Christine Benz of Morningstar for Associated Press
If you’re a do-it-yourself investor aiming to build a “babysitterless” portfolio, here’s the key steps.
Step 1: Find the true north of your portfolio
Take good care of asset allocation. That decision will have the biggest impact on future portfolio behavior.
The tricky part of asset allocation, and even the handoff approach, is that “correct” asset allocation is often a mobility target as a retirement approach.
Target-Date Funds addresses this issue elegantly by moving towards a more conservative attitude as the years pass. With asset allocations not necessarily tailored to a particular situation, the exploration of a no-maintenance portfolio could begin and end with a quality targeted dating fund.
If you want more control over asset allocation, consider the risk capacity and risk tolerance.
Asset allocations in target dating funds can be a decent starting point in deciding how to allocate assets according to their life stage. You can also adjust the combination of offensive and conservative investments. This is especially valuable when you’re resigned and are actively spending from your portfolio.
Also consider how asset allocations change over time. High quality target dating funds can help you visualize your portfolio glide path.
Step 2: Eliminate redundant accounts
If you are aiming to reduce portfolio complexity and monitoring, you can slim your account number. Multiple rollover IRAs from previous employers, as well as Straggler 401(k) assets, can create unnecessary complexity.
Remember that the integration process can only proceed so far, as some accounts need to remain clear for tax purposes.
For example, you can combine multiple IRAs with your name, but you can’t usually combine a 401(k) with those IRAs unless you leave or leave your employer. Taxable non-retirement assets must remain different from IRAs and company retirement plans.
If you and your spouse each have assets in your own name, those accounts should also remain clear.
Step 3: Identify low-cost, well-varied building blocks
Now you can focus your attention on identifying building blocks and entering them into your portfolio.
For long-term investments, a wide range of “market” index funds and exchange trade funds are the lowest maintenance options. The best aspect of these products is that a single fund provides everything (or almost everything) needed for a particular asset class.
One fork on the road is whether to acquire market-wide exposure through traditional index funds or exchange sales funds.
For cash holdings, focus on low-cost, well-varied, and low-maintenance products, such as online savings accounts and money market mutual funds.
Step 4: Document your maintenance regimen
Follow the steps above and a thorough annual review is sufficient.
This is essential if you have already retired, as you will need to know how to extract cash for living from your portfolio and get the minimum distribution you need from your tax deferred account once you reach 73.
I love the idea of using an investment policy statement that documents a basic overview of the portfolio, how often you check your portfolio, and how you do it.
If you retire, maintaining your portfolio is a little more complicated. Not only will you need to decide where to go to cash to meet your living expenses, you should also make sure your portfolio withdrawals are not that abundant and you are at risk for the early depletion of your portfolio. A retirement policy statement will help ensure that all these issues are considered and documented.
This article was provided to the Associated Press by Morningstar. For more personal financial content, visit https://www.morningstar.com/personal-finance
Christine Benz is director of personal finance and retirement planning at Morningstar.
