Publication: Investor's Notebook
WHERE TO PUT 401(K) MONEY? A LOW-COST IRA ROLLOVER | |
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Investor's Insight - November 10, 2006
"A Digest of Investment Opinion From the
World's Leading Financial Advisers"
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WHERE TO PUT 401(K) MONEY? A LOW-COST IRA ROLLOVER
by Scott Burns
Q: About your recent column about the Northrop Grumman
401(k) lawsuit, I was laid off from Northrop Grumman back
in May. I wasn't thinking about moving my 401(k), but I
think differently now.
I am very green in the subject of money and have not
found a local financial adviser I trust. I have visited
several Web sites that offer 401(k) rollovers, but do
you have any suggestions on what to look for? I have
nearly $70,000 in the 401(k) account.
My husband is a great saver of money but would rather
clean the toilet than think about investments. I just
opened a Vanguard Roth IRA account for him. We, like
you, believe in being debt-free and currently have no
mortgage or car payments. I am 32 and my husband is 44.
We have almost $100,000 in our savings account earning
about 4 percent. We are conservative, and my husband's
risk tolerance is very low. Do you think it is best for
us to leave the money there or invest it? If invest,
where? -- M.R., by e-mail
A: In your shoes, I'd do a rollover to one of the major
low-cost providers such as Fidelity or Vanguard. My
personal preference is for Fidelity because it has branch
offices in many locations where you can get help doing a
rollover if you are nervous about doing it online. Many
people are.
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If you visit the Fidelity Web site, you will find a page
that will tell you the office nearest to your ZIP code.
Then you need to have a long talk with your husband. There
is nothing wrong with being risk-averse. Had more people
taken risk seriously, the 2000-2002 bear market would not
have done the damage to retirement portfolios that it did.
Unfortunately, avoiding all risk is a virtual guarantee
of retirement failure because money market returns are
only slightly higher than the rate of inflation. To acc-
umulate a meaningful nest egg, you need two ingredients:
(1) regular savings and (2) a return substantially higher
than the rate of inflation.
So ask your husband how much risk-free money he needs to
have. With $100,000 in a savings account and $70,000 in
your 401(k), you could invest 100 percent of the 401(k)
account in equities, and it would still take a fairly
bad year to cause you to lose money.
As a practical matter, you should invest much of your
$100,000 savings in equities to reduce your current tax
bill while concentrating your IRA rollover investments
in a mix that is dominated by fixed income and REITs
that are taxed at ordinary income tax rates.
A very simple portfolio would be the following:
(1) Keep $30,000 of your savings account in a money market
fund.
(2) Put $70,000 of your savings account into Fidelity Four
in One index fund (ticker: FFNOX).
(3) Divide your 401(k) rollover into a $35,000 investment
in a REIT exchange-traded fund and an additional $35,000
investment in Fidelity Four in One index fund. This would
give you a diversified portfolio holding U.S. large and
small equities and International equities, bonds, cash and
real estate. You could make your overall portfolio more
conservative by using Fidelity Balanced fund (ticker:
FBALX) instead of Four in One Index fund.
Q: I have a question about some information I've been
reading at different Web sites regarding foreign stocks
and small-cap value indexes. Basically, I've read that
small-cap value indexes and foreign stock indexes per-
form better historically than the S&P 500. Is this
true? I understand that there is a greater degree of
volatility, but most professionals use domestic large-
cap funds as the "core" of their portfolios.
Will an equity portfolio based on small-cap value in-
dexes and foreign stock indexes outperform the S&P 500?
Is it worth setting up a portfolio based on these asset
classes? -- C.G., Dallas
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A: Yes, it is likely to be quite worthwhile. The Ibbotson
Associates data shows that U.S. large-cap stocks have
returned 11.2 percent annually (compounded) since 1972
with a standard deviation of 17.5 percent. Small-cap U.S.
stocks have returned 14.9 percent compounded annually over
the same period with a 22.8 percent standard deviation.
If you mix cash, small-cap stocks and large-cap stocks,
you will have a portfolio that will provide a higher re-
turn, with slightly less risk, than a portfolio that is
100 percent large-cap stocks.
Ibbotson Associates data also shows that adding inter-
national stocks or equity REITs will provide a further
benefit in diversification and risk reduction. According
to its 2006 yearbook, for instance, equity REITs provided
a return of 13.4 percent compounded annually over the
1972-2005 period, with a standard deviation of 16.7 per-
cent.
Building portfolios with different asset classes is the
main task of modern portfolio theory. Add some geopoliti-
cal reality and the danger of a declining dollar, and you
can understand why the portfolio that economist Larry
Kotlikoff and I recommended in "The Coming Genera-
tional Storm" (MIT Press, $18) included international
stocks, equity REITs, international bonds and energy
stocks.
You can discuss this issue or any other topic in the new
Investor's Insight forum. Check it out here...
Investor's Insight Forum
(Investor's Insight reflects the opinions of experts. It does
not recommend any specific investments, and no endorsement is
implied or should be inferred. For more information, contact
the individual firms cited).
COPYRIGHT 2006 UNIVERSAL PRESS SYNDICATE
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