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Hitting the Personal Financial Reset Button

Hitting the Personal Financial Reset Button

"With an extended family of more than 20, I figure I spend $75 a year on cards. They are now getting photo cards I print off my computer and pictures that my son draws."

David Kiley | Business Week

A BW senior correspondent details his quest to repair his retirement portfolio and get his family’s finances in order

It could have been worse. At the end of February—a year and change since my wife and I had shifted our money to professional wealth management advisers—our equity holdings were down 48% for the 16 months they had managed it. But our overall portfolio took a hit of just 26% during that period because early last year we pulled the “professionals” back from their plan to pile 70% of our money into equities. Instead we decided to invest just 30% in stocks and keep the rest in fixed income and cash.

But looking at the February statement, it was clear what we had to do: Fire da bums.

It’s not only that we’re peeved that their best advice was to go so heavily into equities months before the market crashed—and that my own instincts to hang back were correct. It’s also that these guys charge 1.25 points on our portfolio annually to be in their funds. A check with some financially savvy friends revealed that such a fee for a portfolio that’s merely 30% in equities is “confiscatory,” as one put it. We fired the pros, posted big gains

O.K., you may ask, now that you’re going the DIY route, where are you putting your money in this market? Since Mar. 1, we have been dividing it into quarters evenly split among cash and CDs; Vanguard’s stock index fund; Vanguard’s bond index fund; and a Vanguard municipal bond fund. That is as plain and conservative a diversification as we can stand in this climate. The average expense ratio of these funds is just 0.15%. I spent in excess of $7,500 last year in fees to do nothing more but track the market with my stocks. This year, I figure we will make back nearly $7,000 in fees we aren’t spending for what I predict will be a better return. Over the next three years, these differences alone will add up to from $20,000 to $30,000.

We took our money out of the “pros’” hands just as the market began climbing back. My wife, though, had put some of the cash into a few individual stocks before the run-up, which helped boost our short-term returns. She picked Wells Fargo (WFC) because their servicing of our mortgage has been excellent and the bank appeared to have been more conservative than others. She saw a buying opportunity when the company’s stock was hammered along with Citigroup © and Bank of America (BAC). She was correct, bringing us gains in double-digit percentages.

We could still be hit with bailer’s remorse: What if the funds we sold out of at our former adviser outperform my index funds? Will we feel as stupid as we did three months ago? According to Mark Kritzman, president and chief executive of Windham Capital Management in Boston, who recently published a study in the Feb. 1 issue of Economics & Portfolio Strategy, that is very unlikely.