Help With Roth and Possibly Getting Rid of Financial Advisor

[Tebowed]

Background: I am a 25 year old currently in my last year of graduate school (I worked for 1 year between undergrad and grad school). When I graduate, I am looking to consolidate my finances and re-examine/allocate my current investments now that I will have a stable income. I worked during summers of high school, college, and after college. I also had a small business for about 3 years during college and after. As a result, I have accumulated a decent amount of money to invest--albiet sporadically and without an overall plan (see investments below).

It is also important to note that my family put aside quite a bit of money to help me pay for school. I was lucky enough to get substantial scholarships, so I have not used any of this investment. They recently told me I could just have it since I did not use it. It has grown to approximately 150,000 now. I realize I am blessed because of this, I had no idea that much had been put back for my education. This 150k is through a financial advisor, so I am not positive what it is invested in (although I think it is a 60/40 mixture of equities and bonds). I would like to use this for a home, but for personal reasons (job, plan on moving soon, etc.) do not plan on buying for at least 2 1/2 years.

I also have contributed to a ROTH regularly since I was 18. This was done through a financial advisor. He has put all contributions in MDLOX -- a well regarded mutual fund, but a mutual fund nonetheless. There is a substantial load on this and seems to be a decent expense ratio. The ROTH account value stands at 48,000.

As for my personal investments (not with a financial advisor):
-3,000 in CHL (a holdover from when I was young and liked to buy individual stocks --- I don't invest in stocks much anymore but too much capital gain here to sell)
-8,000 in TRSGX (T Rowe Price Personal Strategy Growth Mutual Fund -- holdover from when I was young. I don't like mutual funds now, as I prefer low cost, but a lot of capital gains here).
-9,800 in ECON (ETF focusing on emerging markets --- specifically consumer products)
-9,900 in SLYV (small cap value ETF)
-16,000 in VTI (Vanguard Total Stock Market ETF)
-2,500 in an Ally CD earning like 1.5% or so
-2,500 Checking
-8,000 Savings


I realize I am young, so I am willing to take a high to extreme degree of risk. Any general advice for me?

Specific Questions
1 - I am really concerned about the ROTH. The MDLOX is a well regarded mutual funds, but I love low cost (like this site advocates) and it definitely is not that. Unfortunately, getting out of it would seem silly given the large load you get on the front end. Furthermore, I believe the load goes down the more you invest (so there is an incentive to keep investing in MDLOX unfortunately).
2 - Should I get rid of the advisor and invest in low cost ETFs/index funds with my future earnings for my ROTH and possibly the 150k?
3 - Any advice for my general allocation, keeping in mind a lot of these investments were made when I was young and I can't really get out of them now due to capital gains? Of course, if you all thought they were much bad investments and it would be worth it to get out of them despite the capital gains, I am willing to listen.


Thank you in advance for your help.

[chaika]

Nobody has responded yet, so I'll just suggest you post your portfolio in the format described here:
viewtopic.php?f=1&t=6212
in order to get your questions answered.

It would be a good idea to include the amount of cap gains in each of those stocks too, as I am sure people will suggest selling at least some of them. Also, spell out funds and stocks as we don't have the symbols all memorized quite yet. =:^)

[nydad]

If you have a low income (eg 10-15% tax bracket), your cap gains aren't taxed - so if you have low income this year it's a great time to sell and consolidate your investments.

Do you know what MDLOX is (I mean, the details of how it works)? It seems like quite a mish-mash - foreign bonds, gold, junk bonds, equities, etc. It does seem to have performed well through the financial crisis, so chalk one up for active management, but if you want to hold for another 40 years in your IRA, do you really think they can continue to outperform, especially with the 1.16% expense ratio and >5% load? The load is brutal, as is the expense ratio. It's not very boglehead-ish as you know.

You might be better off just buying a target retirement fund in the Roth, which will give you a broad spread of US and foreign equities, as well as bonds (and soon, foreign bonds) - all at a very low cost. Or - since you now have an additional $150k to invest, most of that will be in taxable, so you'll likely want to fill up your tax sheltered space with bonds.

I note that several times you say things like "I don't like mutual funds now, as I prefer low cost, but a lot of capital gains here" - being a mutual fund has nothing to do with cost - vanguard's mutual funds are among the cheapest investment vehicles in the world (besides holding individual stocks, but that as you know exposes you to risk b/c undiversified). Mutual funds have certain advantages over ETFs - many threads and articles in the wiki detail this. There's no right answer, and many people end up with a mix of mutual funds and ETFs.

I'd suggest reading the bogleheads guide to investing and the book 'all about asset allocation', then come up with an overall asset allocation that fits your needs. You could stay simple with 3 funds - total US, total world, and total bond (or intermed treasury index which I prefer). Or read about various lazy-portfolios on the wiki if you want to slice/dice further (eg adding more small cap value, small cap international, REIT, etc)

Given that you've found this site, you may not need a financial advisor: consider rolling over all of that $150k in-kind to Vanguard (to limit fees/commissions if you sell), and then map out all of what you have on a spreadsheet, and compare it to your desired asset allocation -
that will give you an idea of what to sell and what to keep. If you want to keep some of your speculative stock investments, they are pretty small so just keep them - compared to the $150k it's not much. I like the idea of CHL - just hold that for a while, it will help you understand behavior of stocks vs index funds. Once you consolidate all of your accounts at Vanguard, you can then start to make changes. Don't rush it!

Consider setting aside money for your home in something very safe - like CDs or very short term high quality bonds or bond funds - keep it separate from the rest of your AA if you really do want to buy in 2.5 years, as the stock market could go down.

Try to put the maximum in your Roth every year - even selling taxable assets if you must - the advantages of tax-free compounding are huge.

[NYBoglehead]

I recommend dropping the financial advisor. Whatever you pay him is a drag on your portfolio return. You are incredibly fortunate to be in the position you are in. A few suggestions...

-Sell your individual stocks now. As another poster already noted, you won't have to pay capital gains taxes if you are in the lowest 2 tax brackets. If you won't start working full-time until June, chances are decent that with 401k contributions you'll be able to keep your taxable income low enough to not have to pay on the gains. Even if you do have to pay cap gains taxes, you should still sell. If the stocks appreciate more over time you will always have the aversion to paying taxes on the gains to deal with.

-$48k Roth balance at 25 is awesome, you are going to enjoy retirement immensely. Keep maxing this out every year. I recommend you go with the 3-fund portfolio of TBM, TISM, and TSM. You said you are aggressive when it comes to investing. My advice to you would be there is not as great a need to be aggressive, you have quite a hefty portfolio for someone your age once the $150k gets factored in.

-When you do get a job there is no reason why you can't max out your 401k.

-For the house purchase, estimate what you are going to spend on the house and put a 20% down payment into a savings account. Whatever is left after doing this should be used to keep a 6 month emergency fund and after that I recommend opening a taxable account.

[nydad]

agree with NYBoglehead, except keep China Mobile. Why not? It's only $3k, and who knows, if it shoots through the roof, you will get to enjoy that special feeling. If it tanks, that's also a good lesson learned!

Also, just to add, congrats on being in this position - I had nowhere near that much money saved at your age - if your business acumen remains strong, keep doing that - at this age, your income is a much bigger determinant than your investment on long term returns. So stay conservative/boring in your investments (eg index funds) and take risks in your business, seems you already know how to make $$...

[Tebowed]

Thank you all for the replies. I will get back to you all on the 150k, I think rolling it all over to Vanguard will be the plan. I probably won't get around to it until May when I can really sit down and figure out a comprehensive plan. I definitely will come here with the plan when I come up with it.

The capital gains point is a good one, I will slowly start consolidating in Vanguard (currently I am at Scottrade). I may leave open my Scottrade Account (or potentially another one with lower trade costs) for my more speculative investments to cut down on trade costs. I actually sold TRSGX today, and will use that money to open up an account at Vanguard down the line. I will start off with a 3 fund portfolio, and then potentially build from there. I also considered just doing a Target Retirement fund as a base, and then build from there. Anyone feel strongly about either strategy as a starting base (3 fund portfolio vs. Target Retirement)?

As for my ROTH, going forward obviously I will putting contributions into low cost index funds/ETFS. However, I am tempted to leave the amount I have in MDLOX there, since it has suprisingly outperformed the market for the most part over the past 10 years and I feel any gains from investing in index funds may be very small. Also, I've already paid the loads on the contributions (a sunk cost I know, but mentally it bothers me to get out after paying that). If anyone feels I should take it out of MDLOX and put it in index funds, I am open to that argument--I'd love to hear your arguments. Will there be any complications for getting rid of the financial advisor here? Or do I essentially take over managing the Roth, with it starting off in MDLOX?

[BolderBoy]

I realize I am young, so I am willing to take a high to extreme degree of risk. Any general advice for me?

Yes, realize that extreme degrees of risk are RARELY accompanied by extreme degrees of reward.

[JW Nearly Retired]

I also have contributed to a ROTH regularly since I was 18. This was done through a financial advisor. He has put all contributions in MDLOX -- a well regarded mutual fund, but a mutual fund nonetheless. There is a substantial load on this and seems to be a decent expense ratio. The ROTH account value stands at 48,000.

Sorry, 1.07% is not a decent expense ratio, one tenth of that amount is a decent expense ratio. This MDLOX is a typical high cost/high load mutual fund....... 1.07% ER, 0.25% 12b-1 fee, 5.75% load.

Dump it. Transfer your Roth to Vanguard or some other low cost no-load mutual fund company.
JW

[Tebowed]

The extreme degree of risk comment was probably stated wrong, I merely meant I would be willing to do a 90/10 or 80/20 split (or even 100% in equities). It wasn't a reference to some crazy idea about investing in weird metals, investing in Russia, going heavy on emerging markets, etc. Sorry about that.

[texasdiver]

Thank you all for the replies. I will get back to you all on the 150k, I think rolling it all over to Vanguard will be the plan. I probably won't get around to it until May when I can really sit down and figure out a comprehensive plan. I definitely will come here with the plan when I come up with it.

The capital gains point is a good one, I will slowly start consolidating in Vanguard (currently I am at Scottrade). I may leave open my Scottrade Account (or potentially another one with lower trade costs) for my more speculative investments to cut down on trade costs. I actually sold TRSGX today, and will use that money to open up an account at Vanguard down the line. I will start off with a 3 fund portfolio, and then potentially build from there. I also considered just doing a Target Retirement fund as a base, and then build from there. Anyone feel strongly about either strategy as a starting base (3 fund portfolio vs. Target Retirement)?

As for my ROTH, going forward obviously I will putting contributions into low cost index funds/ETFS. However, I am tempted to leave the amount I have in MDLOX there, since it has suprisingly outperformed the market for the most part over the past 10 years and I feel any gains from investing in index funds may be very small. Also, I've already paid the loads on the contributions (a sunk cost I know, but mentally it bothers me to get out after paying that). If anyone feels I should take it out of MDLOX and put it in index funds, I am open to that argument--I'd love to hear your arguments. Will there be any complications for getting rid of the financial advisor here? Or do I essentially take over managing the Roth, with it starting off in MDLOX?

Here's how to look at it. With the 3 fund portfolio you are diversified across the entire US and foreign stock market in proportions roughly equal to the size of the companies. Anything else you add from there (such as MDLOX) mostly just duplicates your existing holdings but in different proportions. So you aren't actually adding any diversification by supplementing the 3-fund portfolio, you are reducing it by over-weighting specific companies or sectors. There are many people here with portfolios 10-20 times larger who basically just invest in some version of the 3-fund portfolio and who have done very nicely.

As for your advisor. It is your money not his. He may try to add complications to scare you into staying put but you sound far too intelligent to need one. Do not be deceived by the seemingly small fees. They will add up to hundreds of thousands if not millions of dollars over your lifetime if you stay on that path. You are hiring an advisor to achieve EARNINGS not store your money. So you should really think about the fees as a percentage of your earnings not a percentage of your portfolio. You can store your money for free at your local bank or buried in your backyard. You are paying for earnings. If your advisor is charging 1% and your portfolio returns an average of 10% a year (which would be a fabulous long-term average) you are really paying him a whopping 10% of your earnings each year. If your portfolio returns 5% a year then your advisor's cut is a whopping 20% of your earnings. That's why most people on this board cringe when they read about 5.25% loads and 1.07% expense ratios. Over a 40 year career the fees and expenses will compound to astounding sums. If the average advisor told people, give me your money to invest and I'll take a 20% cut off the top of everything you earn most people would be shocked and show him the door. But that's exactly what they do and worse still, they still earn their cut when they lose you money.

Finally regarding your question about using 3 separate funds vs one all-in-one fund such as one of the target retirement funds. If you buy individual funds you have large enough balances to qualify for Vanguard's Admiral shares which have slightly lower fees than the investor shares that compose the target retirement funds. So you will save a small amount of money in fees by going with the individual funds. Many people who invest in Vanguard through 401(k) plans don't have the admiral shares available anyway so they don't really gain anything by going with individual funds. But you do.

You also have some studying to do. Two topics you need to study are asset allocation and tax-efficient investing as you have both taxable and tax-exempt fund to invest and you'll soon be earning income and worrying about taxes. Here is a place to start

http://www.bogleheads.org/wiki/Asset_Allocation
http://www.bogleheads.org/wiki/Principl ... _Placement

For someone your age I don't have any real arguments against a portfolio that is mostly equity funds. I was 100% in equities with my small portfolio from age 25 to about 35 and rode it up and down with various exotic mutual funds. But I think it is good even at age 25 to start investing using sound asset allocation principles and educate yourself about boring things like bonds as well as stocks. Educate yourself about all the major asset categories by putting some money in them even if you still have 90% or so in equities.

[nydad]

In this case since you have a large Roth it may be
Worth doing 3 fund - that way you can get exactly
Your desired allocation in bonds (in the roth) without having
To hold any in taxable.

As for the mdlox, remember that economists
Tell you to ignore sunk costs - they are lost,
So you have to make the best decision
Going forward.

That said, you want to keep track of it perhaps,
So why not keep $5k or 10k of it and then
You can compare its performance over
The next 40 years. You should consider at
The very least not re-investing dividends,
As they will give you a 5% haircut each time (or
Maybe they don't charge load on div reinvestment?)

You def don't need an advisor to manage a portfolio of this size and complexity.
I think the best role for an advisor is if you feel you won't be able to stay the course,
So having someone to hold your hand and keep you steady could be worth it but you
Sound pretty self-driven.