David’s Personal Finance Q&A – November 2017

David's Personal Finance Q&A - November 2017

David’s Personal Finance Q&A – November 2017

Through my work as a Certified Financial Planner™ I receive and respond to many questions throughout the course of a week. They come from clients, readers, colleagues, friends, family, and more. Some questions are general in nature while others are specific. Either way, there are still little nuggets of information that can be helpful to others. I’ll be sharing these questions and answers in this series called David’s Personal Finance Q&A.

Please note some of the questions have been changed around to protect the privacy of others. In addition, none of these responses should be considered investment advice. This Q&A is for educational purposes only. Please consult your own legal, tax, or financial advisor for help with your specific situation. I hope you find this helpful as you continue on your financial journey. Enjoy!

Should I rollover my 401(k) even if it has low fees?

I would caution you against making the decision based on fees alone. There is no doubt that fees are important.  Most 401k plans are limited in the number and type of funds available. However, there is usually more than enough avaiable to build a diversified portfolio. IRAs at most large brokerage firms (Schwab, TD Ameritrade, Fidelity etc.) will allow a much broader range of investments to choose from. Within an IRA you might be able to access investments with similar expenses and better 3, 5, and 10 year returns. I wrote an article 5 Steps To Improve Your 401(k) that you might find helpful.

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How should I invest $50,000?

The first step is to identify what the funds will be for. An example of this would be grad school, down payment on a home, starting a small business, retirement, etc.

The next step would be to identify the time horizon. Will the funds be needed in 5, 10, or 20 years? If you’re going to be investing funds for the short term like 1 to 3 years, you should steer clear of the stock market and stick with CDs despite the low rates. If you are investing with a longer-term time horizon, it would be completely prudent to allocate a portion of your investments to stocks.

Lastly, you need to identify your risk tolerance. Consider how comfortable (or uncomfortable) you would be experiencing a 10% to 15% drop in the value of your investments. If you couldn’t sleep at night, it might be the wrong investment for you.

I wrote an article called Diversification Is Not Enough that goes into greater detail on this subject. I hope you find it helpful.

Should I invest in gold ETFs to protect against inflation?

I would be very cautious about investing in gold whether via an ETF, mutual fund, or in the precious metal itself. I’m not suggesting that gold is a bad investment. To be fair, this would apply to any precious metal or commodity for that matter. If you’re looking to add a little diversification to your portfolio, that is one thing. But adding any more than 5% of your portfolio to any precious metal isn’t investing. It’s speculation.

Inflation alone isn’t a bad thing. In fact, the right amount of inflation is healthy and required for a normally functioning economy. That is why the Federal Reserve is tasked with trying to maintain a healthy level of inflation.

What we should fear more than inflation is deflation, which happens to be what scared the you know what out of the Fed in 2008 and 2009. That is why they flooded the system with money. At that time, everyone thought Quantitative Easing (QE) would cause runaway inflation. It didn’t.

Are ETFs the best way to grow an investment portfolio?

Not all ETFs are equal and that is where some investors can go wrong. Like mutual funds, ETFs can seek broad market exposure or focus on specific sectors. Also like mutual funds, they can invest in various types of securities, like stocks, bonds, and REITs just to name a few. ETFs are much lower in cost than most mutual funds and they are more tax efficient.

Taking it a step further, some ETFs track commodities and can even provide inverse returns. Stated more simply, some ETFs provide a positive return when the underlying security goes down. If you’re looking to get broad based exposure to the stock market via an index ETF, that’s one thing. If you’re investing in an ETF that is taking a bearish bet on the 10 Year treasury bill, that’s another. Proceed with caution, all ETFs are not created equal.

Should I have a conversation with my broker regarding the fiduciary rule?

This is a conversation worth having. However, you should be aware that this fiduciary rule is on thin ice. The new administration will be taking a hard look at the rule and has indicated a desire to have it undone. Don’t be shy about bringing it up. It is a valid concern.

Whether the rule remains or is scrapped, it is my belief that financial professionals recommending or selling investments should be putting their clients’ interests ahead of their own. It is already the standard that Registered Investment Advisors (RIAs) are held to. For advisors, like me, who make it their business to provide independent fiduciary advice, it is clear that the investing public should be demanding this approach whether it is the law, or not.

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