The easy way to simple, low-cost investing

Q: I'm worried about Required Minimum Distributions and investing expenses in my IRA. This year, I decided against a variable annuity because of expenses. But I'm still worried about RMDs and taxes. What do I do now? I think I would like to put my money in an index fund. But how do I do it? Can you give me an easy-to-understand solution? - S.A., Dallas

A: The easiest thing to do, particularly if you are uncomfortable starting an account online, is to visit a Schwab or Fidelity office in Dallas, transfer your existing account there, and make yourself a Couch Potato portfolio account. Both firms are very good at handling all the details of transferring accounts.

You can learn more about creating a Couch Potato portfolio on my website, but it can be as simple as a 50/50 mix of the U.S. total stock market and the U.S. total bond market. Both firms offer low-cost index funds for these asset classes, either as mutual funds (Fidelity) or as exchange-traded funds (Schwab).

In the process of opening an account at either firm, you'll get an online account with great information, including tax data on realized and unrealized capital gains, and a checking account. If you want, you can also get a credit card.

How would you have done with such a simple, low-cost investment? Pretty nicely, thank you. According to the portfoliovisualizer website,

if you had invested 50/50 in these two asset classes from 1986 through 2015, a $10,000 investment would have grown to $122,921. That's a compound annual return of 8.72 percent.

During that period, your worst year would have been a decline of 16 percent and your best would have been an increase of 27 percent. Your actual return would be slightly lower due to the expenses of the index funds, but the operative word is "slightly."

Is this the very best thing you can do? No. If you had been incredibly fortunate, you might have found a fund that did better. The odds, however, are against it. You would be hard pressed to find better returns from the many, many more expensive alternatives offered by the financial services industry.

Q: I've read many of your columns on how management fees can take a large percentage of your profits and that actively managed funds actually cost you profits over the long run, instead of making money.

But now I've been told of a new twist, concerning tax-managed funds. In these funds the adviser says he can maximize your after-tax profits by buying and selling stocks to create a favorable tax position. Any history to support or deny their assertions? Your thoughts on whether profits can be enhanced by paying larger fees to obtain better after-tax returns? - B.D., by email

A: There are two issues here. The first is: What are the immediate benefits of tax management, usually called tax-loss harvesting? This year, for instance, you might sell a stock that has lost value to offset the gain realized on another stock. The net result would be no tax cost for the current year. That can look really good. But it overstates the benefit because the same trade has also lowered the cost basis of your investment. In effect, you've traded a current tax bill for a future tax bill. Long term, the benefit is quite small. But don't take my word for it. The topic is well covered by financial planner Michael Kitces on his website (kitces.com/blog/evaluating-the-tax-deferral-and-tax-bracket-arbitrage-benefits-of-tax-loss-harvesting). The whole business of tax-loss harvesting is complicated, and Kitces examined the question because some extravagant claims have been made. The net long-term benefit, he figures, is fairly small, under one-half of 1 percent.

The second issue is how much do you have to pay for a service that is worth less than half of 1 percent? If tax-loss harvesting is included in a managed fund or portfolio that costs you, say, 1.5 percent a year versus a cost of less than 0.10 percent for a very tax-efficient broad index fund, you're paying 1.4 percent for something worth quite a bit less.

This is a good place to be reminded of what Warren Buffett calls his favorite investment holding period: "forever." Like many things in investing, tax-loss harvesting sounds a lot better than it really is.

• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. Questions about personal finance and investments may be sent by email to scott@scottburns.com.

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