This week's panel:

What is a reasonable fund expense ratio?

Should I consider defined benefits as part of my asset allocation?

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What is a reasonable fund expense ratio?

from David

A: (Lou) The answer is ... it depends. Different funds have different levels of expense ratios because of what they do. Listed below is a table that can be used for guidelines. Superior long-term performance by the portfolio manager may warrant a higher expense ratio, however.

Type of Fund                                             Reasonable Expense Ratio

Domestic Large Cap Managed Funds                 < .75%
Domestic Large Cap Index Funds                         < .35%
International Large Cap Managed Funds             < 1.00%
Domestic Small Cap Managed Funds                  < 1.50%
Domestic Small Cap Index Funds                         < .75%
International Small Cap Managed Funds              < 1.25%
Real Estate Mutual Funds                                       < 1.25%
High Yield Bond Funds                                            < .90%
High Grade Taxable Bond Funds                           < .50%
High Grade Municipal Bond Funds                        < .70%
Hedge-like Mutual Funds (Long-Short, Mergers and Acquisitions, Market Neutral, Convertible Arbitrage, etc.)          < 1.50% to 2.25%

Remember expenses are but one issue in choosing mutual funds. Asset size, consistency of the management team, taxation issues, etc. are usually more important than taxation issues. Well-marketed funds (meaning names you have heard of) does not mean well managed. In fact, frequently the best managed funds usually are the ones most have never heard of, have a small asset base, will close to new investors early and are run by owner/managers.

Should I consider defined benefits as part of my asset allocation?

from Richard

Q:  Most literature says to diversify between the three categories, cash, stocks and bonds.  However, if you have a defined benefits retirement plan and receive monthly payments, isn't that the equivalent of owning bonds?  Should you then treat that as fixed income and hold mostly stocks?  Is there a way to convert that monthly income to a number so you can then compare that with the balance of your holdings?

A: (Cathy) Assets or income outside of your direct control (defined benefit, social security) and in-use assets that are illiquid (i.e., home, auto, land, etc) should not be considered as part of your asset allocation. Your pension benefit is an income stream that offsets total income required during retirement. The portfolio you control should be independent of that. I don't know enough about your situation to make personal recommendations. However, consider the following:

a.) If the pension income you are receiving covers all of your expenses and you have no need to draw down from your portfolio, you may consider an all equity allocation. This depends greatly on your individual risk tolerance and future liquidity needs.

b) If the pension income does not cover all expenses and supplemental income is needed from your portfolio, a healthy balance of stocks/bonds is needed. The amount of bonds allocated depends of the amount/percentage of assets withdrawn per year.

Hope that helps! Good luck.

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.

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