You have to keep track of many things in your life — kids, friends, hobbies, careers, self-care, the list goes on. Chances are, investment portfolio knowledge is not high on your list.
But what do you know about your investments beyond the account type and maybe the quirky name you assigned within each platform? While you’re probably aware of your 401(k), IRA, or brokerage accounts, there’s a good chance you may not know enough.
By understanding your investments more concretely, you can ensure your money is aligned with your values for the long run.
Here are the top three things everyone should know about their investment accounts.
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1. You Must Understand the Total Amount of Investment Fees
There’s a reason subscription payment models work so well — you set it and forget it.
After all, when was the last time you batted an eye at your monthly Netflix bill?
If you’re not careful, the same thing can happen with your investments. It’s easy to go on autopilot and let them run in the background, but you should be fully aware of what it’s costing you.
Fees and investing are multi-faceted and there are a few layers to understand:
- Fees on the securities themselves. The fees you pay for the securities/funds you invest in depend on the type of investment. For example, with mutual funds, you may have to consider expense ratios, loads, commissions, marketing fees, etc. You’ll also need to factor in the cost of trading (both the sticker price and the tax implication).
- Platform fees. When you invest with a custodian like Fidelity or Vanguard, you’ll likely have to pay platform fees. While they are usually nominal, they do add up.
- Advisor fees. If you have an advisor manage your money (which can be beneficial from an ongoing maintenance perspective), you’ll also need to account for their fees. For example, Abacus charges a fee of 1% on your assets under management (AUM) up to $3 million. Fee transparency is essential to our approach. We do not have hidden fees and we do not receive kickbacks or commissions from third parties. Be wary of uncertified financial professionals who try to sell you on investment opportunities without disclosing their fees.
While you’ll always have to contend with fees, you should be intentional about how much you pay. If you’re overpaying, you may find that switching platforms can benefit your net returns.
Making Investment Fees Intentional
Today, several online stock and exchange-traded fund (ETF) trading platforms have minimal fees. This could be a prudent option if you’re early in your career and just starting to invest.
However, if you are investing large sums of money, working with a financial professional who generally charges 1% to 2% of managed assets can be beneficial. Their tailored guidance can save you money in the long term, as they are aware of more nuanced financial- and tax-saving strategies.
Consolidating investment accounts may also be advantageous so you don’t overpay fees to multiple institutions.
Remember, the less you pay in fees, the more money you can keep compounding and working in your favor.
2. You Need to Know What You’re Actually Investing In
This is known as your allocations. Sure, you know you have a 401(k), but do you know what securities you’re really investing in?
If you’re like most American adults, the answer is probably a resounding no. CNBC reports that a shocking 63% of Americans don’t even understand how a 401(k) works, let alone how to properly allocate their investments.
Let’s break it down.
Investing In Your 401(k): How it Really Works
Most 401(k)s have a 60/40 equity/fixed income allocation. But this mix isn’t likely aligned with your risk tolerance, time horizon, and goals. If you’re in the wealth accumulation stage and have 30+ years until retirement, that allocation mix might be far too conservative.
Creating a diversified portfolio is essential when you decide how to allocate your investments, whether through your 401(k) or another investment account.
Diversifying your portfolio means spreading your investments across various stocks, bonds, and commodities in multiple industries and locations to protect your finances against unexpected losses. Most investment experts believe that a properly diversified portfolio can yield higher returns on your investments in the long run.
Some great investment options to diversify your portfolio include:
- Mutual funds pool assets from shareholders. Professional money managers oversee these funds and attempt to produce the greatest returns for you and other investors.
- Exchange-traded funds (ETFs) are similar to mutual funds since they include a wide range of assets, yet they trade on the stock market like a normal stock, so they offer you the flexibility to buy or sell whenever it serves you best.
- Index funds are also a collection of assets that mirror an underlying index, like the S&P 500. These investments are often low-cost and strong in the long term.
- Real estate investment trust (REIT) is an investment in a company that owns and operates income-producing real estate (like a mall or apartment complex) and produces quarterly dividends for investors.
Many 401(k)s don’t offer a wide range of investments, so you’ll need to pick and choose carefully. If you decide to invest using an IRA, you will have more flexibility, though the annual contribution limits are much lower than for a 401(k).
The 2022 contribution limit for a 401(k) is $20,500 ($27,500 if you are over 50), while the limit for an IRA is $6,000 (or $7,000 if you are over 50).
Investing Strategically for Different Financial Goals
How you invest in each account should look different and suit your larger goal. For example, your allocations might not look the same for a 401(k) retirement account and a brokerage account, typically used for more medium-term goals, like supporting your child’s wedding or saving for a dream home.
What type of investment account should you choose? And how do you determine allocations?
That depends on several factors:
- Risk tolerance is the degree of risk you can withstand within your investments; it fluctuates throughout your life.
- Risk capacity measures volatility and potential losses to determine how much risk you can take before it affects your goals.
- Time horizon refers to the period you hold an investment until you need it. Longer time horizons often lower risk capacity and allow for more compounding interest.
- Goals are also vital to consider when determining your risks and allocations. They are the blueprint for your larger investment strategy.
Try to revisit your investment accounts annually (at minimum) to rebalance or adjust your equities/fixed income ratio to match your desired balance.
Since you may have to make the changes yourself (like with a 401k), it’s important you know how your investments are allocated (and their purpose), so you can make informed decisions.
3. Feel Confident About When You Plan to Reach Your Goals
This is known as your time horizon. Every goal has a unique timeline — from getting married to opening a business, changing careers, moving out of state, retiring, and everything in between.
Understanding these time horizon timelines can help you invest intentionally.
Longer Time Horizons
When you have more time to reach a goal, you might be able to be more aggressive (in the unique ways that word is defined by you). You can afford to be more aggressive because there is time to weather market volatility, recover from downturns, and enjoy long-term compounding returns.
For example, say you are in your 30s with several decades until retirement. In that case, you can likely use an aggressive investment strategy that focuses on capital returns through investment choices. These choices may carry a higher risk, but they can also produce a higher return on your investment.
With help from your financial advisor, you can implement a more aggressive investment strategy by investing in the following:
- Individual stocks
- Small-cap stock funds
- Aggressive growth funds
- Private equity investments
Shorter Time Horizons
That said, there are other times in life when you may need or want to be more conservative with your finances.
Life can be complicated and unexpected. The early 2020s have proven that to all of us!
Let’s say you’re in a season of life where you face many expenses: vacations, home and car repairs, paying for your child’s college. If that’s the case, you might not be able to put as much toward retirement, but you could make a plan to recoup those savings later.
Or, if you’ve experienced an unexpected layoff and have to tap into your emergency fund, you might need to re-think your short-term investment strategy and redirect funds to help you get back on your feet.
Work within your definition of what being “financially conservative” means, as it’s different for everyone depending on their risk preferences.
Your time horizon may also influence the types of accounts you use to invest and save. You wouldn’t use a high-yield savings account for retirement, but you might for your emergency fund.
Knowing Your Investments Support Your Future
Right now, your investment returns may be affected by market volatility, spurred on by current events like the war in Ukraine and record inflation.
Working with a financial advisor to better understand your investments can mitigate anxiety and help you avoid rash, or even disastrous, financial mistakes.
When living in uncertain times, having a third party offer their knowledge and counsel is invaluable. While you may understand that you “invest”, knowing how those investments work is essential to ensure you’re staying true to your unique life goals.
If you want to learn more about your investments and what to understand about your portfolio, you can download our free investment brochure: Pursuing a Better Investment Experience.
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As financial advisors, we aim to connect your money to what matters to you most. Through mindful investing practices that take into consideration your financial archetype, we can help give you a sense of peace around your money.
If you would like to learn more about how a financial advisor can help you expand what’s possible with your money, schedule a free introductory call today.
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