Question:
What non-stock options are available for a 72-year-old man? I’m retired and sitting on a pretty good amount of funds. I’m looking for investments that are semi-liquid and semi-safe.
—Ben
Answer:
Ben,
Without doing a full risk assessment profile, I will take the terms “semi-liquid” and “semi-safe” to mean that you are comfortable handling some conservative level of risk.
Rather than trying to get growth from individual stock positions, I would recommend constructing a globally diversified portfolio utilizing institutional share class no-load mutual funds and ETFs.
What are institutional share class no-load mutual funds?
- Institutional shares are a class of mutual fund typically offered by investment companies.1
- These are often labeled with an I, X, Y, or Z at the end of a fund name.2
- Institutional investors may have different fee structures and expenses,3 and typically have the lowest annual expenses of any class of shares—which means higher returns for the investor.4
- Such funds are available to investors with minimum investment amounts of $25,000 or more, upwards to several million dollars.1, 4
- No-load funds are those which investment companies sell directly to the public, as opposed to load funds, which investment companies sell through a third party, whom you must pay commission fees.
Keep in mind:
- No-load funds are not equivalent to load-waived funds. Load-waived funds often do charge some fees and have higher average expense ratios.5
What are ETFs?
- ETFs are Exchange-Traded Funds. Similar to index mutual funds, these are investment securities that are traded like stocks in a bundle on a stock exchange.
- Shareholders of ETFs own shares of the fund, rather than owning the underlying assets of the fund.
- ETFs were created in the mid-1990s and have since established themselves as a venerable part of stock exchange transactions, exceeding $3 trillion, as of December 2017.6
- Like usual stocks, ETFs can be traded any time of day and you may purchase shares at various prices throughout the day.7
- No minimum investment is required.7
- Generally speaking, ETFs are potentially advantageous over mutual funds in that they offer “intraday liquidity, better tax efficiency, and lower costs.”8
Keep in mind:
- Brokerage fees may apply every time you buy or sell ETFs.
- Some ETFs have distributed capital gains.
- For maximum tax efficiency, keep ETFs in taxable accounts.7
To stay on the conservative side, I would construct a portfolio with approximately 25-30% equity and keep the balance in high-quality, short-term fixed-income positions.
- If you are in a high-income tax bracket, some of these high-quality, short-term fixed income positions may include some national or state municipalities to keep an eye on your tax exposure.
Using no-load mutual funds and ETFs provide great liquidity as most give you access to all your money whenever you need it, with no front-end or back-end fees to buy or sell. If you construct this portfolio on your own, for example at a discount brokerage firm, make sure to inquire about trading costs and no-load funds and ETF options.
Conclusion:
It is possible to construct a liquid, conservatively allocated portfolio that is less risk than an all-stock portfolio. Take some time to investigate your options with investment class no-load mutual funds and ETFs to make sure the choices are right for your retirement needs as well as for your portfolio.
To be sure, there are many advantages to having such investments that can save you additional fees and expenses, and keep your money more at hand, when you need it.
Sources:
1. https://www.investopedia.com/terms/i/institutionalshares.asp
2. https://www.thebalance.com/what-are-class-inst-funds-2466754
3. https://www.sec.gov/fast-answers/answersmfclasshtm.html
4. https://finance.zacks.com/institutional-class-mutual-funds-7895.html
5. https://www.thebalance.com/no-load-vs-load-funds-2466715
7. http://news.morningstar.com/articlenet/article.aspx?id=137219&_QSBPA=Y&hsection=Comm2
8. http://global.morningstar.com/us/documents/pr/Cost-Of-Owning-Index-ETF-MFS.pdf