Talk to a professional financial advisor, not us idiots.
this post was submitted on 05 Sep 2024
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How does one find a good financial advisor? How do you spot flakes or bad ones?
I've been suggested some legit ones by my credit union, upon request. Your mileage may vary, but I suspect most recommendations from a bank or CU have been vetted.
Ideally, you should be paying them for their time, and they shouldn't be getting any commissions other than you paying for their time. Look for a "fee-only advisor" who has a license that lists them as a fiduciary, which means they have a legal obligation to act in your best interests.
But honestly, you probably don't need one. Personal finance is relatively simple:
- keep 3-6 months cash in an emergency fund
- pay off high interest debt - where high interest is usually something >6% or so
- invest in low-cost index funds - if you're unsure, find a target date retirement fund with fees <0.20% (anything up to 0.50% is still "low" though)
But if you're not confident, find a fee-only fiduciary advisor to educate you about investing. A good one will help you feel more confident and provide options, they won't be pressuring you into any particular decision.
Ask them about their investment strategies. If they put all your money on mutual funds, ETFs, etc (i.e. managed accounts that you can choose yourself in a self-directed account) then run.
Advisors often get a kick-back for getting their clients to invest in managed accounts where they have a relationship with the fund managers. AND you pay the fund management fees to the fund company on top of whatever your advisor charges you for their own fees.
The need to be acting as a fiduciary which has a legal definition.
Make that a "FIDUCIARY financial advisor," important distinction.
Actual instructions are big for an internet comment, and dependant on your specific situation and needs. I'll recommend some reading.
If you don't want to spend a lot of time.
Go straight to The Index Card
Bonus points if you read Pound Foolish first.
They aren't long. They explain what to do, and what not to, respectively. They were kind of written as a pair.
If you're willing to take a longer journey.
Start with The Richest Man in Babylon, explaining why investing is a good.
Then read A Random Walk Down Wall street, describing all the ways you could invest, but probably shouldn't.
Then move onto the other two I mentioned first.
If you read all of them you'll know more about finance and investing than 90% of people.
These books are all quite US centric, but the basic principals are the same everywhere. Though some of the tax advice you'd want to check into locally.
As the most very general of rules, put it in an equal weighted index of the top companies. Here in the United States, that would be a equal weight S&P 500.
To add to this, just open a vanguard account. its quite simple to purchase their ETFs of various flavors. You can set up an IRA, an investment account, whatever you wanna do and its all low pressure.
This would have to assume you're saving long term, not planning to use the money for preferably 10+ years.
What would be the best option for money you might need within 10 years? I'm in the same situation as OP
So the problem is in how volatile it is. Think of a term deposit or savings account as being the least volatile. Next year your money will have grown by 3% or whatever your interest rate is. Almost guaranteed.
Shares are much more volatile. Next year they might be worth 50% more. Or 5% more. But also could be worth 30% less, something that doesn't really happen with bank deposits.
Over a long period this averages out. You can normally expect something in the ballpark of 7-10% average annual return over a 10 year period for an index fund type one based on the S&P500.
But if you suddenly need the money, you might be forced to cash out when it's a -30% year.
There are cash-ish instruments like bonds that are often used in balanced investment funds, but the general idea is that you balance out the risk by having money split between the two kinds.
It's also a risk appetite thing. You might be a bit flexible so you might think you'll buy a house in 5 years, but happy to wait another year or two if the share market is down, then you might still be happy to put everything in shares.
If you need the money in 6 months or a year, you'll most likely want to put it in a term deposit that matches when you need it. There isn't a lot of gain to be made in that time.
If you'll need it in a few years, you might choose to split some into a term deposit and some into the S&P500 fund to balance the risk but also have a higher opportunity for growth.
There are funds that manage this for you. You want to make sure it's an index fund not actively managed (you can generally tell because the fees are vastly higher for actively managed funds), and you should be able to find funds that split between cash/income investments and stocks in different splits based on your risk appetite and timeframe.
I'm not in the US (and assume everyone on the internet is) so wouldn't be able to recommend anything specific. Where I live you'd expect fees to be less than say 0.5% of the invested amount. I understand the US should be less than this.
But if you see 1%-2% fees you're most likely looking at an actively managed fund, which you should avoid.
Based on what I've read, short term options are stuff like HYSAs and CDs.
Any good financial advisor would tell you, "it depends." The variables essentially are:
- do you have any debt? If so, you should probably put it toward anything with a high interest rate (e.g. >6%)
- when do you need the money? If <5 years, put it in something safe, like treasure bills, CDs, or a HYSA (should be able to earn ~5%)
- if you don't need the money for at least 10 years, invest it for retirement - broad index funds (or target date index funds) are a good bet
If I assume you don't have any high interest debt or any short-term (<5 years) expected expenses, I personally would:
- reserve 3-6 months expenses in an emergency fund; get a HYSA earning >4% interest
- invest the remainder into an index fund (VOO or VTIAX for Vanguard funds)
You didn't specify which country you're in, but if you're in the US, take advantage of tax-advantaged accounts, like a Roth IRA, up to the limit and invest the rest into a regular brokerage account.
If you're not comfortable with this, find a fee-only fiduciary (look for those specific terms), which should cost something like $100/hr. If you're not paying for the advice, they're most likely going to nudge you into a high-fee fund that's good for them, but not for you. If they pitch whole life insurance or annuities (indexed annuities, or anything that limits downside), run and find a better advisor. A good advisor won't pitch any products, they'll explain your options and suggest something, and they should be able to explain their reasoning for making that decision. In most cases, it'll probably be a few index funds (e.g. S&P 500, international index fund, and bonds) or a target date retirement fund, but the specifics really depend on your situation. Your overall fees for the funds should be well below 0.50%, probably more like 0.10-0.20%, and the funds will likely come from Fidelity, Schwab, Vanguard, iShares, or Blackrock (maybe a couple others I'm missing). If it's something else, feel free to name-drop one of those I mentioned and see how they react (every financial advisor would know those companies).
Is there a national level recommended fee only fiduciary, or is it better to seek out a local company?
I'd go local. But if you want something online, I generally trust The Money Guy show on YouTube, and they operate a fee-only advisory called Abound Wealth, so you could check them out if you're interested. Check out some of their videos and see if you like what they say, I imagine their advisory services would be similar, just more focused on your specific situation (in particular, check out the Financial Order of Operations).
I like their advice way better than Dave Ramsey (Ramsey is way too anti-debt, and way too aggressive on retirement asset drawdown), and their content is really accessible while not being too dumbed down.
I'm in the US, but on a work visa. I have a 2.875% mortgage, and a 2% car loan that ends soon (but planning to get a second car). We would mostly need the money in the next 5 years, so I'll start with the hysa and go from there. By the way, is it prudent to take a small portion of it and invest it in more daring ventures like stocks?
I wouldn't invest anything you need in the next 5 years. I'd stick it in a HYSA or Treasure Bills (if you're in a state with high income tax) or something instead.
That's excellently detailed advice, thank you very much!
Money market funds or CDs should get above 5% right now whether thats with a bank or brokerage.
It depends on your time horizon and risk tolerance. Typically dont buy stocks based on hunches... just buy index funds and/or interest bearing vehicles. I have a small basket of stocks, a lot more index funds, and then the majority of my holdings are in a money market fund in this high interest environment. I would consider rebalancing to more index fund allocation if interest rates diminish.
Thank you, I'll look into money market and CDs
Its important to be taking advantage of tax deferred savings btw. I just assumed these funds are all taxable savings and that you are already contributing to your retirement and health savings.
Simply investing your savings without putting money into iras/401ks/hsas would be a huge mistake in the long term.
Going off of SMCF, it really depends on how liquid you are and what country you're in.
If you're in the US, I have SoFi and 4.5%/APY on my savings account. Gotta have your direct deposit or move $5k monthly into the checking. If you can swing that, it's a great bank. I think Ally does similar.
Most major brick and mortar banks are shite for accruing interest money.
In addition to all of the very good advice in this thread, I will add I am a big fan of Dollar Cost Averaging. If you have a large amount to put into the market, don't put it in to whatever fund you decide all at once, put it in on a monthly basis. This protects you, to some extent, from the market taking a dump the day after you buy, because you are always buying. And your cost at the end is an average of all the times you bought in, and is not so much tied to prices on the day you bought in.
This may involve some planning for moving money around, because you will want to keep the remainder in a good HYSA in the meantime.
If you move the money into a place like vanguard, it will sit in a money market account earning 5.25% (as of now) while you DCA into other funds.
It depends how old you are, how liquid you need the funds, how risk adverse you are and what country you’re in.
Vanguard. You can either invest directly with them, or open whatever brokerage service if you want to gamble on stocks in addition to being responsible.
Invest around 30k in each of VEA VSS VYM, enable DRIP and then you can have 10k to yolo on GME or whatever if you want.
I'll get started with vanguard, thank you
how much potential money I've lost by letting my money stagnate
It's not just potential gains that's being lost, you're very much losing wealth to inflation by doing this.
well first off you can get way better than .o5% right now. what do you have it in checking? I agree with some others. get rid of debt if you have any, fund your ira or hsa or any other tax free things. If you have some sort of match for retirement at work and not taking it sign up for it right away. then honestly see if you can swing a condo or townhouse or something.
First you need to educate yourself on different investment strategies, but a broad MSCI World can easily give you the peace of mind and diversification.
Check https://www.justetf.com/en/academy/etf-for-beginners.html which is providing very good starting point. There are more articles there that will describe the basics.
The best advice is not to invest in single stocks and always keep your investment portfolio diversified.
If you open an account with vanguard you can choose to have your money automatically put in a money market account earning 5% like this one https://investor.vanguard.com/investment-products/mutual-funds/profile/vmfxx
Or Schwab has SNSXX https://www.schwabassetmanagement.com/products/snsxx but you need to buy it manually
Put your money in a tax deferred account like a Roth IRA or 401(k). Find a cheap target date fund that's for the year you turn 65. It's the way to go for people who don't know what they're doing. It balances the portfolio automatically based on industry standard advice for retirement. Read through the prospectus for the fund and make sure it fits your goals and risk tolerance.
Some others have said, but it really matters how old you are and what your goals are. But as a general rule of thumb...
-
money for bills and monthly expenses can stay in a low-interest checking (or savings) account. Keep only as much as you need for a month, maybe a bit as a cushion just in case
-
money you're planning on spending in the next 1-5 years in a high yield savings account (you'll make higher interest) to use as "sinking funds" or an emergency fund (3-9 months worth of monthly expenses, give or take)
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invest the rest
Get a fiduciary advisor. Not just a stock trader. Fiduciaries are supposed to look after your best interests, not their own profits.
Diversify.
Invest in appropriate risk based on your age. Youngsters can invest in risky stocks because they have decades to make up any losses. As you age you shift some risk to moderate risk or more stable investments. As you near retirement, your risk should be minimal.
Get an advisor, a fiduciary
It's gambling with extra steps
The generic advice is diversify and invest in the riskiest options you can stomach when you are young. For me, that means low cap index funds.
Where do I get started if I want to do that? Is that through vanguard?
Yea vanguard is good I hear. I have a bank account with bank of america, so I use merrill. Chase has their own investment firm. Most large banks have bought one. Take your comfort where you find it with banks. I'm honestly not a fan.
There are also independent ones. I also have an account with tiaa, but that's only for educators. You might find something tied to your industry as well.
Also why index funds. Low cap in particular. Index and mutual funds are both collections of stocks. You spread your risk that way. Stocks rise and fall rapidly.
The difference between them is that mutual funds are managed. People will try to predict the market and build and change them. It gives people the impression that someone's working to make sure they have the best fund possible, but the reality is that predicting the market is basically impossible, so you pay extra for that self assurance. Index funds are static so they are cheaper
Both mutual and index funds are built of a collection of stocks from various companies based on what is called their market capitalization. That's roughly what a company is worth in it's entirety as well as its ability to generate revenue. Large caps are things like your giant tech companies. Medium caps are smaller. Something like walgreens. Low caps are companies that have just ipo'd.
The reason for choosing low caps is they have a much larger potential to grow in value. Apple isn't going to double in value, but a new start up could. Spread your risk around many startups and a few are going to increase in value many times over. But it also mitigates your risk as it's a group rather than just one.
Low cap is a long term plan. Buy when you are young, and hold onto them for 20 to 30 years. IMO it's the best tradeoff between growth and safety. Leaning more on growth.
When you approach or after retirement, trade them for something really stable like US treasurey bonds. Those hardly grow at all, but they also tend not to lose value either.
I also don't actively invest. Your job will set aside a percentage of your salary that goes directly into an investment account. That percentage is something like 5%, but in workday or whatever your job uses, you can set how much you want. I've set mine as high as 30% before. Try to keep as little cash in your bank account as possible with a rainy day fund set aside. Cash doesn't grow in value. You don't want a lot of it.
So what happens to the money your company puts into the investment account? It is automatically invested into something of their choosing. Typically something middle of the road because it is the same for all employees regardless of age. So what you want to do is log into that investment account and change what it is automatically buying to whatever it is that you want. Set it and forget it.
This stuff can get really complex, so listen to what several different people have to say. This is just what I do.
If you have a HYS, there is no reason to have 100k in an account earning .05%.
Like others have said, everything else depends on your risk tolerance. If you’re young, you should have more in higher risk stuff (stocks, etc.). Even if you have a big loss, you can earn it back.
Whatever you don’t need liquid and whatever isn’t in high-risk investments can go into stuff like bonds and CDs