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Financial Q&A


abw0004

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I wanted to create this thread to help those that are uncertain with how to move forward in these turbulent times.  Should I pull out of the market?  Are we headed into a recession?  How to make sure I can still retire.

I am sure there are other financial professionals out there on this forum and please feel free to chime in.  I am looking for this thread to be beneficial to the Auburn community.  One thing I have learned is people who are not financially literate are usually too afraid to ask for advice.  And another thing I have found is most people who give "free" financial advice for a living have some sort of anterior motive.  I would like to use this thread to help those that have questions on what to do as the market continues to take a dive.

First my credentials.  I have both Series 7 and Series 66 licenses, which are the highest investment series of licenses you can acquire.  I am also a CFP candidate (Certified Financial Planner).  Lastly I am an AIF, or Accredited Investment Fiduciary along with various insurance licenses.  I got started in the business helping families in debt as well as people with student loans.  Once my practice was bought I focused solely on estate planning for high net-worth clients.  I now deal with trust planning, succession planning, charitable planning, estate tax planning, etc.  Enough about me.

When I think of something pertinent I will create a post on it and things you need to know.  Please stop me at any time and ask away.  No question is a dumb question, because in order for me to have the answer I had to have asked the same question at some point.  Here we go!

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Market Behavior:  I get asked this the most frequently as of late.  It is true the market has taken the largest single-day hits recently.  It is also true we very well may be headed into a recession.  A recession is a good thing.  Why on earth would I say that?  The market needs to correct every so often.  Usually every 7 years.  We are currently in year 12.  We have done all we can to keep delaying the inevitable with slashing rates.  Here is the issue with delaying it.  Think of a water dam.  Dams hold back water, and every so often you need to have controlled releases or the water just builds and builds.  The longer you wait to release the water the bigger of a release there will need to be.  Our market needs a pressure release.

This is good for you in a way.  Theoretically you want to buy when the market is down.  Well the market is down.  I say that with a caveat though because it is never a good idea to try and time the market.  You just can't do it.  What you want to do is dollar cost average, or DCA.  This means to put in a set amount of money every month to take advantage of the different stages of the market.  You probably do this with your 401(k) at work.

The market will go back up, guaranteed.  If you pull out your money in an effort to stop the bleeding you are actually hurting yourself.  I gave the example yesterday of letting air out of your tires when it is cold outside.  You actually let more air out than you thought because the air molecules are condensed.  When it heats up you lost more than you think.  So when the market heats back up you just lost out.  An investor with $10,000 in the S&P 500 index who stayed fully invested between January 4, 1999, and December 31, 2018, would have about $30,000. An investor who missed 10 of the best days in the market each year would have under $15,000. A very skittish investor who missed 30 of the best days, would have less than what he or she started with—$6,213 to be exact.

Long story short, don't move your investments, and more on that next.

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Retirement Accounts:  Most people in the workforce have the option to invest in their company's 401(k) or 403(b).  Everyone has the option of investing in IRA's, or individual retirement accounts.  There are two different types of each, traditional and roth.

Traditional retirement accounts allow you to put money in pre-tax.  So the money in these accounts grow tax-free until you pull them out in retirement.  Roth accounts work the opposite, where post-tax money goes in and it grows this way and once you pull them out in retirement you are not taxed.  I always tell people to make sure you max out your allowed contributions before investing in brokerage or advisory accounts because of these tax advantages.  There is a kicker though.  You cannot pull the money out before 59 1/2.  If you do, you get hit with a 10% penalty.  So if you pull out now, you get hit with the losses and the penalty so don't do it.

Most employers match, which is wonderful.  From what I have seen most employers will match up to 3%.  This means, for every dollar you invest in their 401(k), they also put a dollar in your account, up to 3% of your salary.  It is free money!  Take advantage of it.  View it as 100% return on your money you invest with your employer.  Not bad.

For the year 2020 you can contribute $19,500 to your 401(k) or 403(b) and $6,000 to your IRA if you are under the age of 50.  If you are 50 or older, you may contribute an extra $6,500 in catch-up contributions to your 401(k) or 403(b) and an extra $1,000 to your IRA.

Please note for Roth IRA's, you can only contribute to one if you make $139,000 or less if you file single, or $203,000 if filing married for 2020.

Bottom line, keep investing in your retirement accounts, even with the market as is.

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Dollar Cost Averaging your Money:  Instead of maxing out your retirement account in January of each year, or trying to time the market (it doesn't work), use the dollar cost average method.  This means that if you are to invest $12,000 this year, don't invest $12,000 in one month.  Invest $1,000 each month for 12 months.  Why?  Here is an example:

Let's say that you want to invest $10,000 in a certain fund, and that you choose to invest $2,000 on the first trading day of the month for five months in order to build your position through dollar-cost averaging. We'll say that on each of the five days you make a purchase, the fund is trading for $50, $40, $20, $40, and $50, respectively. In other words, the fund ended right where it started, although it was quite volatile along the way.

Here's how your five purchases would have turned out:

Capture.JPG

Here's what I mean by a "mathematically favorable price." The average share price of this fund for the five days you made your purchases is $40 (add $50, $40, $20, $40, and $50, and divide by five), but the average price you paid ($35.71) was significantly lower.  I used round numbers to keep the calculations neat, but you can repeat this experiment using any five hypothetical share prices. Your average cost basis per share will always be less than or equal to the average of the five share prices.  

You may be thinking: "Wouldn't it be better to have bought all of your shares when the stock was trading for $20?"  Sure it would have. It also would have been great if I could have picked last week's Powerball numbers, or if I knew whether "red" or "black" would come up next at a roulette table.  However, reliably predicting the odds of something isn't always possible. The same can be said for trying to time a stock's price. There's no way to know reliably when a stock is at its low point, or when it will go down even further. You might get lucky sometimes, but market timing is generally a losing battle.

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Emergency Savings:  This can be a touchy subject.  A lot of people do not like being told they are not saving enough money.  Well, with where our economy is currently, this is a great example of why you always need emergency savings.  I always made a rule for every client when I first got into the business to have at least 6 months of emergency savings.  And some people are finding out the hard way right now.  When you get home tonight sit down and write down every expense you pay each month.  This includes mortgage payments, car insurance, utilities, food, gas, subscriptions, etc.  If you pay for certain things annually like home insurance, college football tickets, etc take the cost and divide by twelve.  Once you have added these things up, multiply by six to get your number.  For example, a single person making $60,000 usually needs about $20,000 of emergency savings.

This is important not only for when you lose your income, but big expenses.  What if the A/C unit goes out.  That is a $5,000 expense right there.  Need a new roof?  $2,000 deductible.  

I understand there are societal pressures to appear to have the "Instagram life" but in reality buying your "wants" instead of protecting your "needs" is a risk and you are seeing who prepared and who didn't now.  I understand some are living paycheck to paycheck and cannot do this.  Any small amount counts for saving.  

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19 minutes ago, Proud Tiger said:

Thanks for your posts. What sector stocks or index would you buy now? Are you OK with covered calls?

Buying individual stocks or call/puts is too much systematic risk.  There is no way around it.  I would instead look at fund families, ETF's in particular.  Mutual Funds are great for those people who are brand new to investing but they are very expensive and take out the work for your personal adviser charging you a fee on top of that.  I would definitely look into value funds.  DFA, or Dimensional Fund Advisers does a great job with value funds and have low costs inside the funds.

ETF's are very low-cost, but are passive funds, compared to mutual funds that are actively manged funds.  This is why you need your adviser to stay on top of it.  You cannot control the performance of the funds really, but you can control the expenses inside of it and make sure none of the funds have revenue sharing.  Revenue sharing is extra compensation paid to the adviser behind the scenes that they do not need to disclose to you.  And steer clear of funds that lock you up for a period of time.  Also go for low cost, transparency, and liquidity.

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10 hours ago, Proud Tiger said:

Thanks, Any ETFs you suggest right now.

It all depends on your risk tolerance.  There isn't a one size fits all really.  Have you ever taken a risk profile survey to find out your risk tolerance?  If you haven't I would recommend to do so.  There have been many times where clients tell me they are this risk tolerant, but it turns out to actually be something vastly different once they take a risk profile survey.  

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  • 1 month later...

Man! Taking a beating at (as all) 57 years old and only in plan for 2 years. My age is what worries me. I've usually done well on my own but wondering if I should hire a pro now. I'm still up 0.81%. My T.Rowe Price(high risk) value is down 13.78%. My S&P +15% and State Street aggressive at+5%. Also have a plus in my company owned stock that is employee owned(Publix). Not looking for free investment advice. Just wondering if I should hire a pro now or move some around and count on my own dumb luck? Probably just answered my own question lol. Just looking for some positive at my age.

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  • 2 weeks later...
On 5/5/2020 at 10:54 PM, sandyclawedtiger said:

Man! Taking a beating at (as all) 57 years old and only in plan for 2 years. My age is what worries me. I've usually done well on my own but wondering if I should hire a pro now. I'm still up 0.81%. My T.Rowe Price(high risk) value is down 13.78%. My S&P +15% and State Street aggressive at+5%. Also have a plus in my company owned stock that is employee owned(Publix). Not looking for free investment advice. Just wondering if I should hire a pro now or move some around and count on my own dumb luck? Probably just answered my own question lol. Just looking for some positive at my age.

Personally I would reccomend to have someone look at your funds.  It appears you have a lot of risk in your funds, more than I would be comfortable.  Also, the market is very turbulent at the moment so everyone is taking a beating.  The worst thing you can possibly do though is rip your money out of the market.  Look for someone willing to put you in ETF's outside of your company-sponsored plans.

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