Business Week, April 24, 2009


Hitting the Personal Financial Reset Button

A BW senior correspondent details his quest to repair his retirement portfolio and get his family's finances in order

It could have been worse. At the end of February--a year and change since my wife and I had shifted our money to professional wealth management advisers--our equity holdings were down 48% for the 16 months they had managed it. But our overall portfolio took a hit of just 26% during that period because early last year we pulled the "professionals" back from their plan to pile 70% of our money into equities. Instead we decided to invest just 30% in stocks and keep the rest in fixed income and cash.

But looking at the February statement, it was clear what we had to do: Fire da bums.

It's not only that we're peeved that their best advice was to go so heavily into equities months before the market crashed--and that my own instincts to hang back were correct. It's also that these guys charge 1.25 points on our portfolio annually to be in their funds. A check with some financially savvy friends revealed that such a fee for a portfolio that's merely 30% in equities is "confiscatory," as one put it.

We fired the pros, posted big gains

O.K., you may ask, now that you're going the DIY route, where are you putting your money in this market? Since Mar. 1, we have been dividing it into quarters evenly split among cash and CDs; Vanguard's stock index fund; Vanguard's bond index fund; and a Vanguard municipal bond fund. That is as plain and conservative a diversification as we can stand in this climate. The average expense ratio of these funds is just 0.15%. I spent in excess of $7,500 last year in fees to do nothing more but track the market with my stocks. This year, I figure we will make back nearly $7,000 in fees we aren't spending for what I predict will be a better return. Over the next three years, these differences alone will add up to from $20,000 to $30,000.

We took our money out of the "pros'" hands just as the market began climbing back. My wife, though, had put some of the cash into a few individual stocks before the run-up, which helped boost our short-term returns. She picked Wells Fargo (WFC) because their servicing of our mortgage has been excellent and the bank appeared to have been more conservative than others. She saw a buying opportunity when the company's stock was hammered along with Citigroup (C) and Bank of America (BAC). She was correct, bringing us gains in double-digit percentages.

We could still be hit with bailer's remorse: What if the funds we sold out of at our former adviser outperform my index funds? Will we feel as stupid as we did three months ago? According to Mark Kritzman, president and chief executive of Windham Capital Management in Boston, who recently published a study in the Feb. 1 issue of Economics & Portfolio Strategy, that is very unlikely.

Counting Expenses, managed funds lag

Kritzman measured the long-term impact of all the expenses involved in investing in a managed mutual fund or hedge fund: transaction costs, taxes, and management and performance fees. He calculated the average return over a hypothetical 20-year period, net of all expenses, of three hypothetical investments: a stock index fund with an annualized return of 10%, a managed mutual fund with an annualized return of 13.5%, and a hedge fund with an annualized return of 19%. The volatility of the funds' returns--plus turnover rates, transaction fees, and management and performance fees--was based on industry averages.

His finding: Net of all expenses, including taxes, the winner was the index fund. Expenses were the culprit. Indeed, Kritzman found that just 3% of managed funds in his modeling would do better than simple index funds.

With our dreams of retiring in a decade or so shot to pieces for the moment, we are on a rampage to make up for the losses--and add to our principal so as to maximize returns when the markets head north. Like charity, financial security begins at home.

And that brings us to the second part of the Kiley Family Recovery and Reinvestment Act of 2009. As a couple in our mid-40s with a son, we decided we wouldn't waste this financial crisis: We attacked the unnecessary spending that was hurting our efforts to build wealth. The idea is simple: Replace the money that isn't growing from stock market gains with money conserved from household budget leakage. That way, the principal will be greater when the market improves.

Here's a blow-by-blow account of the great budget beat-down:


We pay monthly, like most Americans. To knock down the principal, we are going to make smaller payments twice a month, a strategy that will add the equivalent of two extra monthly payments a year. This will reduce the 27 years we have left on our mortgage to a little over 22 years, saving us $77,000 in interest payments. We also are refinancing, from a 6% rate to a 5.12% rate with no fees.

School payments

Our seven-year old son attends a private school, but we've been thinking this is unnecessary because there's a very good public school in our town. For at least the next four years--until he starts middle school--we plan to bank the $11,000 a year, replenish his 529 college fund, and invest the rest.

Household expenses

It is difficult to look at daily, weekly, and monthly budget leakage. Some of the things we are identifying may make us sound like nickel-and-dimers. But we are using this recession as a teaching moment for us and for our son to change habits. Some of the things we are chopping out of our budget will likely return when the market does, but who knows? New habits may die as hard as old ones.

Greeting cards

With an extended family of more than 20, I figure I spend $75 a year on cards. They are now getting photo cards I print off my computer and pictures that my son draws.


I know. I'm squeezing dimes, right? But budget cutting becomes contagious. My son and I were going to the barber every six weeks to get our hair buzzed. That's $30 for the two of us. Over a year, the roughly seven visits added up to $210. I've bought a buzzer/trimmer for $22 and we now do our own hair.

Health care

I was seeing a chiropractor twice a week for $35 per visit. Cancelled. I think I can accomplish the same relief for my back by working out more on my underused Total Gym. Also my wife was seeing an out-of-network specialist, which could have cost $2,000 this year. She is now seeing an in-network specialist, which requires a 90-minute round trip.


My wife and I are dialing back on clothing purchases by 50% this year. To maintain domestic harmony, I promised I wouldn't publish how much we're saving, but the number is substantial. The limits do not apply to our son, who is growing rapidly.


We've cut back our spending at the fancy deli in town by $100 per month. We'll make do with Havarti cheese instead of the stinky expensive stuff for a while. Minimum savings: $1,200 a year.


We've piggybacked family trips onto two of my business trips this year to New York and Florida, with days off, to save some airfare and hotel expenses. We'll save about $3,000 this year, based on what we would have spent taking those trips on our own.

Dining out

We have dialed back on going to our favorite restaurant, from twice per month to once. That saves about $80 a month, or $960 annualized.

It may all sound like a penny-pincher's life, but there's an old adage: "Watch the nickels and dimes and the dollars take care of themselves." What's better, we feel much more in control of our financial destiny.

Savings like these can be illusory if you don't track them and set the money aside for real. Each month we put the savings on greeting cards, dinners out, and haircuts into our vacation fund. That way it's sitting there when we need it and we aren't draining our working checking account. Fancy food savings are going to the 529 fund.

As market conditions dictate, we will divert money-market and CD reserves into the stock index fund as part of a dollar-cost averaging program.

We calculate that our minimum annual savings will be, to us, a staggering $24,000-plus. If we merely continue those savings over five years, add them to our remaining principal, and keep it all invested for a very conservative compound-interest return of 3.5% after taxes, it will add at least $213,000 to our nest-egg. That will put us above where we were before the markets tanked.

So the party--and the financial laziness we developed--is over. And even if the markets and home values bounce back sooner than many of us think, our new, frugal habits will hopefully die harder than our old ones did. We do, however, look forward to going back to the barber. I'm not sure how long my son will put up with Dad cutting his hair.

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