Investing

I can’t invest, all my money is tied up in change.

I don’t have a problem paying a commission. Are the guys that don’t charge really trying or are you just providing them with working capital.

This simplified example helps quantify the difference in expenses/brokerage fees compounded over someones working years.

Lets say we have two individuals who start off with a $10,000 initial investment and add another $10k/year to their portfolio for 30 years. Obviously returns fluctuate from year to year, but lets say the first guy gets an average annual return on their portfolio of 7% (over the last 100 years, the average annual return is somewhere around 10%). The second guy gets the same 7% but pays 2%/year in brokerage fees, so his annual return is net to 5%. At the end of the 30 years, the first guy’s portfolio will be just over $1,000,000 where as the second guys portfolio will be just over $700,000… So that 2% in brokerage fees, while appearing small at first, amounts to over $300,000 in this example.

While brokers may advertise their portfolio management will beat market returns, the broker would need to beat the market returns by 2% per year for 30 years to come out even with the first guy who is invested in low cost index funds without a broker. The likelihood of any broker doing that is very, very low. As hnd mentioned, most brokers can’t beat market returns for 3 years in a row, let alone for the entirety of your working years.

As patk mentioned, it is eyeopening how expenses will impact your portfolio growth when compounded over your working years.

there are definitely great advisors out there and i think they are very useful for tax situations, Taxable vs tax advantaged, and other money matters like insurance and allocation decisions. But they can be expensive. I prefer fee based. Ones that will charge you a fee for X amount of time of advice and aren’t paid by specific familys of funds to put you into their products.

But I think a large chunk of advisors are effectively roboadvisors. They plug your info into the company they work for’s program and it spits out what you should be invested in. Some get kickbacks by fund families, some will try and get you into high commission insurance products.

Sometimes finding the right advisor is harder than doing it yourself.

I don’t mind high fee funds if they perform.

Very well said hnd… The advice provided by a good tax advisor is worth paying for. Like you said, many advisors just plug you into their system and their system is essentially managing your portfolio based on some inputs… Very little, if any actual thought goes into that sort of portfolio management.

My first question for you would be simple, what’s your age?

If you’re young or not nearing retirement, I don’t believe you need a financial advisor. If your income is significant, a good CPA is more beneficial. There are many low-cost diversified portfolios available at large brokerage firms. Some basic knowledge of taxable vs tax-deferred brokerage accounts is easily obtained online. Decide what is right for you and your financial situation.

If you’re nearing retirement or expecting a significant financial windfall, a financial advisor can be very beneficial. As mentioned earlier, do your homework. https://brokercheck.finra.org/ I’d personally choose an advisor licensed and backed by a large, well-known, financial organization for reputation and security purposes. As with most things, you get what you pay for.

This is only my opinion.

A lot of good perspectives shared. The take away for me is reinforcement of lessons learned over time. Start investing early, start with low cost index funds. Review and diversify holdings regularly. Identify the uses of invested funds – college for kids, retirement, supplemental income, etc. Engage professionals for retirement planning when it seems like something more than a distant dream. Engage tax professionals (can be the same person) when planning for retirement and passing along estates. Non-investing but still critical is to have a will that distributes your estate as you wish. Also have a medical directive in place and provide your personal representative with a power of attorney. Get it done and enjoy your life.

I moved to a new area 20 years ago and needed to find a local financial advisor. I asked the head financial guy at the company I was going to work for if he had recommendations, and he recommended I just contact a local bank (Wells Fargo), which I did. They put me in touch with a great advisor who works in affiliation with the bank. He has done a great job serving my financial needs, and then some.

I have worked with a half dozen advisors over my lifetime and an most satisfied with the current one which we “hired” 20 years ago. Check with your bank or with a chief financial officer (or similar) who you know for recommendations.

Index funds are a great tool to use for many people. They mimic the market so your returns are similar to the market returns. Most fund managers under perform the market so this way you don’t pay them for subpar returns. I believe in doing it myself. Who cares more about your money than you? It isn’t hard to learn how to value companies and buy shares in them when they are undervalued. The hard part is setting the money aside and waiting for the opportunities to present themselves.

Anyone have much experience with a Roth IRA? I’ve thought about trying to slowly grow that as a secondary option since I already have the pre-tax 401(k). Are there annual limits to what you can contribute to a Roth? And can you just contribute any money to that, rather than it being a payroll deduction?

IRS Contribution Limits for 2020
Roth IRA $ 6.000
Roth Catchup $ 1,000
Roth Total $ 7,000

401(k) $ 19,500
401(k) Catchup $ 6,500
401(k) Total $ 26,000

Catchup contributions availabe only if you are age 50 or older.

You can open a Roth IRA through your broker/dealer as well as trough payroll deduction from you paycheck. You can do both but total contribution is limited to the $6,000/$7,000 amount depending on age. Check fees and investment options, particularly with payroll deduction.

Roth plans are an excellent way to accompany a traditional 401K. I personally think everybody who’s investing & saving for retirement should have a balance of pre-tax and post-tax savings.

A roth ira is post tax and your withdrawals from it are tax free. the 401k is pretax and you will be taxed on those withdrawals.

If you are making more today than you think you will need to withdraw yearly in retirement, continue to invest in pretax investments. You could do that through your existing 401k at work, or open your own traditional IRA.

If you are young or your income today equals what you think you’ll need in retirement, open a Roth Ira and contribute to that.

I am a heavy roth guy as even if i make more than what i need in retirment, i believe we have a huge debt burden in this country and I also believe that eventually we’ll be taxes for universal healthcare and as such, I believe taxes rates will go up by the time i’m in retirement.

Here is kind of my order of operations :

1. invest in your 401k at work to at least get the match (assuming you don’t have a ton of control over what your 401k is invested in)
2. max out your own Roth IRA (or traditional depending upon your yearly earnings)
3. max out your 401k
4. Move to taxable

If you make way more yearly than you’ll likely need in retirement AND your 401k has good low cost diversified options, you can first max that out then move to other tax advantaged vehicles.

Dan, you may have an option to make Roth contributions directly into your 401k through work, your HR/payroll dept could say for sure. The annual limits go up substantially, and sometimes the costs are lower than what you may pay on your own, as the 401k is generally priced on the overall size of the plan, not just your individual balance. That can vary wildly, definitely not my place to say for sure. Your employer matching dollars have to go into the deferred portion, which will ensure you have both tax-free and tax deferred monies in the account at retirement, and like tornado said, it’s hugely beneficial to have both. It will allow you/your CPA/financial advisor to really manipulate your taxes depending on the brackets at the time.

also keep in mind that you can’t directly contribute to a roth IRA if you make so much money (160k i believe) but you can backdoor it into a roth using a traditional.