National Women’s History Month: https: Women’s Guide to Investing – Week Two

National Women’s History Month: https: Women’s Guide to Investing – Week Two

Happy National Women’s History Month! This month we want to take the time to celebrate the numerous accomplishments and contributions of women throughout history. With each passing year, women continue to break more barriers and shatter more glass ceilings than ever before. For our part, ML&R Wealth Management would like to propel women of today forward by answering your financial planning questions each week in our special month-long series, “Women’s Guide to Investing”. We asked the women in our community what they would want to hear from a Financial Advisor as a woman. Each Friday we will share a variety of questions and provide answers and explanations to help you feel more empowered and confident as you navigate through your financial journey. This week we will explore ways to save and invest beyond your 401k, help you understand how to look for good investment options, and explain the difference between a broker-dealer and a Registered Investment Advisor.

I max out my 401k every year. What else can I do to make sure I am saving enough for retirement?
Answered by Carli Smith, CFP®, Wealth Management Advisor

Employer-sponsored 401k plans are a wonderful benefit for many reasons. By contributing, you are given the opportunity to save and invest for retirement in a tax-deferred or tax-exempt manner. In addition, you may have the opportunity to receive a company match (FREE MONEY!) and you typically have access to diversified investment options. The only downside to a 401k is that there is a maximum dollar amount that you can contribute each year. However, that doesn’t mean you have to or should stop there for saving and investing towards retirement. For example, if you are a high-income earner, maxing out your 401k and doing nothing else may not provide the level of retirement savings needed to maintain your lifestyle once you stop working. Or, you may be a great saver and are looking for additional ways to put money aside for retirement. Either way, there are ways to save and invest beyond a 401k.

When we think about the best way to approach retirement savings, we need to think of it in terms of buckets. First, you want to take advantage of any employer-sponsored plans and max those out. Second, if you qualify you will then want to max out your Traditional or Roth IRAs (You can find the income and contribution limits here). If you find that you are not able to contribute to a Traditional or Roth IRA because of your income level, you can just move on to the next bucket. After you have filled all your tax-advantaged buckets, it is time to think about making contributions to a taxable account, or what is known as a brokerage account. This is an account that you can open at a custodian like Fidelity or Charles Schwab that is either in your name or jointly with your spouse. You can even set up automatic transfers each month from your bank account to make contributing more automatic and consistent. While you won’t receive the same tax advantages as you would in a retirement account, you still reap the rewards of being able to invest towards retirement. One important thing to mention is that within a 401k, you are accustomed to having a fund lineup to choose from for your investments. Within a brokerage account, there isn’t a specified fund lineup. Rather, you have access to all stocks, bonds, mutual funds, and ETFs that are publicly traded and available at that particular custodian. This can be overwhelming for some. When deciding what to invest in, it may be tempting to purchase a handful of individual stocks. However, it is important to maintain your diversification which can be achieved by purchasing mutual funds or ETFs.

Often when people reach this level of savings, it is advantageous to start thinking about creating a comprehensive financial plan. This includes a complete review of your assets, goals, tax planning, investment planning, insurance planning, estate planning, and retirement planning. By visiting with a Financial Advisor and going through this exercise, they can help you determine the optimal savings rate for each bucket, which types of investments to own in which accounts for tax efficiency and proper diversification and build out a portfolio that supports your goals and overall risk tolerance.

How do you decide that something is a worthwhile investment?
Answered by Carli Smith, CFP®, Wealth Management Advisor

When it comes to investing, there are some things that cannot be controlled. With each passing day, the movement of stock prices is unpredictable. Unfortunately, none of us have a crystal ball to tell us which way the wind is going to blow day in and day out. Knowing this is the case, how do you find a good investment? It is important to point out that diversification, the cost of your investments, staying disciplined with saving, keeping your emotions in check during turbulent times, and risk exposure are going to be the main drivers of your investment success. Investment returns are important and a crucial factor for growing wealth, but by focusing on the things you can control versus the things you can’t, you will end up with a more positive investment experience overall.

When looking for an investment that fulfills this concept of “focusing on what you can control”, where can you begin? Starting with diversification, the most common way to achieve that is by investing in mutual funds or ETFs. A mutual fund is a professionally managed investment vehicle that will invest in hundreds or thousands of different companies rather than just a few stocks or bonds which immediately diversifies you. In essence, mutual funds combine money from thousands of investors and then invest in stocks or bonds using those pooled assets.  An ETF is similar in that it also provides immediate diversification. Next, pay attention to what that investment is costing you. Each mutual fund or ETF has an expense ratio. An expense ratio is the fee paid for managing the mutual fund. This fee is automatically deducted by the asset manager that manages the fund. Ideally, you want this number to be low. While the average mutual fund costs anywhere between 0.80% to 1%, the ideal expense ratio is much lower. Risk is the next item to look at. Generally, if the mutual fund or ETF is invested in stocks, then it is riskier and will be more volatile, but has a higher expected return. If it is invested in bonds, then it is less risky and will be less volatile which has a lower expected return. How much to own of each is highly dependent on how long you have until retirement and on your appetite for risk. Some other data points to look at are how does the mutual fund or ETF compare to its peers. Each belongs to a category and has a ranking within that category. For example, a mutual fund that invests in US Large Companies shouldn’t be compared to a fund that invests in International Small companies. It would be an apples to oranges comparison.

To educate yourself, a great place to do your research is by going to Morningstar or using something like Yahoo Finance. You will be able to find the recommended data points mentioned above. By working with a Financial Advisor that is a Fiduciary, they will do this leg work for you and then build out a portfolio with investments that are in your best interest and help facilitate your goals.

You can read more about the key to a successful investment experience here.

What is the difference between a broker-dealer and a Registered Investment Advisor (RIA), and how do they help with Investments?
Answered by Julie Reinhardt, Wealth Management Associate

A broker-dealer is either a person or an institution that buys or sells investments on behalf of a client.  They can in some situations provide investment advice and basic retirement planning help as well. However, they typically focus only on the investments.  They may make recommendations on the stocks, bonds, or mutual funds they want you to investment in based on how suitable it is.  They will charge a fee for transacting on your behalf, generally paid by commissions on the investments that are being investing in. They may also receive ongoing commissions from the investments or products they sell. Broker-dealers are held to a suitability standard meaning that their advice must be suitable for your needs at that time.  Another type of advisor is a Registered Investment Advisor or RIA.  There are several ways that an RIA differentiates themselves from a broker.  First, RIAs must register with the Securities and Exchange Commission.  They are also considered Fiduciaries which is the highest standard of care within the financial services industry. Obligated by law, Fiduciaries must act in your financial best interest making them a step above a broker-dealer which only has to adhere to a suitability standard. To see an example of the difference between the two click here.

Second, Registered Investment Advisors are compensated in a fee-only structure. This means they charge a percentage of the total portfolio managed, or a flat or hourly fee for services.  Registered Investment Advisors do not accept commissions for any transactions or recommended investments. Therefore, there is no incentive to recommend one investment vehicle or product over another. When deciding which to choose, the main question you should ask yourself is, do you want to receive advice that is objective and based solely on what is best for your situation? Or, do you want to receive advice that could be influenced, at least in part, by how much money the advisor will make based on recommendations? The only way to ensure that the recommendation you receive is unbiased is to work with a Registered Investment Advisor. They MUST offer financial and investment advice that is based on your best interest and not his or her compensation.

“Women’s Guide to Investing” Week Two Wrap Up

We hope you enjoyed the second week’s topic for our “Women’s Guide to Investing” special blog series. In the following weeks, you can expect more questions on a variety of topics that impact women. If you missed last week’s blog, you can find that here. If you have a question for one of our Advisors at ML&R Wealth Management, please contact us. We would love to help answer your questions!

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About Author

Carli Smith, CFP®

Carli Smith is ready to embark with you on your financial journey. She will take the time to understand your values and listen to your goals. With this solid foundation, she will build out a long-term investment strategy and a dynamic portfolio based on the comprehensive financial planning built out around what matters most to you. Her attention to detail, love of problem solving, and compassion for clients allows her to be an ideal investment management advisor.

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