Adam from Tampa is skeptical about working with a financial advisor and wants to know how to invest on his own.
“For most of my life, I have been told what to do with my money. I had a family member work for Morgan Stanley and he invested for us for years.
Last year, we had some issues within the family and decided to part ways. My wife and I quickly decided to go with another guy who does good but the last email was life insurance focused.
The main question is I want to handle all of this on my own. I feel like I can’t teach my kids what is best without knowing. Any advice?“
That is a tough situation you’re in and it sounds very familiar to me. I wanted to invest for the future, but I didn’t know much about investing.
I got hooked up with an investment broker that ended up having very high fees and I felt didn’t have our best interest at heart.
Based on that experience, I wanted to learn as much as possible about investing so I wouldn’t get burned again. That’s part of the reason I started this podcast … to learn, grow and help my family get to the next level.
Regarding your situation, I’m going to share with you 7 thoughts I have.
1. Consider a Fee-Only Certified Financial Planner
Before you dive headfirst into the world of investing by yourself, please consider looking at a different type of financial advisor first. It sounds like you have been suspicious, burned and otherwise uncomfortable with the investment advisors you’ve met with so far.
Fee-only certified financial planners are a bit different from other financial advisors. They have signed a fiduciary oath and are legally and ethically bound to ensure your interests are put above their own. Additionally, they are not in the business of selling products (ie. whole life insurance) as they only receive compensation through the fee you pay them.
To test the waters, set up a free consultation call with a potential advisor from partners like Facet Wealth or XY Planning Network. These groups are focused on the fee-only model and may restore your hope in the financial advising profession.
Make sure to ask questions about how they are paid and how the fee structure works. If you don’t feel like the person you are working with has your best interest at heart, keep moving along. This is your life savings we’re talking about here!
2. Read Books About Investing and Personal Finance
Whether you decide to go with a fee-only advisor or not, I believe it’s smart to educate yourself on investing so you can make informed decisions for the betterment of your family.
Here are 5 books that helped me become a better investor:
The Richest Man in Babylon by George S. Clayson
This book was written in 1926 and it was based on parables from 8,000 years ago. Although ancient-sounding, The Richest Man in Babylon has principles that hold true today.
This is a refreshing and fun personal finance read that is more of a story than “how-to” non-fiction.
The Automatic Millionaire by David Bach
David Bach shares strategies that make becoming a millionaire simple and easy. The Automatic Millionaire touches on the importance of automation and how not overthinking it can help you succeed with your money.
The Millionaire Next Door by Thomas J. Stanley
This book dispels the myths of what it takes to become a millionaire. These philosophies and exposed truths in The Millionaire Next Door help us to stay the course and achieve real wealth.
MONEY: Master the Game by Tony Robbins
One of my favorite authors and speakers is Tony Robbins. In Money: Master the Game, he tackles investing and personal finance by interviewing top investors and billionaires to find out their secrets to financial success.
The Simple Path to Wealth by JL Collins
Investing can appear very confusing for most people. JL Collins creates a simpler path for readers of this book by breaking down complex topics and making them easy to understand.
The Simple Path to Wealth explores the success and simplicity of index funds and how they can give you a successful portfolio.
Now, these books aren’t going to give an answer on how YOU should invest. They are going to help you understand different strategies and principals for you to consider. With this new knowledge, you can have more engaged conservations with a fee-only financial advisor and you’ll feel more equipped to invest on your own if you choose to.
If you’d prefer to listen to your books instead of reading them, try Audible for free for 30 days. I love it.
3. Choose a Low-Cost Brokerage Firm
In fact, these three are in such competition with each other that there is a “fee-war” going on right now and the consumer is winning! They are battling each other for who can provide the lowest fees to investors with some going completely to a no-fee model for ETFs and some index funds.
I’ve used Vanguard for years and before that, I was with Fidelity. Both have phenomenal customer service and are more than willing to help you get started with investing.
4. Take Advantage of Target Date Funds and Index Funds
If you’re not sure where to start, utilizing a Target-Date Fund with a partner like Vanguard gets you good diversification and low fees. This is a quick and easy way to invest by yourself.
There are pros and cons to Target Date Funds and all Target Date Funds are not the same. Check out the fees associated with the Target Date Fund you’re considering and compare it to other low-cost brokerage firms.
Additionally, index funds help you to keep fees low and they can diversify your holdings across different market indices like the S&P 500 or Russell 2000. By investing in major market indices, you can track the market and invest in top-performing companies. There are also index funds for bonds and real estate (REITs) as well.
5. Diversify Your Portfolio
Depending on a multitude of factors like your age, assets, liabilities, income and general goals for life, you’ll want your investment portfolio to be diversified. That way, your eggs aren’t all in one basket.
Some areas to consider for diversification are as follows:
- Real Estate (REITs)
Even in these categories, there are sub-categories to invest in. For example, you could have international stocks and US-based stocks. Or you could even diversify further within US-based stocks by investing in small-cap, mid-cap, and large-cap mutual funds.
A simple rule of thumb for stocks and bonds is as follows:
120 – YOUR AGE = STOCK PERCENTAGE
For me this would be:
120 – 38 = 82% Stocks
So based on that rule of thumb, my portfolio would be based on 82% stocks and 18% bonds. I like to add real estate into the portfolio as well to diversify even further. This works for me. It might not work for you. Here is the diversification breakdown that I use in my retirement based on my age, assets and risk tolerance:
- 60% Large Cap US Based
- 10% International
- 10% Small / Mid Cap
- 10% Bonds
- 10% REITs
As I get older, I will increase my bond holdings as that is typically a less volatile investment. The older you get, the more conservative you want to be so your money doesn’t all disappear in a big market crash right before you retire.
6. Make Sure to Rebalance Your Portfolio
Rebalancing is important and can be crucial to a successful portfolio.
For example, let’s say you decide that a 90% stock and 10% bond portfolio (90/10) is what you want. Over time, especially if the stock market continues to soar as it has been, your portfolio may start to look like 95% stocks and 5% bonds (95/5). At this point, you’ll need to sell off some of your stocks and purchase more bonds to get back to your 90/10 portfolio.
Set a reminder for yourself to rebalance annually or twice per year. Or partner with a company like blooom to do it for you. This way you’re making sure your plan is still in place.
7. Get Automatic with your Investments
Once you have your plan set, set up recurring investments on a monthly basis so your balance continues to grow.
By purchasing new index funds repeatedly, you’re taking advantage of dollar-cost averaging and removing the emotion out of investing. This way, you’re deciding in advance that you want to grow your investment portfolio. Although you still want to rebalance periodically, this methodology allows you to set it and forget it.
Over time, your investments can grow substantially with your consistent investments and with compound interest. It’s an incredible thing to see your money grow while you sleep!
I started investing in my 401k in 2013 using the steps above and almost 7 years later, I have around $200,000! Time, compound interest, contributing the maximum possible and receiving a 15% employer match made that healthy balance possible.
Related Interview: Simple Millionaire Investing Strategies with the 401k, IRA and 529
Invest Alone or With a Financial Advisor?
I’m not a financial professional so take my advice with a huge grain of salt. Adam. You and your financial advisor know your situation better than I do. If you don't trust or like the one you have today, try to find one that feels like a partner instead of a salesman.
If you have the time, interest and drive, you can definitely invest by yourself. Decide what is feasible and smart for your family and go for it.
I hope these 7 steps give you an idea of where you can go with your investing path.
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