by Archie M. Richards, Jr., CFP^®
July 25, 2005

Martin writes, "My wife and I are in our mid-to-late 70s. We have two IRAs, a SEP-IRA, and a joint account, all invested in a total of 16 mutual funds. We've placed all of the accounts with a single family of mutual funds. A representative of the fund suggested we use its advisory service and recommended 22-to-24 separate funds in each account, for a total of 47 funds. Is this right?"

No, Martin, it certainly isn't. 47 funds is ridiculous! The mutual fund family isn't adding value; it's just trying to give the impression of earning its fee.

Say you hold 6 funds, all invested in large value stocks. You're not properly diversified, because each fund moves roughly the same as all large value stocks. Instead, you should hold a single index fund containing all of the large value stocks included in the Russell 1000 Value Index. The fund doesn't try to beat the index's record; it just tries to equal it.

The costs are low, because no stock research is needed. If you can equal the record of market indexes with low costs, you'll come out just fine.

My column dated 11/15/04 (in archierichards.com) recommends 9 index funds, each of which covers a different type of investment. Those choices represent true diversification.

With 22-to-24 funds in each of your accounts, rebalancing, an essential part of successful investing, becomes almost impossible. But with fewer funds, it'll work. When the value of an index fund representing a particular investment sector becomes too large a portion of the total portfolio, sell enough of it to bring the value back to the desired portion of the whole. Invest the proceeds in sectors that have underperformed.

Rebalancing should be done once a year. It's an automatic system for selling high and buying low, cutting volatility and increasing the return. Nothing wrong with those objectives!

Ditch that mutual fund family. It's doing more harm than good.

Ramiro writes, "I've been self-employed for 5 years and am now earning enough money to pay my bills. I want to start investing in the market - maybe $100 to $200 a month. What investment should I use?"

Way to go on your business, Ramiro. I'd use the Capital World Growth & Income Fund, offered by American Funds. The minimum is $250. Arrange for monthly amounts to be invested from your bank account automatically.

You must buy this fund through a broker and pay commissions. Among load (commissionable) mutual funds, American Funds is my favorite group. Its record is excellent, and its costs are low.

Let's say you've maxed out the contributions to your retirement plan. You can't contribute more, but you can pay the operating costs. Rather than allow the fund to deduct the costs from the account balance, pay the costs with your own money.

In effect, the payments serve as extra contributions. They may also be deductible.

Financial planning takes into account what you want to do with your life, not just your money. You might ask yourself the following questions, crafted by The Kinder Institute.

1. Imagine that you have enough money to take care of your current and future needs. Financially, you're secure. What would you do with the money? How would you live your life? Would you change what you're doing now?

2. A month later, you're at the doctor's office for a routine checkup. He has terrible news: You have only five years to live. Although you'll feel no sickness or pain, you'll have no warning of the time of your death. How will the news change your life? What will you do during the time remaining?

3. Another month passes, and the doctor asks to see you again. He has truly shocking news: You have only one more day to live. What dreams remain unfulfilled? What do you wish you'd been, or done, or finished? What do you miss?