Help a Reader: Advanced Financial Information

Here's an email I recently received from a reader:

My question is, what resources are available to help someone after they’ve mastered the basics of personal finance?

A little background, I’m mid-30’s, no home, no debt, ~$300k in my 401(k) and another ~$200k in taxable accounts, income of $150k per year and obviously living well below my means. I’ve put a lot of time into reading up on personal finance; I understand the how and why of diversification (across asset classes, countries, currencies), how to use a Roth account, rebalancing, lump sum vs. dollar cost averaging vs. value averaging, etc., etc. I’m not sure if hiring an adviser is the right way to go as I enjoy learning about these subjects, it comes fairly naturally to me, and no one will care about my money as much as I do. I also have the sense that I’d be a very small fish for an adviser at this point.

So where do I go from here? What subjects are going to be helpful in growing my net worth at this stage and become a more sophisticated investor?  I'm fine with investing time, and I'm not scared by a little math or new software if that's what's needed.  Any guidance from folks who have or are making the jump from intermediate to expert investor?

What's your advice for him?

Comments

[texashaze]

You are doing very well. I'd recomend you hire a good financial advisor from a "boutique" type firm. IMHO, they give much better advice and return on investments. Hire one whose pay is a percent of your account. This way they have an incentive to increase your worth. It's a win-win.

Next I'd look into other ways to reduce your tax liability such as owning rental properties to take the depreciation deduction. You should also look into investments outside the stock market which provide good return. This could include investing in a business as an active or passive partner.

You are doing good. Now that you have some good money you should get professional help and advice. I don't recomend franchise type firms though (ie. Edward Jones, AG Edwards, etc.). Sorry just my preference.

[jim]

They asked what subjects will be helpful.

My answer : Taxes.

They have a pretty high income and pretty high asserts so they are going to be hit more and more by taxes. I'd put some work into understanding how taxes work and the implication they have on your financial choices. If they find ways to cut their tax bill it could save them a lot.

[Dan]

Texashaze: Why do you not recommend franchise type firms besides it's your preferences? Is there something wrong with a franchise type firm?

[ehrof]

Dan - I bet it's because franchise-type firms love peddling THEIR products (primarily mutual funds and the like) where boutique firms want to sell you the best investment possible, especially when you tie their compensation to the value of your assets under management.

[texashaze]

@Dan - All those firms give the same advice "buy and hold". I don't think that is a good strategy considering the recent 5 years of market volatility. While timing is difficult I think you can still sell and buy and make a better return. I don't suggest constant 'churning' of your investments but some movement is neccessary. I've had my money with those types of firms and followed their buy and hold advice.... and missed a lot of opportunity.
Sometimes its okay to sell if the potential return on another investment can provide greater upside.

The franchise firms also heavily push American funds to get the highest comissions they can get. This doesn't help your interest. If they only get paid on the value of your account then they'll have incentive to increase it. Boutique firms follow this model which helps you out. Boutiques also have more access to hedge funds and other investment vehicles regular Joe's don't get. I've also been given access to private investments which you don't hear about with your Jones, Schwabb types. That's my 2 cents. This style isn't for everyone. I just felt the franchise guys didn't want to make you money, they only wanted to get my money.

[Chris]

It depends on the reader's interest. I would suggest Real Estate Investing for him, if he's interested - as a way to build a strong net worth that will grow as well as provide cash flow.

Outside of this, other options are investing in starting his own business or getting into more detailed stock investments, such as picking individual stocks to invest in.

[Mark]

Congrats on having that high net worth and no home! Too many people peddle real estate as being the end all be all. It sounds like you're pretty similar to me; I have an income just a little lower than you, same age, and just a little more in savings/401(k). I used to own a house in California, but sold it right before the bust in 2005. I think the "buy and hold" strategy for real estate, stocks, gold, you name it, is an outdated simpleton solution for a very complex world. It sounds like you keep up on current events which may affect your portfolio...very good. I suggest that you manage your money yourself. Fees are too high for "investment professionals" and many of these people were suggesting buying real estate at the top of the market! Your tax burden is obviously high; municipal bonds may help with that, but be careful. As the recent shakeout in that market suggests, it would be a misnomer to think that things economically won't get worse. But, MB can provide nice tax benefits, and by keeping the duration short (a couple of years), and using Vanguard or Fidelity, you will keep costs low and get the maximum possible return. Personally, I like Vanguard's Limited Term Tax Free best, but the yield is still only 2.25%. But, considering taxes, it is more like a 3.5% yield, which is not bad for a liquid account. Quite honestly, though, I'm not particularly bullish on anything right now--everything seems overpriced. Sometimes the return OF capital is more important than the return ON capital, as they say.

[Nate]

What are you trying to accomplish? You say become a more sophisticated investor. Investing does not need to be sophisticated to work. You have mastered the fundamentals. Just keep doing what you are doing...stick to the fundamentals, they will take you where you want to go. Life, and investing/personal finance, does not need to be complicated. SImple is usually better. To answer your question, "Where do you go from here..." go and do whatever will make you very happy and stick to what you are doing financially. Maybe hold a free assembly at your local high school and teach kids the basics of personal finance and how you got to where you are today. That could be rewarding. Congratulations and good job on getting to where you are.

[Jetskreemr]

We are in a similar boat. I found an independent financial adviser in my area who you can pay by the hour, and had one meeting with him just to ask a few questions and have him review everything we were doing to see if he had any further advice on what else we could do. He mostly confirmed that what we are doing is great, but also had a few other bits of advice that we took and modified a few things. I would say DO NOT go to a financial firm, because they are simply going to sell you on their products, and I think it's best to get unbiased advice.

[Original Poster]

Hi all,

I'm the one asking this question. I've been following FMF (and other personal finance blogs) for a few years now and feel like I've mastered the concepts most talked about. I've read and take heed to Old Limey's previous advice that managing a portfolio well is a full-time job, but I don't believe that I've learned all I need to and now I need to just cruise for 20 years or so before I retire and then can really devote attention to it.

@Jim, Mark - I'm a little limited on what I can do with taxes as I'm maxing out my Roth IRA and Roth 401k, but I don't have any muni bonds and that might be a nice complement.

@Nate - I'm on board with not making things any more complicated than they need to be, but I also believe in continuous learning and this is an area that definitely interests me.

@Jetskreemr - Will you regularly use a financial adviser from now on, or did you just use it as a one-time checkpoint?

[Wilson]

You might consider joining AAII - American Association of Individual Investors.

[MBTN]

Not sure what you mean by becoming a more sophisticated investor. If it is knowledge for knowledge sake, then there are plenty of directions to go in, depending upon your interests. If it is to become a better investor, then sophisticated <> better. Sometimes the KISS principle (keep it simple, silly) is best!

[HenryTalksMoney]

You should pick an area of investing that most interests you first and pursue it. Many people have mentioned real estate, investing in businesses, commodities, etc. If you try to get too into all of those at once, you'll end up hurting yourself. You're better off focusing your efforts more strategically as opposed to a blanket approach. Find an asset class that you're most comfortable with and then build a level of expertise. It's difficult enough becoming an expert investor in one asset class, let alone in all of them at once. You're in a position where you can afford to invest a little money to educate yourself in whatever investment category without having to chase a return. I think you have the right mindset in just wanting to get better as an investor.

[Mike Hunt]

Original poster,

What is your savings rate in % and dollars, per year?

Seems like the guaranteed way to build your portfolio is just to max out on savings. That and perhaps buy and hold bonds to maturity.

I am in the same position as you, just quite a few more years ahead. I have most of my money in the bank. Don't like equities and think interest rates are going to have to go up. Lots of threats of countries defaulting. As soon as there is a single default rates will have to go up. That's probably the better time to make a move into bonds.

Then again, I've never had much success with investing. Savings has been the only thing I can guarantee when it comes to investment returns.

-Mike

[Original Poster]

Savings rate is ~$40k per year, currently all post-tax due to the Roths, which amounts to about 40% after taxes.

I'm definitely keen on saving as much as possible, but want to combine that with the best returns (or preservation of capital, as previously suggested) to shorten my time to full or partial retirement.

@Henry, I agree on the surface that it makes sense to become a deep expert in something, but over the last 10 years we've seen bubbles in real estate, stocks, maybe gold now; if I'm focused in one area only I feel as though I might be able to identify the irrationality in the market, but would still be hostage to the dynamics of that particular investment class for potentially years (unless I was good enough to also go short when the time came, but even identifying a bubble is very different than knowing the top or when it will pop).

[texashaze]

@ Orignal Poster - I'd strongly encourage you to meet with an advisor in order to evaluate tax reduction strategies. Your income is high which means your taxes are high. Besides real estate there are many other options. However, rental properties are fabulous because you can get a double ding - the depreciation as well as the mortgage interest deductions. This double benefit can provide a lot of shelter for you. Besides, real estate is a great bargain now if you do your homework correctly. I'm not convinced that the stock market provides the best opportunity. You should look into diversification of your capital.... good luck!

[Lindsey]

Everyone is so quick to judge financial advisors negatively. While an advisor is not for everyone, they can be an asset to some people.

A financial advisor, when properly chosen, can be an asset. With your net worth, it would be well worth the money to hire a professional you trust with your money and who listens to you. A good advisor will assess your risk through a questionnaire and align your assets accordingly. Depending on your savings rate & strategy, you should be checking your allocation between 1-4 times per year, re-allocating contributions and/or invested funs to remain within your risk comfort zone.

They also can be a great resource for estate planning, reaching breakpoints for fund companies (cheaper fees), & for products not available to individual investors-secondary market products like non-publicly traded REITS, among other products.

Interesting topics to read up on may be: The Markowitz approach to asset allocation, charitable giving, estate planning (trusts, beneficiaries, etc).

[Anonymous]

I'm far from your net worth position, but also feel I have mastered the basics of personal finance as I can apply them within my income level and family constraints.

You might enjoy exploring modern portfolio theory in greater detail using Quantext Portfolio Planner.

http://www.quantext.com/Qweb4QPPlicense.htm

The have a free demo, which I used a few years ago to develop my asset allocation. Surely you can afford the annual license. With the money you have to deploy, this could help you develop a series of micro-portfolios to test strategies if you're into that type of thing.

[Bruce]

The absolute first thing you should do is figure out the age you want to retire and the amount of money you will need to retire on. Then you can figure out how much you need to save each year and the percentage return you will need on your entire net worth to reach that goal. Then you'll have a percentage return to shoot for and can adjust your allocations accordingly to mitigate your risk. Until, I know what those numbers are I can't offer any better advice

[John]

I'd recommend you study the tax code and I bet you'll find some deducations you are missing. After you tackle that, I'd start to think about ways to hedge your investment portfolios. Options are cheap and fun to trade once you know what you are doing!

[Original Poster]

@Lindsey, Anaonymous - thanks for the ideas, I'll look into those.

As a number of people have stated, taxes are definitely another area to look into (although I do have an excellent tax accountant, I do like to be able to converse with him on complex subjects).

@Bruce - I'm not looking for specific recommendations on what to do next as what to learn next - what resources can I leverage to make better decisions to increase my returns or reduce my risk?

[Bruce]

@ original poster - I was trying to tell you what to learn next. In figuring out your retirement number and age, you will learn a lot of important stuff on the way there especially if you don't blindly trust in the calculators out there and take an active approach in understanding the numbers and how the taxes work. By the time your are done you should have established rate of returns required, required allocations among taxed and tax deferred accounts (if you retire before you can start taking distributions you'll need money invested outside of retirement plans), how to take best advantage of tax brackets on retirement income (how much in a Roth vs how much in non-Roth), etc. Knowing these factors and where your money is allocated will inherently limit your investment opportunities to what is best for you and help direct you to what to learn next.

[jim]

I'm guessing you must be married right? You don't mention a wife at all but you can't do a Roth IRA at your income if you're single. Personally I wouldn't be putting ALL my savings into Roth's. You aren't in a low tax bracket so I don't see a big reason to lock in a higher rate today.

Defining some specific goals is also a good idea. If you plan to retire at 65 then thats a much different situation then retiring at 50. It would impact how you save, how much risk you'd want to take, what vehicle you use, your post retirement tax situation, etc.

[Original Poster]

Bruce, thanks for the clarification. As yet, I don't have a fixed number or age, there is still a lot of uncertainty for me. I'm not married and no kids, but if those change it would probably double the number required and put the age off for a while. I do have a spreadsheet that tracks average monthly expenses vs. what my investments are worth/generating in income - so if I were to stop today and put everything in Treasuries and keep spending as I am, how long until I go broke. For everything non-retirement that's at about 5 years and with retirement accounts that's ~12 years. I'm looking for that number to far exceed my life expectancy. In general, though, I think mid-50's is a highly reasonable goal for me to shoot for.

@Jim, I'm using the Roth conversion loophole for higher incomes until they close it. All of my savings up until 2 years ago are in traditional retirement accounts, so the Roths are actually only a minority % that I'm doing for some tax diversification.

[Old Limey]

Some brokerages have affiliations with advisors. A friend of mine obtained one through Schwab and is very pleased with his performance. The advisors often have access to classes of funds that are only for advisors and from what I gather they are very experienced and successful traders that will do a far better job of investing your money than you can ever do yourself while you are fully occupied with your job and career.

I am in a Private Client group at Fidelity but it has been my experience that they will try to steer you into their own funds at every opportunity. I do my own analysis and rarely does a Fidelity fund appear at the top of whatever sector I am ranking. I don't own a single share of any Fidelity fund and haven't for many years. They do however provide great service when you have any questions whatsoever about any account details and also provide some great software that allows you to monitor the status of your accounts.

My advice would be to keep your money at one of the well established and large companies but to first investigate what services they offer in terms of very experienced private advisors that are not employees of the company. In this kind of arrangement your money stays where it is but you would provide the advisor with limited trading authorization over whatever portion of your money you decide upon and also authorize the advisor to withdraw whatever fees you agree upon. I would think that a good advisor would have several portfolios that he manages and it would be then up to you to choose what compromise between risk and return that you are comfortable with.
For example, in my case my preference would be "maximum tax deferred and tax exempt income with minimum risk", which is not what would be best for you.

As for taxes, stick with your current tax accountant but get his general advice about what your priorities should be at your currant age and level of income etc. and whether you should try to maximize growth, minimize taxes, or what balance you should aim for somewhere in between.

[LotharBot]

If you have at least $100K in assets at Vanguard, you can get a free consult from Financial Engines:

https://personal.vanguard.com/us/insights/retirement/financial-engines

it sounds like you've got many of the basics down, but they may be able to give you some useful advice or at least point you to the next subjects to read up on. According to the Financial Engines website, they don't sell anything or get any commissions; they are strictly fee-based (and, again, if you have $100K+ at Vanguard, the consult is free.)

I haven't yet done this, but I'm planning to soon.

[jim]

Why are you converting to Roths?
Is your CPA telling you that you should do so? If so what is their reason?

If you're single and making $150k then you're in the 28% bracket. If you're converting to Roth on top of that then that conversion is taxed at regular income rates so you're paying 28% or 33% on your conversions. Thats a fairly high tax rate to voluntarily lock in today. Especially if you don't expect to have higher income level after retirement.

[Tyler]

First, dont hire an FA unless you really dont want to deal with your investments (which doesnt sound like you). You dont have enough money to get a good one or be worth their time. You dont have enough money to really get any benefit. I can spend more time on this subject if you want or you can just take me on my word- don’t get one right now.

Second, spend a day on tax knowledge. Know it from 10,000 feet. Know it because your a citizen who pays taxes. Dont spend a lot of time on taxes. People who spend a lot of time trying to minimize their taxes are thinking small. Spent the time trying to increase your income or better managing your assets. Its penny smart dollar dumb. Pay your taxes and move on with life. I can assure you, should you ever get cute with your taxes and you go to battle with the IRS you will lose even if you win.

What you should learn:

The best investors can debate and know different theories of finance. What are the benefits and disadvantages of buy and hold? Value investing? etc. Learn about different strategies. You dont need to be an expert but you need to be able to discuss them.

Be well read in general. Read the news (people magazine really doest count). Think critically about the news.

Know basic economics. Macro and micro.

Know the dollar. Know bond yields. Know the stock indexes. General knowledge- again. What does it mean the 10 year yield soared to 10%? what does it mean when the dollar and the euro are trading at parity? What does it mean for the stock market? Know the relationships.

Read about successful investors – current and past. Read about successful businesses and their leaders.

Successful investing means you know a little about a lot and specialize in one thing. This tends to be successful people in general.

The investment strategy that works for me doesn’t work for you. What works for Old Limey, Apex, FMF etc doest work for you. You need to learn about all and decide what will work for you. Noting works all the time for everyone.

[SteveD]

I was in a nearly identical situation a year ago (having learned lots of the financial basics thanks to this blog). I have done two things in the past year that brought me to the next level:

First, I got financial advice from a free adviser offered through my company, which rounded out my basic knowledge. It was pretty basic -- they reviewed all my assets, helped guide me on a "recommended" portfolio balance based on my age, and answered lots of questions on things like taxes and how mortgages work through a few one-hour sessions. Mostly it provided basic education and confirmed that my assets were pretty well allocated (I didn't end up adjusting anything). This is the only "financial adviser" that I have used, they never tried to sell me anything, and after about three sessions I realized that I had learned all I could from them. (Personally, I think I could spend forever trying to optimize stock investments, but it's not a good use of my time.)

Second, I moved to a new type of investment, and bought three rental properties. I did this with a close friend who works in the real estate industry and a good honest agent, both of whom have their own rental properties. All three houses appear to be great investments -- I put money down and renovation, and the tenants pay my mortgage and even give me extra cash flow every month! Assuming that rent rises with inflation, in 30 years I will have an extra income of $80k (in today's dollars) for free (plus the value of the houses)! Being a landlord is not for everyone, but it is a great time to buy if you can afford it.

Next, I want to learn more about other types of investments. I'm learning all I can about how to start my own businesses, and keeping my eyes open for other business opportunities next year. I hope to be retired from corporate life by 40 :-)

[texashaze]

@SteveD - Have you got to claim the depreciation on your taxes yet? This in my opinion is one of the best tax shelters still available. The good news is that you get the deduction while in your high earning/high tax years. Then when you are old and sell when you income drops so does your tax rate. I've benefited a lot from this.