BOROSON ON MONEY
You remember Patricia Q. Brennan. During the 40 or so years she labored on behalf of Rutgers University, she gave some 3,000 talks all over the state, mostly on personal finance.
Her five-part financial programs for women were always jam-packed – and there were 23 of them!
In giving advice, Pat enjoyed two powerful advantages: (1) she had her listeners' best interest at heart - she wasn't selling a thing; and (2) she knew her subject inside out. (She has a ton of certifications, including CFP.)It didn't hurt her ability to hold an audience that she's tall (she played on her college's basketball team - the "Mighty Macs" of Immaculata College), blonde, and good-looking.
Someone once said of her, "When Pat shuffles off the mortal coil, maybe 50 years from now, she will be the first Certified Financial Planner ever to be sanctified by the Roman Catholic Church."
Where is Pat today? In some godforsaken place in Bucks County, Pa. (called Holland), enjoying her retirement. No, she doesn't play tennis all day and hang out at bars all night. (That's what I do.)
She's teaching at Bucks County Community College. And yes, she's willing to drive all the way to New Jersey to give financial talks - provided you cover her transportation expenses and provide a modest honorarium. ("I want to contribute to a Roth IRA this year, and I need earned income," she explains apologetically.) Contact me and I'll relay your message to her.
She left Rutgers, by the way, because of the budget cuts.
OK, time for an interview:
NJNR: I understand that you're a big fan of stock index funds, which just mindlessly buy a sampling of the securities in an investment market – or all of the securities. Like all the stocks in the Standard & Poor's 500 Index. How come?
P.B.: Indexing is a wise way to get exposure to stocks, whether we are in a bull or bear market. You can get broad diversification and – although you aren't shielded from a broad market decline – an index fund softens the impact of a dramatic fall in any one stock or an entire industry sector.
Generally, index funds are also very low cost; some charge a miniscule 0.10% of your investment a year. They're very tax-efficient, too. Reason: Stock index funds typically make only small dividend distributions each year – they don't buy and sell, and incur capital gains. So, shareholders end up with modest tax bills.
Then too, index funds require almost no investor management – they're a no-brainer investment, perfect for someone's buy-and-hold strategy. And they work well for buying bonds as well as for stocks.
The bottom line: Over the years, index funds have done better than 80% to 90% of actively managed funds.
NJNR: What do you think about "target retirement" funds?
P.B.: These funds intend to put retirement savings on autopilot. The idea is to select a fund with a name that contains the year close to when you plan to retire – like 2020. These are well-diversified funds, with stocks, bonds, and cash. They gradually become more conservative as they reach that year 2020, moving regularly away from stocks. They are meant to be a sole retirement investment, although I myself would not recommend that. I would just align my existing portfolio with the stock, bond, and cash percentages of the target-date fund.
Not all target-date funds are created equal. Some are more aggressive than others – holding a high percentage in stocks, even when people are approaching retirement.
The big three are T. Rowe Price, Fidelity, and Vanguard, with T. Rowe Price being the most aggressive and Vanguard the most conservative. These funds require your doing some homework to find the one best for you and your tolerance of risk.
NJNR: I understand that you like the Vanguard Group.
P.B.: I'm a big fan. It has the lowest expenses in the industry and a stable full of terrific funds, both index and actively managed.
For those people in retirement, I recommend going with one large, strong family for convenience and simplicity. This way, you can more easily set up your own "retirement paycheck" from your portfolio, as well as have all your tax-deferred plans from which you must take your required minimum distributions in one place. This fund family is also has a different ownership model: It's owned by its shareholders.
NJNR: What advice do you have about asset allocation – your portfolio's exposure to stocks, bonds, and cash?
P.B.: The easiest way is to take your age and subtract it from 100 (if you consider yourself a conservative investor). The balance will be the percentage allocated to stocks. So, if you're 40, you would be 60 percent in stocks.
If you have a moderate risk tolerance, you subtract your age from 110 – so a 40-year-old would be 70 percent in stocks. Yes, I know it's simple. But it works.
NJNR: When do you rebalance – bring your asset allocation back to where it was?
P.B.: Generally, I think investors should rebalance their portfolios once a year to bring the asset allocation they set for themselves back to the original proportion, i.e., 60/40, 50/50. This means you will be buying low and selling high. I would rebalance only if the percentages have gotten more that 5% out of whack. Generally, do your rebalancing within your tax-deferred accounts or with new money. This way you don't create any taxable events.
NJNR: Do you prefer mutual funds to individual stocks?
P.B.: My feeling is that, for most investors, mutual funds are the way to go for these reasons:
- You get professional management. Most people don't have the time or skill to pick stocks and bonds and monitor them.
- You get reduced risk through diversification, as mutual funds own many stocks and bonds, and the impact of poor selection is reduced.
- You have ready access to your money. Mutual funds are required to buy back shares – making withdrawals easy.
- Automatic dividend reinvestment is available, making it easy for you to increase your shares.
- Automatic investment plans as well as automatic withdrawal plans are available.
- You can get broad diversification with just one or two funds, and with a low minimum initial investment, perhaps $500 to $3,000, depending on the fund.
NJNR: No loads are preferable to load funds?
P.B.: You don't get better performance by purchasing a fund through a broker for a commission rather than buying it directly from the mutual fund company. So, why do it? The fund fees drag down the performance. If you invest $1,000 in a 5% load fund, only $950 goes to work for you, not $1,000.
NJNR: How can you find a good financial planner?
P.B.: Look for someone who evaluates your entire financial picture rather than just focuses on your investments - which may give him or her commissions. One way to avoid any conflict of interest is to select a fee-only planner. You can get names of fee-only planners in your area by contacting the National Association of Personal Financial Advisors – by checking napfa.org or calling 1-888 FEE ONLY.
Boroson on Money appears Mondays at Newjerseynewsroom.com.