I guess you can blame it all on his roots, but my dad never had much financial education growing up. He knew how to put money into a savings account. He knew to not pile up debt on credit cards. He also knew that income needed to be greater than expenses.
But he did not know how to invest. And because of this, he wasn’t quite sure what to do with a lump-sum he received when he finally retired from his union. Not wanting to bother me, he sought the expertise of a financial advisor with his current bank. This is what happened…
Again, the idea of investing into the market didn’t come naturally to my dad (or my mom who wanted to store the entire payout under the bed!). With the horror stories of 2008 still fresh in his head, he told the advisor he met with that he wanted, “everything invested in bonds.” Now, I wasn’t there so I don’t know how the entire conversation went, but my dad walked out of the bank with a new portfolio of 100% bonds in January of 2016.
Proud of his new “safe” investment, the largest investment he ever made, he called me to let me know the “good news.” Honestly, my initial thought was, “well, maybe he’ll make 1-2% each year with dividends and growth, not great, but still better than a savings account and surely better than in a tupperware container under their bed.” I asked him to forward me the details, this is what I saw…
15 Mutual Funds, 0 ETFs
Average expense ratio: 0.558%
Average dividend yield: 2.27%
Account Maintenance Fee: 0.5% per year.
We had a little conversation once I did my calculations. I explained that the account maintenance fee was eating into any money he was due to get back through his dividends. Likewise, I informed him that the expense ratios of the mutual funds were also preventing him from gaining ground when it came to returns. He told me his primary goal was to not lose any money and was comfortable with this “safe investment.” Moreover, he pointed out that the dividend yield(2.27%) was still greater than the expense ratio and annual maintenance fee combined(0.558% + 0.5% = 1.058%), so he’d be able to come out slightly ahead(2.27%-1.058%=1.212% expected gains). Right?
Okay, let’s give it a try
Last thing I wanted to do was to give someone financial advice (especially close friends/family) and have it not work out. So we decided to give this investment portfolio one year and then reassess. I didn’t pay too close attention to his portfolio over the year, but come year’s end, we took a closer look. All my dad wanted to see was more money now than what he started with.
And then I saw the surprise, and the fear in his eyes…
Down 1.4% after one year!
And beer can’t chase those blues away…
Now, let’s give this a try
Not only was his portfolio losing money, but he was also missing out on the gains the stock market was experiencing. In other words, there was a significant opportunity cost to maintaining the course. So I offered my plan: transfer the entire account over to Vanguard, exchange these high priced mutual funds for a target retirement fund (E/R 0.14%) and two ETFs- Total Stock Market (E/R 0.04%) & Total Bond Market (E/R 0.05%) which would allow us to tilt the stocks/bond ratio as needed. No account maintenance fee. But account maintenance babysitting was gladly accepted.
My thought process was by making this transition I would save him roughly 1% each year in fees, so that gave me some wiggle room in case some of the areas underperformed. We transitioned his account at the beginning of 2017, put 70% of his account into a very conservative target retirement fund (VTXVX) which would get even more conservative over time. The other 30% was split amongst stocks/bonds to give the final ratio of 35/65, stocks/bonds.
Now I didn’t mean, to cause a big scene…
But his account is now up 5.8% after almost a year! Sure, it could have done better than that, but again, my dad’s standard for “doing well” is that the value simply goes up. His portfolio is conservative enough to help him sleep at night, but aggressive enough to be able to take advantage of these nice gains from the stock market.
And now that everything’s all right, I’ll just say goodnight and show myself to the do’or.