Can You Do This?

Source: Capital Pixel

What if I said to you, "You need to increase your large cap equity position by 2%."  Could you do it?

First, you would need a good handle on the market value of your assets.  Let's assume you have that at your fingertips - for example, you may be doing your annual rebalancing - and let's assume the total market value of your accounts is $800,000.  Then, by advanced calculus, you figure that 2% of $800,000 is $16,000.

Secondly, you would need to understand that it is coming from somewhere--some other asset class is over-weighted and will have to be reduced.  Or, maybe there are a couple of asset classes that have to be reduced.  To keep our problem simple, we'll assume that cash is over-weighted and that's, therefore, where the $16,000 will come from.

Step 3 is to figure out what to invest in to bolster the large cap position.  Depending on your investment approach, this could be stocks (for example, IBM and/or other large caps), it could be a mutual fund like the TIAA-CREF large cap index fund, or it could be an exchange traded fund that tracks the S&P 500 like SPY.  What it is depends on your overall investment philosophy and what's available to you.

Next, and finally, you need to get the price of what you need to buy and do some simple arithmetic.  For example, if you are buying a mutual fund and the price is $26.17, you divide $16,000 by $26.17 and find that you need to buy approximately 600 shares.  If, instead, you are making the adjustment in your 401(k), all you need do typically is go online and change your allocation - there is no need to do the actual trade.

If you're doing the trade, then you need to go to the broker site and enter the trade.

If you're sitting back and thinking that this is pretty easy, or even if you are thinking that you sort of get it, then I believe you can manage your own investments.  In the second case, it is usually a matter of sitting at the terminal and seeing a couple of trades done.  When all is said and done, this takes longer to explain and appears more complicated than it is.  And it is a big deal because over the years, if you can manage your own investments, it can make a meaningful contribution to your nest egg - to the tune of being able to retire a few years earlier!

Makes Sense to Sit Down With An Advisor

Having said all of this, I highly recommend that most people sit down with an advisor and go over the whole process.  There are some nuances.  You want to make sure the location of investments is appropriate.  For example, you pay taxes on interest and dividends in your taxable account.  Thus, holding bond funds in your 401(k) and IRAs makes more sense than in the taxable accounts.  You want to make sure you understand the expense ratios on any funds you own and ensure you are minimizing costs for what you are trying to do.  At the trading level, you want to observe the difference between the bid and ask spread and know how to see if a fund is trading at a premium or a discount.

In a major repositioning or rollover of an account, you want to understand if your funds have loads and whether gains are long term or not before you sell and reposition.

Depending on your familiarity with all of this, it pays, I have found, for most people to sit down with an advisor (on an hourly fee basis) and go over the investment philosophy and its execution.  More times than not, this process points out something that may have been overlooked.  Just make sure the advisor is just giving advice and is not selling products.

DIY Investment Management Sites

Here is a recent article, with the engaging title "You're Investing Like an Idiot," that looks at online investment management sites that enable individuals to manage their own money.  The article is a good place to start to see some different approaches that are out there.  Each site is different and will fit different investors.  MarketRiders, for example, enables you to select a broker (preferably a discount broker) and tells you what low cost funds to buy.

Betterment actually invests for you.  One difficulty I have is that, according to the article, Betterment invests the bond portion solely in U.S. Treasuries.  At least for me, this is a non-starter because Treasuries are so low-yielding.  Over time, this sacrifices considerable return.

The final site, Personal Capital, sounds intriguing.  According to the article, it has a free service that brings together all of your accounts - something that many investors ask about.  Managing assets holistically is important.