At This Size, Your Retirement Portfolio Is Too Big For Mutual Funds

You’ve learned why it’s important to avoid investment products once you enter your retirement. If you’re lucky, you can, and maybe you should, begin transitioning your investments to individual securities well before you earn that gold watch.

“Typically, the further one gets away from owning individual investments, the higher the costs become,” says Stephen Taddie, Partner at HoyleCohen, LLC in Phoenix. “It is a function of paying for the multiple layers of responsibilities overseen by people, firms, managers, etc., as each layer creates an additional layer of fees.”

Your retirement date represents one factor that determines when you should shed your mutual funds to build a private portfolio. You also need to monitor the total value of your portfolio. It may tell you to speed up your transition, or it may tell you to wait longer before making the switch.

What’s the smallest asset size that allows you to invest in individual securities?

Previous generations had to contend with trading costs when they bought and sold stocks. This influenced their trading strategy. They wanted to avoid odd lots—anything less than 100 shares. It meant they needed a larger asset size before they could begin trading.

Today, commission-free trading is the norm. In addition, many brokers allow you to buy fractional shares. You can literally start with just $100 dollars. Still, for that amount of money, it makes more sense to buy investment products rather than invest in stocks.

“There are many advantages to investing in mutual funds or ETFs, including simplified diversification, lower minimum investment requirements, professional fund management, improved tax efficiency, and low expense ratios,” says David Rosenstrock, Director and Founder of Wharton Wealth Planning in New York City. “The smaller the portfolio size and the size of individual positions within the portfolio, the less advantageous it may be to invest in individual securities.”

Still, it’s possible to build a…

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