Questions and Responses

What can I do to salvage my 457 plan investments

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What can I do to salvage my 457 plan investments?

from Carol

Q: I own almost 2000 shares of American Century International Growth. It had almost doubled a year ago, but  I quit buying it on a dollar cost basis because I felt I had enough of it. I never sold any and now it has lost about 40 percent of its value. 

We are limited by the 457 plan as to what we can invest in, so I started purchasing Vanguard Growth Index Fund, and while it isn't doing so hot, but I'm still buying. I now have 700 share of this fund. Should I continue purchasing shares?  

I am also investing In MASmidCap Growth Inst.  I have researched and researched, but it is very hard deciding when to stop buying and when to get out. Can you help

A: (Lou) Unfortunately, many retirement plans that sponsor 401(k)'s, 403(b)'s and 457 plans offer too few investment options and the underlying investments usually overlap each other, as in the case of American Century Growth and the Vanguard Growth Index Fund.

However, I would still strongly recommend that you continue dollar-cost averaging but invest into multiple funds at the same time.  I would also seek to invest into a small cap fund, a large value fund, an intermediate domestic bond fund and a real estate fund, if any of these are available as investment options.

Should I hire an advisor who says he gets paid only by the funds I invest in?

from R

Q: I have been thinking of hiring a financial advisor who told me I don’t have to pay him anything. He says he will get paid by the mutual funds that I invest in. Is this normal for the industry? I would wonder whether or not he was giving me proper advice or just telling me to invest in the funds that give him the most money. What is your advice?

A: (Paul) My advice is not to hire this advisor. Yes, the arrangement that he described is common in the industry, but it is not in your best interest.

To make a living, such advisors must steer you toward financial products that pay commissions to advisors, whether or not those products are the best ones for your needs. For example, it would be financial suicide for such an advisor to conclude that the best thing for you was a money-market fund or an index fund that tracks the Standard & Poor's 500 Index. Therefore, your interests will never come totally first with such an advisor; the system is set up so that cannot happen except in the rarest of cases.

If such an advisor suggests you invest in mutual funds, you will be directed to load funds. Typically somewhere between 3 percent and 6 percent of the money you think you are investing will be used to pay a commission. That money will never be invested for you, and you will be accepting the equivalent of a guaranteed 400-point decline in the Dow Jones Industrial Average on the first day you own the investment. What’s worse, it’s the equivalent of a decline that happens only to you, not to all investors.

If you could count on getting really good investment advice in return for such a sales commission, I would not be so adamantly opposed to it. Excellent professional advice is certainly valuable and it’s worth paying for.

But unfortunately, the “norm” in the industry is that fee-based financial advisors are essentially salespeople. Salespeople, naturally enough, like to sell to the path of least resistance. Therefore, they typically will steer you to a mutual fund that has been performing well recently, because it has a good “story” attached to it, instead of advising you to invest in a properly diversified portfolio.

This is really the equivalent of selling food to a child. It’s obvious to most adults that vegetables are better for the child than candy. But if you get paid only if children eat what you offer, and if you have competition, which are you going to pitch, the vegetables or the chocolate? 

For further reading, I’m going to recommend two articles you can find on our Web site. The first is called “Ten Reasons why You Should Never Buy a Load Fund.” 

The second is called “Why You Should Care how Your Financial Advisor Makes Money.”

Here are two direct links to the articles:

http://www.fundadvice.com/FEhtml/InvestingBasics/9504(b).htm
http://www.fundadvice.com/FEhtml/PsychHurdles/0003.html

Important Disclaimer

Investing in equities involves a serious principal risk, and no assurance can be given that the techniques described here will be successful. Returns vary and you may have a gain or loss when you sell your shares. Past performance is no guarantee of future results. Index returns shown are historical and include the change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged and do not reflect the impact of transaction costs. Transaction costs would have reduced the total returns.

International investments, especially those in emerging markets, entail greater risks (as well as greater potential rewards) than U.S. investing. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less-established markets and economies.

Lastly, the questions and responses set forth here are for general informational purposes only and are not intended to substitute for performing your own independent research or contacting your financial or legal professional before making any investment decisions. We make no guarantees as to the performance of any investment strategy you choose and are not responsible for any losses you might incur.