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5 Questions For An Investment Expert, Answered

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Have you ever noticed how hard it is to get your investing questions answered? For one, the internet can be a deeply scary place and wow! Everyone’s got an opinion! (I’m looking at you, Reddit.) And trying to cobble together an investment education via random online articles? Ugh. 

So, let’s get right to it, and answer some of your investing questions, submitted on Instagram! 

Before we dive in, please note that none of the following constitutes personalized investing advice and it for educational and entertainment purposes only. For personalized advice, seek out an investment professional. To invest is to take on risk — please be aware of those risks!

When you retire, how do you live off of your investments? 

The gold standard is to get to a point where you’re living off your portfolio’s profits. Think of an investment portfolio as “the gift that keeps on giving,” continually generating investment returns even as you’re skimming off the top. This gives you the best chance at making the money last. 

Quickly, let’s review the two ways you can make money on an investment. The first is through dividends or interest payments. These are usually made in cash. Second, an investment can increase in value over time. In schmancy investing parlance, we call this price appreciation. 

When a retiree is ready to step into their glorious lounge years, they can tap into both sources of investment profits: the dividends and interest and via selling investments, hopefully at a gain. Some folks may attempt to live on stock dividend income only. This is fine, too, but will require a larger portfolio, as dividends make up a minority of the stock market’s total return. 

I have two investment accounts, one self-directed with smaller amounts for stocks that intrigue me, and one robo-advised with regularly scheduled deposits. Is this an okay approach?

Absolutely! You’re smart to allocate the majority of your portfolio to a diversified approach, as is likely provided by a robo-advisor. And I’m over here quietly fist-pumping ‘bout those regularly scheduled deposits! The best investing is the kind that happens consistently and automatically.

For your next step, I’d spend some time looking at your fees. For example, where are you buying your stocks? Some banks charge “trading” or “transaction” fees; think $5 or $10 for each “set” of stocks you buy or sell. Others do not. $5 might not seem like a lot, but when you’re a small investor, it can be. We don’t want to spend more money than we could hope to gain!

Next, let’s take a look at your robo-advisor. First, we must understand the service that a robo-advisor provides. Most are buying you a portfolio of index funds, in a mix that they deem best suited to your investment goals. They are likely charging you a management fee, and .5% seems to be the going rate. This is on top of any fees embedded into the funds themselves. 

With robo services, it all boils down to this: Is this fee worth it, considering you could just buy the index funds for yourself? There is no right or wrong answer, here! Using a robo-advisor is a great way to get your feet wet and it is certainly better than not investing! But the more cost-conscious among us may not be willing to pay for something we can do on our own

In the world of investing, even a .5% or a 1% fee can be a lot. But we’re not used to that, in the “real world.” Can you imagine going to a sale, and having all sweaters be 1% off? Lamest sale ever! Here, don’t think of 1% as one piece of a 100-piece pie. Instead, subtract the fee from whatever you would expect to earn. For example, if you think that your portfolio is going to be up 6% on average, subtract the fee from 6%. For example, 6% minus 1% is 5%. You see, you’re giving up one piece of your six-piece pie! And just as returns compound over time — so do fees. 

Any book recommendations on how to start investing?

Start out with Broke Millennial Takes on Investing, by Erin Lowry. Lowry is brilliant and cheeky, and this book will get you your sea legs. And given that it’s not written by a crusty old dude, you may actually be able to enjoy it! I wish that I could give this book to every college grad.

My all-time favorite is The Little Book of Common Sense Investing, by John Bogle. Bogle popularized the index fund, allowing even small fry like us the ability to participate in the stock market’s riches (without all the profit-smushing fees). He’s got a good sense of humor, too. 

For a wonderful, free, online resource on investing, check out The Stock Series by JL Collins. 

How much money should you invest if you’re new to investing?

Start with whatever you are comfortable with! 

Here are a few good rules of thumb when it comes to investing: First, don’t invest any money that you can’t afford to lose. For most people, that means ensuring that you’ve got an emergency fund that you’re totally comfy with before diving into the world of investing. 

Second, know that volatility — the wacky ups and downs of the market — are a part of investing. Seriously, it’s like clipping your toenails and paying your bills: you may not like it, but you don’t have a choice. It’s a fact of life. If you want to invest, you have to be okay with volatility. 

Last, practice your patience. The stock market does not take your calendar, it does not take my calendar, and it certainly doesn’t give a damn about the Gregorian calendar. We can’t know how long stock returns will take to materialize, but we give ourselves the best chance at success if we stick with it for the long haul. Best to ignore the market’s drama and keep piling money in. 

Are there other ways to invest pre-tax money aside from a 401k and Traditional IRA?

Sounds like you’re familiar with your pre-tax retirement account options. Great start! (The 401k is the most common type of retirement plan through work, but it’s not the only one. For those without a 401k, you may have a 403b, 457, Thrift Savings Plan, or SIMPLE IRA.)

There may be one other super-sneaky place where you can make pre-tax contributions for retirement, and it’s in a little-expected place: your Health Savings Account (HSA). HSAs are designed to be used as a supplemental place to save for medical expenses, when you’re using a high-deductible health insurance plan. Like a 401k, you bypass income taxes on any money you contribute to an HSA.

Some savvy savers prefer not to use an HSA as it was originally intended — for use on qualifying medical expenses — and instead, invest the money for retirement. Unlike a Flexible Spending Account (FSA), HSA money rolls over from year to year. It’s yours. Some plans even allow you to invest that money, as if it’s a 401k. And like a 401k, it also offers tax-free investment growth. 

But the tax savings don’t end there! You also pay no taxes on any money you withdraw from an HSA for use on medical expenses (of which you’ll have plenty in retirement). Compare that to your 401k and Traditional IRA, where you’re on the hook for income taxes on money that you pull out for use in your golden years. (That’s why these are also called tax-deferred accounts.)

Because of this unique and advantageous tax treatment, HSAs are sometimes called “triple-tax advantaged.” 

You may or may not have access to an HSA. You can contact your HR department or your health insurance provider to inquire. And while you consider an HSA, tread cautiously always make sure that you have the health insurance coverage that you need, first and foremost!

If you’re looking for a simple way to finally start investing what you save, you should check out our sponsor Fidelity. Their team is here to help you reach your money goals. Fidelity’s no-nonsense approach to investing could help give your money the potential to grow. Click here to get started today.

Image via Unsplash

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