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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Put your plan together first, explore the strategies you wanna implement second, and then put your portfolio together third. Welcome
Mike:the Retire on Time q and a podcast. I'm Michael Decker with David Franson here. This show is all about answering your questions, but not that oversimplified advice you've heard hundreds of times. We wanna dive into the details, but nitty gritty as they say. That said, remember, this is just a show.
Mike:It's not financial advice. Enjoy your research. Alright. Text your question to (913) 363-1234, and we'll feature them on the show. David, what have we got today?
David:Hey, Mike. I have a rollover IRA account that was set up fifteen years ago that has all mutual funds. Is it worth it to switch everything over to ETFs?
Mike:So at risk of giving oversimplified advice Uh-huh. Probably
David:Probably worth it to a twitch.
Mike:And here's the reason why. Mutual funds were a great system that would kind of mark the value of the fund at the end of the day, and they were just built for an older time. Mhmm. Okay? Today, we have ETFs, exchange traded funds.
Mike:Right? So they, you can trade them mid market. They're just they're lighter. They're easier to manage. They're and I'd say easier to manage in a generalization there.
Mike:A fund is still a fund. Yeah. But the fee structure within it may be different. So it's not that mutual funds are bad. There are some situations where you may want to work with a mutual fund.
Mike:You may want to be under that umbrella because the fund manager did it very deliberately in that way. Are you with me so far?
David:Yeah. I think so.
Mike:So it's basically, you don't wanna get rid of mutual funds because they're mutual funds.
David:Oh, just for the sake of that.
Mike:But ask your favorite AI. Say, here is my fund. What are the fees associated with this fund? Mhmm. And is there an ETF equivalent with less fees?
David:Oh, okay.
Mike:So let's break this down. Let's say you have an S and P 500 or whatever index fund.
David:Or like a retire retirement target date 2040 or something like that.
Mike:That was a little different.
David:Oh, okay.
Mike:Yeah. Let well, let's go there next. Okay? That's that's a great point. Let's go there next.
David:Okay?
Mike:But you've got it in some sort of ETF or a mutual fund, S and P 500.
David:Alright.
Mike:Very generic. And this fund in particular has, like, an expense ratio of point five.
David:Okay.
Mike:Or there's a 12 b one fee. Look these up. Expense ratio, 12 b one fee.
David:Okay.
Mike:Those are the two big ones. And it's point 5%. It's seeking to to hit the S and P 500, but the fees might eat into it a little bit. Maybe not. But you could get basically the same thing and just have an ETF with Vanguard or Fidelity or whoever.
Mike:Mhmm. And it's an S and P 500 ETF, but you're getting basically a lot less than that point 5% expense ratio. Like, let's say it's, like, point zero two or seven or, you know so now you're making a slightly better return, and over time, that can compound. So that's the first layer of things. Now before we cast too much judgment on the mutual funds, you need to understand all funds by themselves kind of underperform whatever index they're seeking to do.
Mike:So they will slightly adjust the fund to try to track it net of fees. Okay? Alright. So this is kind of a silly example, but let's have fun with it.
David:Alright.
Mike:Let's say you've got fund one that has a 1% fee, all things included, and another fund that's got point 1%. But the fund with the higher fees is able to tweak it in such a way that they're actually tracking the index the exact same dollar for dollar as the fund with point 1%. In your situation, that's basically the same thing. It's the same net of fee performance. It's just one fund manager happens to do a little slightly better job tracking the index net of fees and making up that 1% difference.
David:Okay. Okay.
Mike:So you don't want to assume just because the expense ratio is necessarily higher, it's which one more closely accomplishes the goal. That makes sense?
David:Yeah. The goal being to to get a good return.
Mike:Right? Whatever well, whatever the index idea is.
David:Okay.
Mike:So the S and P five hundred index funds, whether it's mutual fund or an ETF, is supposed to track the index as closely as you can.
David:So if you had so let's say at the end of the day, closing Bell, the S and P was up 1.6%. This fund is will be maybe have gained 1.3% or
Mike:Well, the 1% is for the year, but, I mean, it's just yeah. Over a year's time, it's is it there? Is it not there? Mhmm. So that you wanna you don't wanna get rid of mutual funds for the sake of just getting rid of mutual funds.
Mike:Mhmm. You wanna compare the fee net of fee performance to something else. Okay. Are they doing a good job? Then maybe you can keep them.
Mike:Are they not doing a good job? Maybe you wanna get rid of them. Generally speaking, that I have observed a major shift of people trying to get rid of mutual funds and going to the ETF for a cost standpoint because that's just what the way people wanna go standpoint. There's a huge shift for that anyway. Mhmm.
Mike:So if they rolled over fifteen years ago, it might be time for a rebalance, an assessment of the portfolio. Do they meet your goals? Do these mutual funds match your current lifestyle and legacy goals?
David:Okay.
Mike:Let me give you an example. Let's say you're 35 years old.
David:K? Alright. Alright.
Mike:You've got plenty of time before you retire. You can take on tons of risk if you so choose. K? 35 years old, now you're 50 years old fifteen years later. Retirement might be five, ten years away.
David:Mhmm.
Mike:You might not wanna take as much risk. You might wanna shore up a little bit. Maybe not put 50% of assets in bond funds, but maybe a little bit less risk. You know, just just just taper it off a little bit. Right?
Mike:So there might be an opportunity to just reassess where the funds are and where they need to go. Again, that might be mutual funds. That might be ETFs. But just make sure the net of fee performance makes sense and the investments are aligned with your plan and what you wanna get your money what what you wanna get out of your money.
David:Okay.
Mike:And this goes back to put your plan together first, explore the strategies you wanna implement second, and then put your portfolio together third.
David:And so fifteen years ago, were ETFs a thing? Were they new then? Because mutual funds have been around since what, like late seventies or or even earlier. Earlier
Mike:than that. Yeah. Sixties? Mutual funds funds been around forever.
David:Okay.
Mike:Let's let's just look this up real quick.
David:And maybe it had if if you have had mutual funds the last fifteen years, they've probably done pretty well. Right? The last fifteen years, the market has has had a been a good pretty good run.
Mike:Last ten to fifteen years, I mean, the market it it's like you could not not make money is what it felt like. Uh-huh. Uh-huh. It's been incredible. Yeah.
Mike:But then the ten years before that, so you go back to 2000 to 2010
David:Yeah.
Mike:It was painful because you didn't make any money. Right. I mean, maybe you made a little bit. Like, you were just barely getting by because you you blame the bond funds. You know, the the boring investment?
Mike:Everyone's like, oh, bond funds. Mhmm. That's kind of what saved you between 2,000 and 2012, that flat market. The bond funds propped you up. They they stabilized the equities or the stock flat market that we experienced.
Mike:So, yeah, ETFs introduced in the early nineties.
David:Oh, okay.
Mike:So, yeah, one of the big first ones was SPYDER or SPY.
David:Oh, okay. Yeah.
Mike:Is that State Street?
David:I think so.
Mike:That was yeah. 1993 State Street. So which is a very popular one. And but I mean, with IVVs, BlackRocks, VOs, Vanguard
David:Yeah.
Mike:They're kind of all very similar.
David:They all track the they all aim to track the S and P 500.
Mike:Yeah. Okay. But mutual funds have been around a lot longer. It's just a mutual funds, they settle when you when you sell it, you're selling it based on the the the price at the end of the day.
David:Right.
Mike:In ETF, you can do it midday. Yeah. So there there's just there's some components to it that are structured differently. And then you've got, I mean, you've got all these other funds. So you've got interval funds, which are gonna be illiquid, but they can do a little bit more within the fund itself.
Mike:You've got buffered ETFs. Those are new as of, like I think 2019 was the passing of the regulations, and then 2020, 2021, they started going to market.
David:Okay.
Mike:And that allows you to put different option contracts within the fund itself just to hedge differently. So, I mean, funds itself are evolving constantly. But yeah. Yeah. I like, around nineteen forties or so, mutual funds became Oh.
Mike:A a big shift. Nineteen seventies was the big shift to index funds. Thanks, John Bogle. Yeah. And but things have evolved.
David:Right.
Mike:The one thing though that I would just bring this all back to is nothing does everything well. There's no such thing as a perfect investment, product, or strategy. Right? So as time goes on, there's gonna be times where growth funds, mutual fund, or ETF are gonna do really, really well. And there's gonna be times where they won't do well, but the dividend paying funds are gonna do really, really well.
Mike:Mhmm. And then you've got other funds today that, like, our covered call income funds. You've got structured notes. You've got real estate funds. The the financial investment options are constantly evolving over time.
Mike:And so you wanna ask yourself, are you in the right thing? Is it the right time for that? And don't get too emotionally attached to it because you want to adjust your portfolio as things shift overall. You're not trying to time the market. Timing the market is saying that I'm in the market or I'm in cash.
Mike:That's not what this is evolving based on trends or different strategies based on that time of your life.
David:Mhmm. Yeah. So I think for the answer to this question then is it's it's like, hey, maybe maybe you should get out of some of your mutual funds if if you've had them for the last fifteen years. Maybe not. Yeah.
David:Don't do it but don't do it just for the sake of doing it like, oh, that's I I need to change. Maybe you don't.
Mike:I would say there's a high probability that your mutual funds either are going away or they're just a little bit heavy on fees Uh-huh. Just on how they're built. Okay. So there's a good chance that, yeah, you can find a similar fund that's in the ETF world, but doesn't mean you have to. The your your mutual funds might just you're just fine.
Mike:Alright. So do you think we may oh, the target date fund conversation.
David:Oh, that's right. Circle back to that.
Mike:So the target date fund's kind of an interesting one. It's a set and forget it where you just put it in there, and they're gonna slowly adjust the portfolio or the fund based on the target date you wanna retire. So basically, each year, you're gonna get a little bit more typically bond funds and their bond exposure to the equity side. That that's gonna help you lower your risk as you approach retirement. Mhmm.
Mike:But that assumes that you just you're trying the the only solution is stocks and bond funds.
David:Oh, right.
Mike:There's other things you could do. Yes. There's other parts of your portfolio that you may want. Maybe you want real estate exposure. Well, your target date fund's not gonna give you real estate exposure.
Mike:Maybe you want I mean, there's real estate, private equity, private credit. I don't love private credit right now, but that is an option there. You could do equities. You could do CDs. You could do treasuries.
Mike:You could do I mean, there's there's so many options that are out there. Yeah. To assume that that's just all you need, I think glosses over the benefits and detriments of other investment options. Mhmm. So I I personally don't care for target date funds because I don't think it gives the the consumer a lot of options for them to figure out the right blend for them.
Mike:It's kinda like the I don't wanna think about it, so I'll just go over here.
David:Oh, right.
Mike:And your portfolio should support your plan. Well, the target date fund assumes everyone has the same plan or the same risk tolerance or the same whatever. Yeah. So I I mean, you could do your own version of it if you wanted to and just have some equities and then have some bonds, and then you just slowly adjust the blend as years pass. When you're younger do.
David:And you can, you know, quote unquote, take a lot more risk. Maybe you have more equities and you're you're accumulating, and then as you get closer to retirement, you wanna shift away from major accumulation to just, hey. Let's preserve.
Mike:Yeah. Well, I mean, consider for a moment that in 2020, 2019, 2020, interest rates were pretty low.
David:Yeah.
Mike:Fixed income bond funds were very competitive, but all the target date funds had bond fund exposure. Uh-huh. Then inflation got out of control. Who would have thought printing lots of money would lead to inflation? Oh, wait.
Mike:Everyone that understood the basics of finance understood that. Yeah. And then and then bond funds started losing money. Well, what's heavily influenced or what what what's a big part of a target date fund? Bond funds.
David:Mhmm.
Mike:So these target date funds are quote, unquote, less risk when you bring in the seasonality, the risk of fixed income or bond funds, bonds specifically, and them losing their value. Well, if rates go up, bond funds lose money. So all these target date funds where they're supposed to take on less risk, really were at high risk of interest rate risk. And so over 2022, 2023, I mean, they got destroyed. But they're being managed to the target date of your retirement.
Mike:Yeah. So do you see how it's like without context? Like, right now, I think they're kind of fine Yeah. As a part of your portfolio because it's an easy stock bond fund mix. But if interest rates go back down to very low, a very low rate, I don't know if if I'd go there.
David:Right.
Mike:So understand what's in the fund. And the last thing for this person is understand if your funds are kind of all buying the same thing. You could buy five funds and they're basically the same thing with the same stocks. You're not really diversifying. Yeah.
Mike:You just bought five of the same thing. So what's in them? Mhmm. You could look that up through their exposure or holdings. Yeah.
Mike:So I think we got that one.
David:I think we did. It's it's up to them. They they have they have to know this person needs to know, like, what their objectives are, how close they are to retirement, what their plan is, and then go from there.
Mike:Yeah. Yeah. Don't just do an arbitrary rebalance. Put a plan together first. Leave leave leave with them where they are.
Mike:But put your plan together first whether you're 30, 40, 50, 60, 70, 80 years old. You gotta have a plan for the next ten, fifteen, twenty years. Yeah. Whatever that plan is, then explore the strategies. What do you want your money to do for you?
Mike:Because if it's all risk, it's all growth. It sounds like it's in a qualified account, an IRA. So you can make adjustments without capital gain issues Mhmm. Without dividend income issues. Right?
Mike:Which is taxes or near income and all that. So so you can you can readjust the portfolio based on what you want to get out of your money. Well, is it cash flow? Do you want income from it? A growth mutual fund is gonna be terrible for income if, especially, markets go down.
Mike:So just plan, explore those strategies, then rebalance your portfolio as would be fit. There we go. Yeah. That's all the time we got for this question. If you enjoyed it, don't forget to like and subscribe.
Mike:Also, to retireontime.com for our book, workbook, and so much more to help you prepare to retire on time. Thank you. We'll see you in the next show.