Dear Carrie: I want to switch my stocks for mutual funds and manage my money myself. I have about $1 million in bonds and $350,000 in equities. I need to produce approximately $50,000 a year to live on. Any suggestions on how I go about this? -- A Reader
Dear Reader: My whole career has focused on the idea that when it comes to personal finance, most people can do most things by themselves, from determining their objectives to building a portfolio that helps them reach their goals. And I applaud people who, like you, want to take control.
At the same time, I think people should be prudent when it comes to managing money -- and $1.35 million is a lot of money to manage. You've got some big decisions to make: How much capital will it take to generate $50,000 per year? How will you construct your portfolio? On the fixed-income side, should you invest in bond funds or individual bonds? And what's the best way to manage your equities?
You might approach this significant challenge by thinking of yourself as the general manager of your portfolio. You determine the objectives and decide the best way to reach them. If you can do it yourself, great! But keep an open mind about tapping outside advice where and when it makes sense.
Here are a few aspects of your plan that strike me as particularly challenging:
-- Tax implications: Depending on what you own and for how long, you could be facing some pretty substantial tax liabilities from liquidating your portfolio. Before you sell off everything, make sure you understand the tax implications, which may necessitate a meeting with your tax adviser. A gradual approach in which you divest holdings and purchase new assets over time might be best.
-- Asset allocation: You stated one goal (generating income), but do you have other financial objectives? It's the whole package of goals, along with their associated time horizons, that will help you determine an appropriate asset allocation. You can probably do this part yourself, but you may also want to validate your decisions with an objective financial planner.
-- Portfolio construction: It's one thing to say that you want, for example, 70 percent or 75 percent exposure to fixed income. It's quite another to build a fixed-income portfolio that gives you that exposure and has the risk/return characteristics you need. In your case, you essentially have three choices: fixed-income funds, individual bonds, or hire a dedicated fixed-income investment manager.
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