In January and February, some investors panicked and sold. They missed the bounce back --- the market went up 40 percent in two months."
Humphreys grew up in Harrington Park, and then graduated from the University of Rhode Island, majoring in economics. He traveled around the world for Merrill Lynch, even spending three years in Australia. Then he and his wife had a child and decided to flee New York and move to the suburbs. So now he's back in Harrington Park.
Q. Should I exchange any of my Bristol shares for Mead, per the current offer?
Answer from David G. Dietze, J.D., CFA, CFP, president, Point View Financial Services, Summit:
Swapping Bristol for Mead could be advantageous. After all, you'll get Mead shares worth about 11 percent more than the value of the Bristol shares tendered.
So, even if you prefer Bristol to Mead, you could turn around and sell the Mead shares and re-buy the Bristol shares, presumably ending up with 11 percent more Bristol shares. But there are pitfalls.
First, if the relative value of the Bristol and Mead shares changes after the calculation for the exchange ratio is made (Dec. 8 to Dec. 10), the hoped-for 11 percent price advantage might disappear. (Since there's a cap on the number of Mead shares to be delivered, you should wait until after the final ratio of Mead-for-Bristol shares has been set before tendering, to confirm your advantage.)
There are probably ways to hedge the risk of changes in relative valuation after the exchange ratio is set by using derivatives. While the swap from Bristol to Mead would be tax-free, and your Bristol cost basis would carry over to Mead, if you then turned around to sell the Mead to rebuy Bristol, and you have a great deal of unrealized appreciation in Bristol, you would have to offset your apparent gain by the disadvantage of triggering a tax liability.
Clearly, if you were going to sell your Bristol shares anyway or actually preferred Mead as an investment, the tax concerns go away.
The deal would be particularly attractive if you preferred Mead over Bristol and had a great deal of unrealized appreciation and held the stock in a taxable account. This would afford you a tax-free way to diversify out of Bristol.
It is not clear to me that Mead is the better long-term investment relative to Bristol. On various valuation metrics, Mead looks more expensive. Mead has appreciated some 80 percent since Bristol sold a portion of its Mead shares to the public last February. And your dividend yield would be lower than with Bristol. So, over the long term I'm not sure Mead would be the better investment, even with the 11 percent head start in connection with the exchange.
Note also that most analysts believe this would be a positive move for Bristol as it reduces Bristol's share count by 14 percent and therefore reduces the amount it pays to its shareholders as a dividend.
Note that you don't have to swap all or none, so you could reflect uncertainty by just swapping some of your shares. If you had various tax lots you could also be selective in order to obtain the best tax outcome.
Note, too, that if you hold Bristol in a tax-sheltered account, all the tax concerns go away.
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