Author Topic: Setting up a 457 portfolio -- listen to the advisor on actively managed funds??  (Read 2778 times)

StriveForMelody

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Hello all,

My wife is a public school teacher and just changed jobs, so we have an opportunity to re-assess how we're managing her 457 account. It was formerly invested in an automatically-generated "moderately conservative" portfolio. This time, we've actually met with an advisor with a financial firm (Lincoln Investments) and have been able to discuss specifics of the portfolio. We're planning on changing our risk level to "moderately aggressive."

The advisor created a hypothetical portfolio for us which included some index funds and some actively-managed funds. When I told her that I tend to prefer index funds, she offered an explanation of the wisdom of holding both index and actively-managed funds, that managed funds are better able to deal with market volatility. She also said that we should especially be sure to have some managed funds in this portfolio because my Roth IRA and our taxable account are all index funds (which we set up through Betterment).

So, is she just trying to sell me something I don't need? Is she toeing the company line and more-or-less ignorant of index funds' superiority? Or is she right? Is it good to have some managed funds in your portfolio, to hopefully have some smart people wearing suits in an office somewhere helping you to deal with market volatility when the indexes are all over the place? From my countless hours reading MMM and similar sites and books on investing, I really haven't heard a strong case for investing in managed funds, except from... financial advisors.

Thanks for any advice and input!

GGNoob

  • Pencil Stache
  • ****
  • Posts: 726
  • Age: 37
  • Location: Colorado
Just stick with the index funds.

MDM

  • Senior Mustachian
  • ********
  • Posts: 11477
From Upton Sinclair:
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

When the FA's compensation is directly related to the fees of the funds selected for the client....

ioseftavi

  • Bristles
  • ***
  • Posts: 401
  • Location: NYC
From Upton Sinclair:
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

When the FA's compensation is directly related to the fees of the funds selected for the client....

This is perhaps the kindest and most succinct explanation.  I'm sure the FA is well meaning, but his job depends on those fees.  Thank him for any help and insight he offers, but tell him you'll be going with an index portfolio.  He may be able to offer help another time if you have questions on your plan.

forummm

  • Walrus Stache
  • *******
  • Posts: 7374
  • Senior Mustachian
The only way to "better deal with market volatility" is to have lower overall performance or to be more diversified. If you buy the total market index funds and total bond index funds there's no way to be more diversified.

StriveForMelody

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Thanks so much for the reassurance, folks. I am letting the advisor know that I want to stick with an all-index portfolio. My issue now is: do I try and create a different portfolio for the 457 than I've set up in my Roth IRA and taxable account through Betterment? My inclination is to just to roughly replicate my robo-advised Betterment portfolio in the 457. If that's a broadly-diversified portfolio of stocks and bonds from around the world, why not just hold that in the 457 too? Or should I use the 457 to diversify further, including REITs, possibly increasing the bond allocation (Betterment is at 90/10), choosing different ETFs for the stock allocation...?

Thanks!

MDM

  • Senior Mustachian
  • ********
  • Posts: 11477
You might read through
http://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts and
http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement and
http://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation
if you'd like to immerse yourself in this question.

In short, you can probably do a little better by placing different assets in different places.  But as one of those links notes, "Determination of your asset allocation (% stocks / % bonds), which sets your portfolio's level of acceptable risk, is the single most influential decision you can make on your portfolio's performance. Only consider taxes after you have configured your total portfolio."