Today, Brian and Bo tackle the risk that you take by sitting on the investment sidelines. They have been fielding a number of questions over the past few months covering this very topic. The moral of this episode is to get started doing something sooner rather than later so that you do not miss out on what the market has to offer.
Brian shared an interesting piece of data that showed if you invested $10,000 a year for 25 years during the period from September 1, 1929 to September 1, 1954 (the Great Depression), while the DOW only increased 2 points in overall value (381 to 383), your dollar-cost-averaged investment would be worth $1.5 million. This shows that during a period where the market did not really appreciate at all, there was still value in investing your money in the market. That equates to an annualized return of 11.7%.
So, with that information, there are a few factors that need to be considered:
- Do you have enough cash to cover your emergencies? You should maintain enough cash reserves to replace at least 3 to 6 months of your income.
- What is your monetary needs timeline? If a big purchase is on the agenda, it may be necessary to hold that money in cash to avoid losing substantial amounts of the principle (down payment on a house 3 to 4 years from now).
- Make sure that the cash you are holding in the bank does not exceed the FDIC insured amount of $250,000.
- Measure your risk profile:
- Risk vs. Reward: How much risk are you willing to take for your desired level of returns?
- Risk Tolerance: Correlates with your risk vs. reward by measuring how much risk you can handle for a given amount of reward (or loss).
- Risk Capacity: How capable is your portfolio of taking loss given your investment timeline?
Risk of Not Taking Risk:
Inflation risk: Inflation could be a factor in the near future, is your portfolio giving you the required appreciation to maintain your purchasing power? Ask yourself what one dollar today will buy for you in 10 years.
Outliving your money: If you and your spouse reach the age 65, there is a 50% chance that one of you will live past age 90.
Multi-Generational Housing: Beware of running out of money and having to move in with your children (not because you want to, but, because you have to). Make sure your army of dollars is working for you!
Strategies to combat the fear of uncertainty:
- Have ample cash reserves worth 3-6 months of salary.
- Diversify your allocations: cuts volatility, use alternatives to outweigh individual sector risk, it has psychological value.
- Dollar cost averaging: This is something we preach! Spread your purchases out over time to help mitigate risk.
Things to consider when entering the market:
- When do you want to retire?
- How much money do you want every year in retirement?
- Do you want to leave a legacy?
- If inflation averaged 3% per year over a 25 year period it would cut your purchasing power in half!
- Current S&P 500 dividend yield is greater than a 10 year treasury bond.
We are always happy to receive emails from our listeners, and, on this show, Brian shares two different emails, one from someone beginning their financial journey and one from someone who is far enough along in his journey to see the fruits of his labor. The lesson from these listeners is simple: don’t let another day go by without saving for your future. Why are you waiting? Every day that goes by makes it harder to reach your goals. Start today to save and make it a part of your life that is automatic. Every dollar that you put away will help you build an army of soldiers that will work for you in the future.
Everybody wants to be a millionaire but it takes a bit of work to get you there. We would like to share some interesting (and exciting) numbers on how to accumulate a million dollars.
How to accumulate $1,000,000 by age 65 (10% Rate of Return)
Age 1 – Save $14.00 per month
Age 10 – Save $35.00 per month
Age 20 – Save $95.00 per month
Age 30 – Save $263.00 per month
Age 40 – Save $754.00 per month
Age 50 – Save $2,413.00 per month
The obvious benefit here is to start younger and let the compounding interest work for you.
We also mention in the show some great books you might want to check out:
•The Truth About Money – Ric Edelman
•The Wealthy Barber - David Chilton
•The Millionaire Next Door – Thomas Stanley and William Danko
The plan of attack -
•Make sure you have cash reserves – money in the bank.
•Retirement plan at work – this equals free money for you! Take advantage of it.
•Decide on what type of account you want to invest in. Roth, Taxable, etc. Research and find out what the initial investment amount is and what the minimums are.
•Make is systematic – make the investments each month and don’t stop.
•Dollar cost averaging – it protects you when the market goes volatile.
It is also important to note that investment products have changed a lot over the last 5 years. One great way to get a great diversified portfolio is to consider doing a target date fund. These funds are available through Vanguard, Fidelity, Charles Schwab and others. Most have no front end commissions and internal expenses of less than one percent. You choose the year that you think you will need the money (your retirement year), and they choose the asset allocation for you. The investments will start out aggressive and get more conservative the closer you get to your target date.
So, what are you waiting for? Take our advice and start putting soldiers in your dollar army! Put those dollars to work so you can enjoy what you love.
When investing in mutual funds, you normally choose between Class A, Class B or Class C. The main difference in these options is the fees that you will be charged and how they are charged. A good way to understand how these fees work is to look at the funds one by one and determine which plan is best for you financially.
We used “360 degrees of Financial Literacy” as a reference for explaining the difference between the classes.
Class A – This class of funds is a good choice for investors wanting to invest a large number of shares for a long-term investment. The commission is taken on the front end, meaning, 3-5% is paid to the advisor and 95-97% then goes into the investment. There is also another component to mutual funds, called internal expense. These expenses pay for the manager or the investment team that manages the assets.
Class B – This class is best for those who don’t want the front end loads. The load is taken on the back end. The entire amount is invested up front, but, on the back end, you pay a fee based on what the fund is worth when you leave that investment. The commissions are paid to the advisor by the mutual fund company through much higher internal expenses.
Class C – This is the new and improved version of the B shares and has become the most popular. The internal expense is not as high as the B shares and they don’t charge a front end expense. This is kind of a hybrid between the A and B shares.
When trying to determine which type investment is best, consider this: research shows that an A share is a better investment than a C share after about 9 years. This is because the front end commission puts the investor at a disadvantage to the C share, and it takes about 9 years to overcome the front end load fees.
No-loads are designed for two types of investors, those who want to do it themselves and those who what to hire an investment planner. Most people can manage their own assets up to about $250,000. Over that, you need the help of a professional who can make the most of your portfolio. It’s like shopping at Sam’s or Costco, the professionals have access to better deals on the investments than just an individual can get.
Just remember, watch your taxes, fees, and asset allocation, and you cannot help but be a successful investor.
Hiring a professional financial planner could possibly be the key that unlocks the door to your financial success. At the same time, choosing the right advisor to work with is an important decision that can often seem overwhelming. In today’s show, we discuss the services that planners will and will not provide as well as key things to look for when hiring a pro.
In the March edition of MoneyAdviser, Consumer Reports outlined what typical fee-only planners will and won’t do for their clients:
What they will do:
- Help you figure your net worth: Typically, a planner will have the client gather the necessary data and then create a statement to uncover other planning opportunities, such as insurance analysis or estate planning. (Do-it-yourself tip: Collect current statements for all assets and liabilities and use an online net worth calculator, such as Mint or Yodlee, to determine your net worth each year.)
- Advise you on 401(k) investments: Your planner should be looking at all the pieces of your financial puzzle, including your 401(k) to ensure that your saving and investing goals line up across the board. (Do-it-yourself tip: See if your 401(k) plan sponsor offers access to investment guidance or check out the online retirement-planning program, Financial Engines, for additional support.)
- Help you invest a lump sum: A planner should be able to offer tax-efficient investment advice to their clients, as this is a core activity of financial planning. (Do-it-yourself tip: Use Morningstar software to research mutual funds and stocks for your portfolio. Also, check out Bo’s Money-Minute about investing in a lump sum vs. dollar cost averaging.)
- Determine if you’re properly insured: Your planner should be able to evaluate your insurance needs, as well as refer you to an agent that can provide the coverage. (Do-it-yourself tip: Do as much research as possible and shop around for the best rates.)
- Assess if you’ve got enough to retire: A planner can determine whether you are on track for retirement or if you need to explore other options, such as working longer or changing your lifestyle. (Do-it-yourself tip: Assess your potential income sources, including Social Security, and use an online tool to calculate where you stand. Consumer Reports recommends T. Rowe Price’s Retirement Income Calculator and Analyze Now’s Free Retirement Planner.)
- Coordinate your retirement income: Planners can determine the best method for drawing funds from your various retirement accounts, while considering tax consequences. (Do-it-yourself tip: Consumer Reports advises that unless your retirements consists entirely of Social Security and a pension, you might want to consult a professional on this one.)
- Help you plan for college funding: A planner can guide you on the best ways to finance your child’s education. (Do-it-yourself tip: Visit www.collegeboard.com, www.savingforcollege.com, and www.finaid.com for additional resources.)
What they won’t do:
- Help you pay down debt: As a general rule, fee-only financial planners refer such clients to a debt counselor or a bankruptcy attorney. (Do-it-yourself tip: Contact the National Foundation for Credit Counseling if you need help with debt.)
The gray area:
- Help you control your spending: While many planners recommend following a budget, it’s not cost effective for you or the planner to spend hours together developing a detailed budget. Most planners are interested in overall cash flow and will recommend cutting back if needed. (Do-it-yourself tip: Create a spreadsheet or utilize budgeting software like Quicken, Yodlee, or Mint.)
- Create an estate plan for you: Planners can help you decide the structure and tax efficiency of your estate, but an estate-planning attorney will be needed to draw up wills, trusts, and end-of-life documents. (Do-it-yourself tip: Contact an attorney to prepare or review your documents.)
If you decide that hiring a financial planning professional would be beneficial for you, the following credentials should stand out to you:
- Certified Financial Planner (CFP): holder has passed a 10-hour exam, has at least three years’ financial planning experience, and has completed an approved course of study.
- Chartered Financial Consultant (ChFC): requires eight college-level courses in financial planning and 30 hours of continuing education every two years.
- Certified Public Accountant/Personal Financial Specialist (CPA/PFS): CPA with specialized training in personal finance.
- NAPFA – Registered Advisors: holder meets strict education and professional requirements for membership in the National Association of Personal Financial Advisors, for fee-only planners.
- Chartered Financial Analyst (CFA): holder completes a series of three six hour exams and has four years of qualified work experience.
Links to other things mentioned in today’s show: