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Where they are now: Yoshi and Keiko are in their early 50s. Yoshi is an IT manager
at a large manufacturing plant, and Keiko is a teacher. Currently, their
investments include $60,000 in Keiko's 403(b) plan and $18,000 in Yoshi's
401(k) plan, plus a Rollover IRA with $120,000 that Yoshi rolled over
from a previous job. Yoshi's Rollover IRA is invested in a large cap
fund he chose based on its low expense ratio. The couple also owns a
few stocks, and they consider buying and selling stocks to be an enjoyable
hobby. However, they do not track these stocks regularly, other than
to view the performance on their quarterly brokerage statement.
Both Yoshi and Keiko plan to retire in 15 years and know they need to focus on getting there. They recently inherited $300,000 and are hopeful that this money will help them achieve their retirement goal. However, they are uncertain how best to choose an investment for this windfall. Should they add the amount to their current stock holdings, choose another low-cost mutual fund, or even seek the help of a financial advisor? What they might do differently:Yoshi and Keiko have a good start toward achieving their retirement goals but will need to remain disciplined with their investments to stay on track. The recent inheritance provides a great opportunity, but they may want to think twice before investing the money in individual securities. Because they're already in their 50s, devoting the full amount to stocks involves a level of risk they cannot afford. Also, while it is fine to own a few stocks as a hobby, increasing their holdings means they must be prepared to devote substantially more time to tracking their investments on a consistent basis.If they decide they don't have adequate time or expertise to choose individual securities, mutual funds may be a solution. However, they'll need to be careful about choosing funds based solely on low expense ratios. Average annual total returns of a mutual fund factor in a fund's expense ratio, and therefore provide a more complete picture of the fund's historical performance. Given that past performance is not a predictor of future returns, Yoshi and Keiko must consider how well the fund fits into their portfolio overall. Finally, if they choose mutual funds, Yoshi and Keiko will want to stick with a company they trust and one that can provide them with the service they expect. And for easier management, they may want to keep their investments with one company, so they can more efficiently stay on top of their portfolio. If they are comfortable choosing mutual funds on their own, they may be able to reduce what they pay in sales charges by buying noload funds directly from the mutual fund company. For example, on their $300,000 investment, they would end up paying $17,250 less in sales charges* if they opted to purchase no-load funds versus load funds. |
