"I want to make my money work for me"
"I want to make my money work for me" is usually the question I get when talking to clients who are invested and are under performing the market or thinking of investing in the stock market. Investing in the stock market can be a scary step to take on your own. There are literally hundreds of thousands of people telling you what to do, what to buy, and when to sell. And just when you've had enough, you go to Yahoo Finance to do your own due diligence only to see green & red flashing numbers. Of course you know red is bad, but the guy on TV said, "X" stock is a great buy and it's on discount," but your buddy who's been following the markets tells you, "it's a bad buy."...WHO DO YOU LISTEN TO!?!
You don't know. So what do you do? Nothing.
That's exactly what NOT to do. I'm a firm believer that one should have an emergency fund and be properly insured before investing but for most of us trying to balance bills, life, and some extra cash that we have, fear not, YOU DON'T HAVE TO sit on the sidelines. Investing is becoming a bit more commoditized as Robo-Advisors enter the financial services industry, but there are still a few questions to ask when you decide to jump into the investment world.
1. What am I investing for?
2. How much risk can I tolerate?
3. What fees am I going to pay?
4. Should I seek out a professional?
What am I investing for?
There is a big difference between saving and investing. The difference, TIME. We all have goals that we want to meet, long-term and short-term, but what savings vehicle is good for what? My rule of thumb is if you are saving for something near term like a new car, down payment on a home, and / or a family vacation, use a savings / money market account. This type of account has little risk tagged to it and is highly liquid. These two things are important because of need. If you need the money fast, you don't want to risk it in the stock market for whatever amount of time.
On the other hand, if you are saving for a long-term goal 10 plus years away like retirement, education for your children, a quinceñera, or your 20 year anniversary, investing may be a better option for you. You are more likely to capture the growth of the stock market and be less vulnerable to the ups and downs of the stock market. This leads me to the next question.
How much risk can I tolerate?
This question is commonly overlooked by many who are starting to invest or have been investing for a while. It's the question that sets the tone for how your investment portfolio should be put together. While many people want their money to "work for them," not everyone is willing to risk it all which is a wise move by the way. Knowing how much risk you can tolerate when the markets are going haywire will keep you from selling at the wrong time or even buying when you think it is the "right" time.
It's a smart move to take a risk tolerance questionnaire, which human advisers and online investment platforms offer, to get an idea of how much risk you are willing to take. As you get closer to your goals or something major in life happens, one should re-take a risk tolerance test to see if it's changed. Keeping in mind that you are not the person you were ten years ago.
What fees am I going to pay?
In the investment world there are several fees you could end up paying. There are trade fees, advisor management fees, commissions, underlying expenses for investments (this is called the expense ratio), etc... So who or what should you pay? The answer is, it depends. It depends on what platform you use and if you have a human advisor.
So for simplicity's sake, if you are starting off or just want to simplify your investments all together, a robo-advisor would do just fine. Your typical robo-advisor will charge you .25% - .50% plus the underlying expenses of your investments which could be anywhere in the range of .50% - 1.00% all in. Why are fees so important? The higher the fees, the less you keep in your pocket. Don't get me wrong, I'm all for low cost investing but at some point, I believe people do need professional help. Which leads me to the last question?
Should I seek out a professional?
Why hire a professional and pay them 1% of your money if you could get it invested cheaper and just as efficient? One answer, the human touch. This can never be replaced by a robo anything. People are fickle and tend to make rash decisions when they hear bad news, life changes, or don't have enough information about something but don't want to admit it.
When the markets are volatile and you want to sell, a human advisor will be there to calm you. When you are about to retire, want to know if your investments will last, and when you should take social security, a human advisor can help you. Or when you second guess your own investment strategy, an advisor can tell you if you're on the right track. The typical charge for professional help is between 1.00% - 1.50% depending on what the advisor's specialty is. Who your professional advisor should be can be summed up in one two words, a fiduciary ( You can watch John Oliver's take on fiduciaries in this video).
MyLife Financial is a fee-only financial advisory firm providing objective and independent advice virtually. Our clients are busy professionals that face daunting questions of how today's financial decisions will affect their long-term financial success. Everything written is strictly for informational use only. Please seek the advice of your CPA, Attorney, or financial professional before implementing any strategies.
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