Dear Savings Guy, should I work with a professional to invest my savings?

Dear Savings Guy, would you recommend I work with a professional to invest my savings? My husband likes to play in the stock market but is it best to trust a stock broker?
Additionally, I tend to want to hang onto the money but I realize it’s probably not doing me much good that way. I think my concern is that it’s going to crash and I certainly don’t want to lose my savings.
Thanks for your time (and amaaaazing example of saving!) -Angelique

 

Hi Angelique, Thank you so much for your question. Investing is always going to be a tricky area, and there’s no one size fits all solution that is going to work for everyone. With that being said, lets try to unpack your concerns and see if we can answer these questions for you.

Working with a professional

Financial Planner

Retirement is a daunting thing to think about sometimes. Trying to figure out the best time to draw from social security, and when you’ll be ready for retirement are difficult questions. Compound those with questions like “how much taxes will I have to pay in retirement?” “Should I invest in a 401k, Roth, or IRA?” “How much will medical insurance cost?” “How much should I save?” and it may seem like you’re in way over your head. If that sounds like you, reaching out to a CFP (Certified Financial Planner) may be the way to go. CFPs usually charge a few different ways. I’ll break them down below:

  1. By the Hour. Looking for quick advice? Trying to figure out if you’re on the right track with your money? Have a specific question you need answered? This is probably the way to go. CFPs will probably chare in the the neighborhood of $200 per hour depending on your location and the company.
  2. By the task. Are you looking to draft a retirement plan for you to follow for the next 15 years? Need help figuring out how much money you can expect to withdraw during retirement? This might be the way to go.
  3. AUM. This stands for Assets Under Management and refers to the common practice of having a CFP manage your investments directly so you don’t have to worry about them. CFPs usually charge a fee of around 1% of your assets that they are managing (AUM) per year. Using a CPA to manage your $100,000 retirement fund? You’ll likely be charged $1000 per year. The downside to this method is that there is often a minimum threshold your portfolio has to be at before a CFP will manage them. Good luck having a CFP manage your $1000 investment. The other downside is that the 1% fee you are paying has to be paid regardless of whether you actually make any money or not through your CFP. You could lose $5000 one year and still have to pay your CFP the same fee.

The cool thing about CFPs is that unlike other types of financial advisors CFPs have a fiduciary duty to place your interests above their own. Think of it like a hypocritic oath for accounting. Make sure your CFP is certified and legit however, or they could place your money in low yielding investments in order to maximize the fees they are able to charge you.

Whether (and how much) to invest

I definitely understand the temptation to hold on to your money. With investing, very few options are 100% safe (and the ones that are usually aren’t very attractive). There’s always the risk that you could lose everything, and that’s a scary thing to think about happening to your hard earned money. Hopefully I can show you that there are ways you can still invest your money while protecting your investment. But

First off, theres a few things that you have to realize are at play here

  1. Keeping your money in cash isn’t free. While there’s no risk of loosing your money here, inflation will slowly eat away the value of your savings. In recent years, inflation has hovered around 2.5%, but could go as high as 5% this year. That means that your $100,000 savings this year is only worth $95,000 next year. You’re paying $5000 this year for the privileges of keeping that money in cash.
  2. Not all risk is created equal. Any time you invest in a company, there is a risk that company goes bankrupt and you’ll loose your investment. You can never completely remove that risk from the equation, but you absolutely can mitigate it. The key to intelligent investing is diversification. Exchange Traded Funds (ETFs) and Mutual Funds are favorites among everyday investors. That’s because ETFs and Mutual Funds aren’t actually companies. When you buy a share of stock in VOO (an ETF that tracks the S&P 500) what you are actually doing is buying a stake in the 500 well established, separate companies that comprise the S&P 500 index. Stocks like Walmart, Apple, Amazon and others. By investing in an index like this, you reduce the risk of loosing your investment. It would take all 500 companies in the index to go bankrupt in order for you to loose your entire investment. The difference between ETFs and Mutual Funds are the mutual funds usually charge higher fees to invest your money.
  3. There are other ways to invest your money. One option is to invest in real estate. This can be done directly by owning a rental property. It can also be done indirectly by buying stock in a company that invests in real estate like a R.E.I.T or by investing on a platform such as FUNDRISE. Another investment option is using a P2P lending platform like Kiva or Prosper. These platforms allow you to lend money directly to other people (usually in amounts as small as $25). If you’re looking for a safer investment option take a look at Bonds and CDs. Bonds let you lend money to Government entities (Cities, States, and the Federal government) and businesses with less volatility and risk than stocks. Bonds are ranked from AAA to D based on how safe the investment is perceived to be. AAA rated bonds are safer, but offer lower returns. Bonds that are ranked D are much riskier, but offer returns. CDs are great because along with Savings accounts they are insured up to $500,000 by the federal government, and are the only risk free types of investments. Like bonds, they offer lower rates of return, and tie up your money for a fixed period of time. Note that some of these investments have low liquidity (which means that once you put your investment in, its difficult to pull your money out quickly)
  4. Your risk appetite should change based off how close (or far away) you are from retirement. If you are planning on working for the next 30 years, you have more time to recover from a downturn in the market and should be investing the vast majority of your money in stocks and real estate. As you get closer to retirement, you should allocate more of your savings to CDs & Bonds. 70% in stocks and 30% in bonds/CDs is a common allocation. Depending on your comfort level with risk you can adjust that allocation up or down.
  5. If you MUST hold money in savings, go with a High Yield savings account. That Wells Fargo bank account of yours offers a 0.01% interest rate. If you are holding $10,000 in your account, Wells Fargo will pay you $1 per year for your money. That’s pretty typical of banks, and thats also pretty terrible. If you put your money in a high yield savings account like Marcus by Goldman Sachs or Affirm, you can achieve an interest rate up to .65% (You would get $65 per year on that $10,000 investment). Its still not great, but its 65x better than your average bank account, and its fully FDIC insured.
  6. Finally, You should separate your short term and long term savings. Looking to buy a car in next year? Getting ready for a down payment on a house in 2-3 years? You’re going to want to keep these savings in safer assets like CDs and High interest savings accounts. For money that you don’t anticipate needing for 5+ years you should strongly consider investing them in the broader market.

Hopefully that answered your question. As always, thanks for Asking the Savings Guy

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