What’s the best way to transition from stocks to index funds and ETFs?

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.

Part 2: Stocks, Bonds, and Cash: A primer on asset classes

Editors Note:
Burt Mayer, a senior at Lakeside High School in Seattle, WA interned at Merriman this summer with the intention of creating educational material for young investors.  This three part series featured on FundAdvice.com is perfect for those investors who are looking to get started but need to know the basics first
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Investors at all levels spend a tremendous amount of time and energy looking for hot stocks and attractive funds. They track fancy-looking graphs and complicated ratios because they’re fancy looking and complicated. Ultimately far more time is spent thinking about individual stocks and bonds than what percentage of their money is invested in stocks versus bonds.

Meanwhile, many academic studies by very smart people have concluded that the way we distribute investments across asset classes is far more relevant to a portfolio’s return than the specific securities or funds in that portfolio. A famous 1986 study by Brinson, Hood, and Beebower (he’s the smart one) called “Determinants of Portfolio Performance” concluded that a full 93.6% of the variation in a portfolio’s quarterly returns can be explained simply by what proportion of the portfolio is put in different asset classes. (more…)