This article appeared originally in the February 2009 Levitt Letter.
First, should you sell now? I don’t think so.
For one thing, most of the damage has been done. We’ve already experienced one of the worst declines in history. It could get worse, but the odds are against it. [Famous investor] Jeremy Grantham believes we’re near a bottom but not quite there. [Vanguard Founder] John Bogle makes a good case that stocks could return 10 percent a year over the next 10 years.
That doesn’t mean you can’t change investments. If you hold a domestic stock fund, you can exchange one domestic stock fund for another. Ditto international and emerging markets. I suggest that you sell your expensive managed funds and move to an inexpensive index fund in the same category or asset class.
Remember, the money you save will be your own.
For most people, leaving a financial adviser is very difficult. You either find another one (think: frying pan/fire) or you become your own adviser (worry: more frying pan/fire).
This is why I believe that absolutely every investor should start with an “escape road” account. This is an account with a firm that provides low-cost index funds or a low-commission brokerage account, possibly both, that will give you access to an entire universe of low-cost exchange-traded index funds. The account can be very small—as little as $3,000. Or it can be a percentage of your financial assets, say, 10 percent.
Once the account is created, you will always have the security of knowing where you can move your money. Better still, the firm that has the account will help you with the moving process. Even better, your new account will have a return that you can compare with the return of your more expensive managed account.
What do you put in your escape road account?
For the smallest accounts that desire extreme simplicity, I suggest Vanguard Balanced Index fund. It’s one-stop shopping and has done better than 86 percent, 81 percent, 76 percent, and 71 percent of its managed competition over the last 12 months, three years, five years, and 10 years. Those are pretty good numbers. According to Morningstar [investment research firm], the fund has a current yield of 3.82 percent—enough to meet the income needs of some seniors.
Remember, this is just money. It is nothing compared to the gift of life.