Q: You frequently mention that it is important to (1) diversify, (2) avoid “fat clogged” distribution systems and (3) invest in low-cost index funds.
You also frequently mention funds such as the Vanguard Balanced Index fund shares (ticker: VBINX) or the Schwab U.S. Broad Market fund (ticker: SCHB) and Schwab U.S. Tips fund (ticker: SCHP).
Our IRA, however, is with Fidelity. They charge a transaction fee if we purchase a non-Fidelity fund. Although it’s not a significant amount of money, it is an additional cost.
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Could you suggest some Fidelity funds similar to the above?
A: Fidelity is a managed-funds shop and has only a few index funds of its own. They are called Spartan funds. They have competitive, but not rock-bottom, low costs.
Fidelity Spartan Total Market Index (Ticker: FSTMX; expense ratio 0.1 percent) is the equivalent of the Vanguard Total Stock Market exchange-traded fund (Ticker: VTI; expense ratio 0.05 percent) and the Vanguard Total Stock Market Index 1 mutual fund (ticker: VITSX; expense ratio 0.04 percent).
Fidelity Spartan Inflation-Protected Bond Index I fund (FIPBX) has expenses of 0.07 percent, and Fidelity Spartan International Index (FSIIX) has expenses of 0.11 percent.
Fidelity also offers 65 iShares ETF funds on a no-commission basis, so you can build even more diversified portfolios at competitively low cost at Fidelity.
Since Schwab introduced commission-free trading of its own ETFs, every major firm has introduced competitive offers.
So while Wall Street continues to develop complicated and expensive ideas for its enrichment, it is also possible for investors to build and manage their portfolio at true bargain-cost levels.
Q: In many columns you have provided a variety of reasons for investors to be cautious about variable annuities. That doesn’t seem to stop the financial planners of today from pushing variable annuities hard.
Do variable annuities now have something I should be considering for my future? I am 70.
A: The variable annuities sold to most people still have the same problem — expenses — that they had six or eight years ago. But the problem has been augmented with new riders that make the contracts even more expensive.
While most conventional contracts had total costs of about 2 percent a year 10 years ago, I’m now getting mail from people who have purchased contracts with an all-in cost of more than 3 percent a year. Vendors have also muddied the waters greatly with equity index annuities. In these products, much of the expense is hidden because it is built into the product structure.
Those who already own expensive variable annuities can move to a low-cost alternative by doing what’s called a 1035 exchange without incurring any tax expense.
Copyright 2013, Universal Press Syndicate