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The Question

The time will come when you no longer manage your own investments because you choose not to or because you are not able. What happens then? What plans have you put in place for that time? This article will help you understand the circumstances which may make such a plan necessary and provide you with actionable steps to get started.

How You Did It

Seeking Alpha's Investors are a savvy lot. Students of business and finance you are comfortable handling your increasing wealth in the financial marketplace. The more experienced, the best investors in the group, work from investment plans honed to near perfection to meet their goals over many years. This plan could read like a mutual fund prospectus, or it might be a few rules jotted on a single sheet of paper. It is, however, key to the investor's success. You built your portfolio out of the fruit of your labors, you used your intellect and experience to fit together many pieces; there is no doubt that your investment plan is a good one.

An Exit Strategy

At some point, you will no longer be involved in the active management of your portfolio. A plan is needed for this eventuality and I call it Plan B. Situations change, that is inevitable. Sometimes we are in control of when that happens and sometimes we are not. Here are some of the more likely causes.

Death - Sadly, this is a part of all human existence. It may come without warning, to either young or old. Often, especially with older people, there is a period, from weeks to months, when you know the end is near. While your doctor may not say to you, "You better get your affairs in order," you know you must. Your heirs and the beneficiaries of your IRA will inherit your investments. Are they good investors, capable of taking over where you left off? I know of some who are grooming a child or grandchild to manage investments and take over at an appropriate time. However, that is not an option for all of us.

The bequest of a collection of common stocks to some individuals is not appropriate for many reasons. We need to consider alternatives.

Disability - There are many kinds of disability, some temporary and others permanent. Some are progressive in nature, others occur in an instant. There are many definitions of disability, the Americans with Disabilities Act of 1990 specifies, "a physical or mental impairment that substantially limits one or more of the major life activities of an individual." Some illnesses may require treatment, such as surgery or chemotherapy, which can be disabling for long periods.

Dementia -A frequent disability of older people, dementia is a loss of brain function that occurs with certain diseases. Alzheimer's Disease is one form of dementia that gradually gets worse over time. It affects memory, thinking and behavior. This is perhaps the most feared disability of older age and rightly so.

Divorce - Aside from an uninsured or underinsured illness, along with the financial toll of partial or full disability, divorce is probably the largest wealth destroyer in American society. It may require an exit from the market or a complete restructuring of assets, often fewer assets. In addition, the emotional toll may interfere with critical thinking. It could be wise to get involvement with the stock market off your plate for a couple of years.

Disinterest - In as much as investing in common stocks is an exciting hobby for some, on par with scuba diving, skiing, golf, fly fishing or sailing, like any hobby one can tire of it. In addition, a major life transition such as a new job, a marriage or the birth of a child can take such precedence in your life that you no longer have the time or interest to groom a portfolio of individual stocks.

Disgust - The daily headlines in the financial pages are at times a litany of illegal deeds by greedy individuals, banks, corporations and politicians. How often do events make you feel that the whole system is rigged, rotten to the core and a most unlevel playing field? Do you ever feel like giving up in disgust? I certainly have times when I wished it were all arm's length, at least.

Plan B

I have an exit strategy, a Plan B, an alternative to my closely watched portfolio of dividend growth stocks. The occasion of one's initiation of a Plan B is often a "wake up call." This might come by way of a few words from a doctor, unwelcome words and frightening words. This realization of mortality could come by the way of the death of a parent, your sibling, spouse, close friend or, heaven forbid, your child. You will know in your bones that you must create a plan so that you will not leave a mess behind you.

My plan is a plan suitable to my circumstances, including current income requirements, and my heirs' situations. My resources and holdings are modest. Your circumstances might be entirely different, your financial worth much greater, your heirs sophisticated investors. In that case your plan will suit your needs and it might be quite unlike my Plan B. However, many of the actions we take will be quite the same.

In all but the simplest cases, it is wise to consult an estate-planning attorney and a CPA.

Steps to Take

These are some of the steps I took with my own plan and I believe that most of these are applicable to other investors. There may be additional or different steps that your planning requires.

Simplification

Simplification was a major objective. Three banks, a credit union, three mutual fund companies and two stock brokerages held my financial assets. Over a period of about a year, I consolidated my financial assets with one investment company and two banks. My investments consist of a dividend growth portfolio, with about 30 stocks, a handful of other common stocks, some individual bonds and several bond funds, one of these a Vanguard Fund, which I have held since 1986.

While I have had relationships with many mutual fund companies and stockbrokers over the years, I choose Vanguard to hold my stocks, bonds, mutual funds and ETFs. I have had a relationship with them for about 30 years, and unlike other mutual fund companies, it is actually owned by its investors. I am pleased with their products and their services, and their low costs. In addition, I recently learned that they have a dedicated staff that assists the beneficiaries of funds and brokerage accounts. For these and other reasons, I have a high comfort level with them. Your choice may be different; go where the services you need are available and your comfort level is high.

General Estate Planning Matters

Everyone needs a will. Attorneys customarily offer several other documents at the time you do your will. One is a durable power of attorney, a document specifying who should handle your financial affairs should you be incapacitated and unable to. You may wish to name a health care surrogate, the person authorized to speak on your behalf if you cannot participate in your medical care decisions. Related to this is a Living Will, which proclaims your end of life wishes concerning the measures to take if you have an irreversible terminal condition and cannot communicate.

Review of Tax Issues

This, like the category above, may be an area where you need the assistance of an attorney or accountant. At the minimum, you need to understand the tax status of each asset; is it tax advantaged like an IRA or a 401K? What are the implications and tax impact if a person inherits an IRA? Can your assets pass to beneficiaries without going through probate? If possible can they be titled in such a way, jointly or for the benefit of a person, to avoid probate.

Depending on the size of your estate, it may be advantageous if some are in a trust. Continuous modification of laws and regulations concerning inheritance taxes, trusts and IRAs may make old plans unworkable. The fee for a periodic review could be a very good investment. An excellent series of three articles on inherited IRAs by Seeking Alpha author Doctor Dividend starts with Just How Do I Handle My IRA?

The Sale and Purchase of Assets

The next step, after consolidation of assets in one place and a review of the tax status of each asset, is the sale of the existing portfolios and the purchase of new securities which require very little attention or maintenance. The new investments should not include individual stocks. There are many ways in which this could be done and your choice of method will be dictated by your circumstances and the situations concerning your heirs. Let me give a few examples of how this divesting might be done and then we will offer some alternatives concerning what these investments might be.

  • You might set aside enough cash to cover your anticipated withdrawals for 3 to 5 years
  • Proceed with sale of all securities, i.e., stocks, bonds, mutual funds, ETFs
  • Sale of stocks over a period of about 1 year by setting appropriate limits and stops to minimize losses and maximize gains by selling on upswings.
  • You could arrange holdings into several accounts. This might especially be a good idea with an IRA with heirs of greatly different ages. See the above noted article.
  • These accounts might be set up with different an emphasis on growth or income.

Your New Holdings - Objectives

A good question to ask is, "What are my objectives for this new portfolio?" I suggest that some of these may be considerations:

  • Predictable income, essential for some
  • Preservation of capital
  • Growth and appreciation of principal
  • Minimum maintenance - no more than a simple annual balancing
  • Perform in the manner of certain indexes

Your New Holdings - Examples of Securities

There are thousands of possible Investment choices. However, embrace simplification and low maintenance as guiding principles and rule out the more complicated ones.

  • Dividend Income ETFs - I toyed with several different allocations of ETFs until I came upon a Seeking Alpha article by D4L last July, which was a much better mix than anything I devised. I highly recommend A Simple Approach To Earn More Than 4% In Dividends. His list is made of seven ETFs allocated as below,

  • SPDR S&P Dividend (NYSEARCA:SDY): 55%
  • Eaton Vance Tax Advantaged Global Dividend (NYSE:ETG): 10%
  • WisdomTree Emerging Markets Equity (NYSEARCA:DEM): 5%
  • Gabelli Global Gold, Natural Resources & Income Trust (NYSEMKT:GGN): 5%
  • UBS E-TRACS Alerian MLP Infrastructure Index ETN (NYSEARCA:MLPI): 5%
  • Vanguard Utilities ETF (NYSEARCA:VPU): 15%
  • Vanguard REIT Index ETF (NYSEARCA:VNQ): 5%

  • The Permanent Portfolio is a long term holding of a mix of different asset classes proposed by Harry Brown in 1998. It consists of 25% stock, 25% long-term bonds, 25% cash and 25% gold. This can be constructed out of four ETFs: the S&P 500 index, SPY; Long Term Treasuries such as held by TLT; Cash, such as the near-cash short-term bond fund, SHY; Gold, which, is represented by GLD, the Gold ETF.
  • A Conservative Allocation - This would consist of a portfolio of stocks and bonds with a balance on the order of 60% stock and 40% bonds. It could be composed of two ETFs such as Vanguard Total Stock Market (NYSEARCA:VTI) 60% and Vanguard Total Bond Market (NYSEARCA:BND) 40%. An annual rebalancing of the portfolio would involve returning to that 60/40 ratio by selling some of the ETF, which has exceeded its target, and buying some more of the other ETF. Of course, another mix of stocks and bonds could be selected, more heavily weighted toward equities or bonds.
  • A Balanced Mutual Fund - An actively managed mutual fund might have as its objective to maintain a target balance of 2/3's stocks and 1/3 bonds. This would be composed of securities selected by the management of the fund. An example of the above is the Vanguard Wellington Fund (VWELX), which holds 100 stocks and 500 bonds in the above ratio. This fund was founded in 1929 and is highly rated. An advantage to this type of fund is that management takes care of the rebalancing.

Other ideas? I am sure there are many. However, I would resist a solution that involved any common stock or large number of fund holdings as moving backwards. Keep it simple. You may be assured that, "All shall be well, and all manner of things shall be well." Julian of Norwich, c. 1394.

May all be well with you in the New Year!

Source: Retiring From Active Portfolio Management In 2013? What Is Your Plan B?