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Over the last few weeks, I’ve had a chance to interact with many of you — both in person at the Orlando MoneyShow and also through some lively discussions on my personal blog.
Today I’d like to answer three very important retirement questions that came out of our conversations.
Let’s start with this one …
“I hold IRA accounts in several institutions. Is that a wise thing to do or should I unify them to one place and, if so, which one would you recommend?”
A: Generally speaking, I see no reason to hold IRAs with multiple institutions. Unlike FDIC-protected accounts, where certain limits might necessitate accounts at different institutions, multiple IRAs typically carry no such advantage.
The exception to this rule is if you are only investing in FDIC-insured investments like CDs. In that case, you WILL want to make sure that you’re at an institution with FDIC coverage. And if you have more than $250,000 in assets … then spreading your money to multiple institutions might make sense. Also, one way to further gauge the health of a particular financial institution is to use the Weiss Ratings.
Otherwise, I think there are advantages to consolidating retirement accounts as much as possible …
For starters, it will be far easier to keep track of your holdings. You will get fewer statements and you’ll ensure there’s no unintended overlap in your positions or target asset allocations.
Plus, many brokerages also offer varying incentives — such as lower commissions or proprietary research products — as your overall account size grows. By keeping everything at one institution, you may qualify for some of these!
Bottom line: I suggest you find one low-cost institution that you like and trust, and combine everything there. My own family currently uses Vanguard but I like other discount brokerage houses such as Fidelity, too.
The best choice for you may differ depending on how frequently you trade and what specific investment vehicles you use most often.
As long as the brokerage is a member of SIPC — the Securities Investor Protection Corporation — you are protected against loss, theft or failure for at least $500,000 (with an individual $250,000 limit on cash). Just note that this is not insurance against market losses, only events such as institutional failure.
“I’m sitting on just two stocks — AT&T and CME. What do you think?”
A: I think you’re asking for major trouble!
Don’t get me wrong — I like AT&T as an income stock. And while I don’t follow CME closely, it may be a very fine holding for you.
However, no two stocks make up a safe portfolio. I don’t care how good they are!
Reason: Just one bad piece of news could send half of your nest egg to the gutter.
Therefore, I recommend holding at least 10 or 20 solid stocks in the equity portion of your portfolio. This range gives you reasonable diversification without spreading you too thin.
“I am 64 years old. One of my 401(k) investment choices is PIMCO TOTAL Return Fund (PTRAX). Do you think this fund is a good choice in light of what the Federal Reserve is doing and the pressure on long-term bond prices?”
A: PIMCO is a venerable management firm, and Bill Gross — the lead manager of PTRAX — is arguably the most influential bond trader in the world. The fund also has a very reasonable expense ratio and is smack dab in the middle of the bond market, both in terms of its average maturity and its credit quality. In other words, it’s a good solid holding — with a mix of high-grade bonds and some riskier high-yield positions.
While it isn’t likely to get hit quite as hard as funds focused on even longer-dated bonds when interest rates rise, it would almost certainly lose some value at least temporarily. And an even shorter-term bond fund would obviously be less risky. The tradeoff is current yield.
Without knowing what else you’d be holding with it, I can’t say whether it makes sense in your portfolio. But I can say it is a fine choice within its category.
Best wishes,
Nilus
