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The Little Things Can Matter Most!

s&p 500

June 1, 2021 by Ryan Zacharczyk

“Beware of little expenses. A small leak will sink a great ship.” – Benjamin Franklin

Most retirees concern themselves with large market fluctuations, major economic calamity, or fraud. With good reason, the large, sudden, dramatic loss always seems to be the greatest concern for investors. However, often-overlooked are the consistent, grinding expenses and fees that can gradually eat away at your returns and pin your portfolio down, preventing it from achieving its maximum potential.

Ann & Betty

Ann and Betty were both 65 and met each other at a widows’ support group. They both wanted to retire and had no intention of remarrying. Despite the $1,000,000 they each had sitting in a savings account, neither had a clue about money and certainly did not know how to generate the income they needed to live. Ann went to a financial seminar and listened to a slick salesman sell her on a financial product he had that would guarantee her $74,549 for 25 years. She was so excited, she told Betty with the intention of convincing her to invest as well.

Betty was skeptical. She shopped around and found the same investment vehicle with 1.5% less in commissions and fees. Betty’s annual income for the next 25 years was $85,810. She received more than $11,000 per year more than her friend because she was careful to avoid high fees.

We live in a world where cost has a direct relationship to quality. BMWs can be expected to perform better than Chevrolets, Hagen Daz tastes better than Turkey Hill, and The Cheesecake Factory is better than McDonald’s. “You get what you pay for” is a mantra we hear time and again. Although this may be the case on Main Street, the truth on Wall Street is very different.

Studies have shown that the only correlation between fees and returns is an inverse one. Higher fees consistently lead to lower returns. Low fees should not be confused with no fees. Attempting to handle your own finances usually ends up costing far more than the fee. It is never advisable to avoid one problem by creating another.

It is possible to find a fee-only CFP® who is as concerned about your investment fees as you are. If your financial planner is worth his salt, he will understand the relationship of fees to performance and do everything in his power to keep them as low as possible without sacrificing return.

The use of index funds is the surest way to keep your fees to a minimum and not fret about possible market underperformance. An index fund is a group of stocks that are pre-assigned; they are not actively managed by a fund manager. The index fund tracks an underlying index, like the Dow Jones Industrial Average, and rarely makes changes to the makeup of the fund. A common example is an S&P 500 fund that tracks (you guessed it) the S&P 500 index. The index is run by a committee and makes changes infrequently, thus, it is not subject to the emotion or whims of an individual whose career is on the line. This can be very beneficial to the investor.

Index funds traditionally have far lower expenses than actively managed mutual funds because they have far less overhead to operate the fund. Index funds usually do not have loads. This is why index funds are so often shunned by full commissioned brokers; there is no commission to be had, thus no income for them. However, fee-only investment advisors are often very receptive to index funds as a large percentage of a portfolio.

Investment fees are unavoidable. In order to have the proper level of diversification, they must be accepted as part of the process. However, all investments are not created equal. Two funds could be exactly the same and have two very different sets of fees. Keeping your fees to a minimum will ensure that you are able to expel every last ounce of juice from your money tree once it begins to bear fruit.

Filed Under: Financial Advisors Tagged With: fee-only cfp, financial planner, financial planning, fluctuations, index funds, s&p 500

May 3, 2021 by Ryan Zacharczyk

FAQ: I inherited a lot of shares of a single stock? I am worried it is too much in one stock, but don’t want to sell it. What should I do?

Answer: This is a very difficult emotional decision for many. When inheriting shares of a company that were held by your parents, grandparents, or other beloved family members, it can often feel like a betrayal to sell any of that stock. In reality, most people that come to us with this problem have way too much of their portfolio tied up in this one stock. Overconcentration in the shares of one company can lead to the equivalent of gambling your future on the future of one company.

Although this can lead to outsized returns over time if your instinct is right, if wrong, overconcentration can be devastating. In financial planning, we don’t like to gamble your financial future. Good financial planners use diversification and asset allocation to ensure that your money is there when you need it and grows over a long period of time.

It seems unlikely that companies like Apple, Disney, or Home Depot could possibly struggle or go out of business, but it is not as uncommon as you think. Nobody could have imagined in the year 2000 that General Electric, General Motors, or Exxon Mobile would be either out of business or materially irrelevant to our stock market and economy in 2021, but that is where we are. GE, the greatest performer of the 20th century has been the worst performer in the Dow Jones Industrial Average in the last 21 years, hanging on for its life at present. A $100,000 investment in this “blue chip” in 2000 would be worth roughly $26,000 today, while an equivalent investment in the S&P 500 would be worth more than $300,000 in the same amount of time.

This may seem bad, but it is far better than investing that $100,000 in General Motors in 2000. This 100-year old company that was the leader in the automotive industry filed for bankruptcy in 2009, essentially eliminating your investment.

The point is not to scare you into avoiding investing, but to understand no matter how solid a company looks at any time, economics, management, and technology are changing so fast, it will be hard for any one company to dominate. The past is not a strong indicator of the future and it would have been hard to predict, in 2000, that a company like Apple, that was months from bankruptcy or Amazon, that was struggling with all tech stocks when the bubble burst, would be the next great stock picks of the future.

The easy solution: Don’t play the game. If you want to maintain the legacy of your loved one, hang on to the inherited stock, but keep it to no more than 5% of your total net worth. Sell the rest. You can then experience the joy of being connected to your loved one without the risk that they might put you on food stamps in the future.

Filed Under: Retirement Questions Tagged With: diversification, financial planning, inherited stock, s&p 500

May 11, 2020 by Ryan Zacharczyk

FAQ: Now that the market has corrected and is down, should I be doing anything different with my retirement investments?

Answer: This is an excellent question that we have been getting often since mid-March.

As the COVID-19 crisis continues to engulf our world in uncertainty, that lack of clarity has translated through to the manic-depressive stock market. The market selloff in mid-March was historic, with the S&P 500 bottoming out about 37% below its all-time high just a few weeks prior.

In addition to a panicky stock market, the traditional safe investments, like treasury bonds were hitting historic highs with the 10-year treasury offering record low yields (in the bond world, yield and price are negatively correlated, so when one goes up, the other falls) of .5% or less. Essentially, valuations of equities, especially when compared with bonds, seemed compelling.

However, the disparity was short-lived as the market remained at or near its lows for only a few days and immediately turned upwards, recovering more than half its losses.

Now, with exceedingly low yields on bonds (do I really want to lend the government money for 10 years and get less than 1% interest each year?) and a recovering stock market, should you change your allocation?

The answer depends on the traditional metrics of financial planning such as age, risk tolerance, time frame, and goals. If you are retired and drawing from your portfolio to provide your retirement income, you may not have the ability to take risks with that money. Volatility can be deadly to money you need to live off of for the next 3-5 years.

However, for those of you who are younger, have more than 5 years to retirement, and have a relatively high-risk tolerance, this may be an excellent time to move your portfolio to a more aggressive posture to take advantage of cheap valuations in equities and sell bonds at historically high prices.

Be smart, make your allocation decision based on your circumstances, and if you have the ability to weather the COVID-19 storm, take advantage of the opportunity presented. However, the stock market is not a casino. Do not gamble money you need in the near future on a hunch.

Filed Under: Retirement Questions Tagged With: financial advisor, financial planning, market selloff, risk tolerance, s&p 500

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