Merriman, Inc

During several recent discussions with clients, I’ve heard a common question, “Why isn’t my portfolio doing as well as the market?”  This inquiry, of course, leads to another question: “What is the market?” To most investors, the market is either the S&P 500 or the Dow Jones Industrial Index. While these two indices are often cited by news outlets, they only cover portions of the larger global market.

At Merriman, we have long advocated that the allocation of the equity portion of your portfolio include large company stocks, small company stocks, international stocks, emerging market stocks and real estate investment trusts. Each of these asset classes perform differently over time, sometimes dramatically so. Tracking error, the way we refer to it here, is the amount by which the performance of a portfolio differs from that of the major market indices. In some years, this difference will be positive, meaning your portfolio outperformed a major index like the S&P 500. However, there will be years like 2011 when these additional asset classes will lead your portfolio to underperform the S&P 500.

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I have read Paul Merriman’s book, Live It Up Without Outliving Your Money and watched some of Paul’s videos and listened to his podcasts. I have a question that hasn’t been addressed: What’s the best way to transition a portfolio from individual stocks to index funds and ETFs?

I would like to make the change quickly, but I’m worried that my timing might turn out to be all wrong. Should I do it all at once, or gradually over a period of time?

We believe that the move you are describing is a good way to reduce your risk and potentially improve your return, because index funds and ETFs will give you much greater diversification. I recommend you follow the recommendations that you’ll find in Paul Merriman’s article “The Ultimate Buy and Hold Strategy.”

Once you have made this decision, I cannot see any good reason to spread it out. If you do it all at once, you will get it over with quickly so you can focus on other things. I recommend you sell all the stocks in a single day. Stock trades typically take three business days to settle, so there will be a short delay before you can reinvest the proceeds.

During that brief period while your money is in cash, the market may go up or it may go down – or it could remain largely unchanged. You can’t control that, so you will have to accept it as an unknown price you’ll have to pay (if you must reinvest at higher prices) or an unknown bonus you receive (if you reinvest at lower prices). Either way, make the change and get it over with.

If you try to control this, you’ll have to predict or guess future stock prices, and that’s likely to lead to second-guessing your plan and not getting it accomplished.

There’s an exception to that advice. If the stocks you own are in a taxable account, it’s important that you consult your tax advisor before you move forward. Tax consequences in some cases should dictate the timing of your sales.

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Most people can benefit from the help of a financial advisor, either on an occasional basis or in a lasting relationship. But not all advisors are created equal. In this section of our online workshop, I’ll explain what to look for and how to avoid financial help that may lead you down the wrong path.

Watch Section 5: Finding the right financial advisor now.

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