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Onboarding with Propel: 7 Frequently Asked Questions

Clients and potential clients often admit to being uninformed and/or overwhelmed by the myriad of terms and ideas that are thrown around by investment professionals.  Here at Propel, we strive to reduce some of that discomfort by answering questions and repeating ideas in different ways to give our clients a chance to understand how these concepts apply to them.

As we approach the end of 2019, we are thrilled to have had a recent influx of new clients (lately they have come from Tennessee, Illinois and Florida) who are brand new to investing.  Some of them are getting started very young, while others have “been meaning to do it” for awhile.  It is never too late or too early to begin saving for the future, whether it is the near future (like emergency savings) or the distant future (retirement).

The purpose of this article is to go over some basic concepts based on real questions from some of our newest clients.  

1.  What will you invest in for me?  Can I lose money?

Yes, there is always the chance you will lose money while investing; but to explain that more fully, we need to talk about the types of assets you will be investing in.

Equities, aka Stocks:  A stock represents ownership in a company, thus it is referred to as an equity asset.   You have equity, or an ownership stake, in a particular enterprise.  It’s important to remember that stocks are not intangible ideas that you see on your computer screen, but are pieces of companies that are made up of real people who are selling their ideas or products to consumers.  Investing in individual stocks is something we do not do for smaller portfolios.  We fully appreciate the risk in buying any asset, which is why we want to invest your portfolio in a variety of stocks – not just one.

Bonds:  Bonds are debt instruments.  You, as the investor, are loaning money to a company or a government entity.  In exchange, they are paying you interest and will return your loan principal to you on a published date (the maturity date).   Bond investors have preference over stockholders in the event of a bankruptcy or some other financial problem experienced by the issuer.  More information about bond investing can be found here.

Mutual Funds/ETFs:  Mutual funds and ETFs are similar in that they are assets that invest in a group of stocks, bonds, or both.  These types of funds allow you to diversify your investment without having to buy lots of individual bonds or stocks.

Can you lose money?  Absolutely. The value of these assets moves up and down daily, if not hourly.  If you sell an asset when it is valued less than it was when you bought it, you have lost money on that asset. If you hold onto the asset and wait for the price to rebound, you’ve lost nothing.   

Short-term moves in price are referred to as volatility.  However, long-term investors worry less about short-term volatility and focus more on the compounding effect of market growth and dividend reinvestment.  The younger you are, the more able you are to withstand market volatility.  Regular contributions and purchases will provide protection from that volatility.   As you grow older, you will move toward more bond investments to protect principal that you will need for income in your retirement years. Those allocation decisions will be discussed with you regularly as your needs and circumstances change.

2.  Should I invest in an IRA OR a mutual fund?

We get this question a lot.  An IRA is a type of account, while a mutual fund is a type of asset.  The account is a statutorily created vehicle that is governed by a variety of tax rules.  There are several types of accounts that may be appropriate for any one investor.  On the other hand, a mutual fund is a type of asset that any investor can purchase within an account.  Nearly any type of account can invest in mutual funds, stocks, or bonds.  But how those assets are treated for tax purposes depends on the type of account they are in and the tax rules that govern that account.

3.  Is it worth starting a Roth IRA if I can’t contribute much?

Yes.  For example, a 22-year-old investor who contributes just $50 a month until age 60 will have contributed $46,800 total.   With 5% annual growth, those contributions could be worth nearly $72,000 at age 60.  At retirement, all that growth (more than $25,000) will be yours tax-free!  

Imagine what you could accomplish if you contribute more than $50 each month?  The compounding effect of long-term investing is incredible.  In fact, we argue that NOT investing is worse than taking risk in the stock market.  (And the science agrees! To learn more about the importance of dollar-cost averaging, click here.  Your advisor will work with you on reasonable risk exposure for your portfolio that takes into consideration your age, health, income needs, and personal risk tolerance.  Choosing assets for your portfolio based on these criteria helps to lower the risk of losing money.  But not investing at all means you will always have nothing.    

Now what if you could compound earnings AND save money on taxes?  That’s exactly what a Roth IRA does.  The growth of your contributions is yours to keep tax-free; and it won’t impact your social security income or any other credits or taxes that are dependent on the Adjusted Gross Income (AGI) reported on your tax return.  

Another benefit of Roth IRAs is your ability to withdraw contributions at any time tax-free.   While we never recommend that you dip into your retirement savings before retirement, we know that emergencies happen to us all.  As long as you don’t remove any of the compounded earnings from the portfolio, Roth IRA contributions are always yours.  Lastly, your beneficiaries could inherit your Roth IRA upon your death tax-free.

We can’t stress enough how important it is to begin making contributions as early as possible.  Talk with your advisor about how to begin a Roth IRA.

4.  I have a 401(k).  Should I max it out?

Maybe.  

401(k) plans are a great savings vehicle for many investors.  The best kinds of 401(k) plans are those that provide an employer match, aka free money!  We recommend maxing out your 401(k) at least to the point of maximizing your match.  Once your match is maximized, then you may want to consider other vehicles such as taxable savings or Roth IRAs to increase your liquidity and flexibility.  As wonderful as 401(k)s are, you can’t easily get to that money nor do you have much say in how it’s invested.  If you leave a job, take your 401(k) with you via an IRA Rollover to maximize flexibility, liquidity, and potentially cost.

If your earnings are substantial and you are in a high tax bracket, it may be a good idea to invest a higher amount in your 401(k) to increase your savings (thus your compounding) and reduce some of your taxes.   But even high tax bracket earners need Roth IRA savings.  Keep in mind that pre-tax 401(k) contributions still only reduce your taxable income by a percentage.  It is never a 1:1 deduction.  You should always talk with your tax preparer about what makes sense year-to-year as your income and tax laws change.

The same is true if your 401(k) plan gives you the option to invest in a Roth or a Traditional 401(k) account.  Let us know if you do not have a tax advisor as we can assist you with that as well.

5.  Can I change my contribution amounts or schedule?

Yes.  We recommend setting up a monthly contribution to your portfolio(s), but you can change that contribution at any time.  We have no minimums, as we want to provide you with the utmost flexibility when assisting you with your financial planning.

Our advisors can provide our clients advice on all things financial.  If you haven’t spoken to one of us lately, please schedule a phone call or in-person meeting.  We do our best work when we know what’s going on in your life.  If you have other questions, please email them.  Chances are, other clients have the same question and would benefit from a newsletter article addressing it.

6.  How do you decide what you buy in my portfolio?

Research.  Our team has been doing this for a long time, and we come from a variety of backgrounds. That benefits you because the economy and the ability to make money in it is not a simple task. All of our team members contribute different perspectives, educational backgrounds and thought processes in creating portfolios.   

None of our portfolios are the same because none of our clients are the same.  We research assets together as a team, including in-person interviews with the sales and portfolio management teams of large mutual fund companies.  We buy inexpensive passive index funds, and we buy actively managed mutual funds that have huge teams of researchers.  All of that is done after diligent research and in-depth team conversations.

For instance, social values investing is becoming a much bigger issue for investors, and companies have taken notice.  It has become a criterion that we review when looking at potential managers for ourselves and our clients.  Whether or not a company can adapt to the modern sensitivities to climate impact or we should avoid companies that create products that are considered harmful are important issues for some of our clients.  We take those ideas into consideration. 

7.  What should I expect when I become a client?

If you like what you hear and are interested in talking with us, we offer a free initial consultation.  We believe a long-term relationship based on positive rapport and mutual trust is best for our clients and for our team.  In order to take the first step towards building that relationship, we need to get to know each other better.  We will be discussing the following with you:

  • Financial history, personal income, tax situation, health concerns
  • Current investments and future hopes for investments
  • Priorities (job, vacation, retirement date)
  • How you define risk
  • Financial plan
  • Estate plan

 This article has covered a lot of information about us – we would love to hear about you.

Danielle Woods, daniellewoods@propel-fa.com