BLACK ENTERPRISE had Dolmo consult with Dale Bryant, portfolio manager with The Bryant Group in New York, to find ways to grow her money. Dolmo is not experienced when it comes to allocating her investments effectively, says Bryant. “She suffers from a common mistake of unseasoned investors — having too much going on. [She’s] mistaking quantity of investing with quality of investing.”
For example, he points to the company 401(k) plan, where Dolmo has more than 10 different investments chosen by a computer. As a result, many of her investments are competing with each other by investing in the same types of stocks. Some of her other investments are also conflicting, negating their yields. Close to two thirds of her retirement plan is getting subpar returns.
There is additional risk — Dolmo may have too much Verizon stock. Bryant says more than 30% of her 401(k) plan is composed of company stock (as part of the company’s match). Verizon stock has declined 6% a year since Dolmo joined her 401(k) plan. “She is getting matched with a decreasing asset in a tough market with a grim outlook,” Bryant observes. “We see a bias toward conservative investing, even though she is at an age to take on some risk.”
Bryant recommends the following financial action plan for Dolmo:
Establish a practical cash cushion. Bryant suggests Dolmo place $5,000 in an emergency fund, preferably in an interest-bearing account such as ING at 2.2% instead of the 0.8% she’s currently getting in the HSBC money market account. That leaves $42,050 to invest. It also frees up the $250 monthly contribution Dolmo was making to the money market account.
Reallocate assets. Bryant wants all of Dolmo’s assets to work in unison toward a common identifiable goal with as little maintenance as possible. He suggests she liquidate the I Bonds and stop the salary deduction plan, which frees up another $400 a month. That’s $55,450, once you add the money from the money market account, to set up a regular investment portfolio as follows: 70% in S&P 500 index funds, 20% in bonds, and 10% in REITs (real estate investment trusts).
Bryant says the investments should be placed in exchange traded funds because “that way, she is getting broad market diversification, but with much less cost and less tax liability.” He says the S&P 500 will help Dolmo benefit from equities when the market moves higher; the ETF bond funds provide a variety of long-term, medium, and short-term bonds that give Dolmo a better chance at positive returns — plus they deliver a dividend for income. The REITs give her exposure to the real estate market without the high cost of holding real estate, and they deliver a dividend, too. Dolmo should reallocate her 401(k) funds the same way, making the plan easier to manage and making it easier to capture most market moves. She should rebalance both investment portfolios twice a year.
Sell off company shares. As soon as Dolmo is able, she should sell the Verizon stock with the intention