Become own financial advisor | CoupleWealth
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Do you want to reach financial independence or make sure you can retire? Do you have financial goals you would like to reach, like a car or college?

It is now easier than ever to become your own financial advisor by learning more about how finances work. Don’t worry about paying someone else for advice if you understand some basic concepts about money.

Let’s get started with showing you exactly how to become your own financial advisor.

Table Of Contents
  1. You have to have a plan to make a plan
  2. Keys To Your Financial Success – Goal Setting
  3. Choosing Your Investment Strategy
  4. 401(k) Retirement Account Investing
  5. IRA Investing Basics
  6. Investment Options – Exchange Traded Funds or ETFs
  7. Investment Options – Mutual Funds
  8. Investment Options – Stocks
  9. Investment Options – Bonds
  10. What Is A 529 Plan?
  11. Investment Opportunities – Life Insurance
  12. Becoming Your Own Financial Advisor

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If you built yourself a home without using a blueprint, what do you think the result would be? Now, you could end up being extremely lucky and somehow get the house you dreamed of.

But what is far more likely is that the house wouldn’t be anything like what you envisioned. You would probably have problems with plumbing and electrical outlets. You might need to move windows and doors. Or you might need to fix an uneven floor.

Imagine the house that Gene Hackman’s character is building in “Unforgiven” – off plumb and a mess.

The same idea holds true for investing.

Without a plan, you could somehow get lucky. But without intervention from a deity the odds are against it. If you don’t have a well-crafted plan of action and some clear goals, you most likely are not going to end up where you want to be financially. You will meet neither your short term nor your long term goals.

You have to have a plan to make a plan

As you might have guessed we can approach investment goals from many angles.

In the traditional approach, investors focus on generating the highest possible returns or on beating the market. This is done while staying within the individual investor’s risk comfort zone.

Another newer approach in wealth management emphasized goal-based investing. This type of investing emphasizes investing to reach specific life goals – like buying a house, saving for a child’s education or building a retirement fund. This is done in lieu of comparing returns to a benchmark

The theory behind goal based investing

  • If you set a goal you are much more likely to achieve it – people with written goals are 50% more likely to achieve than people without goals that are written down.
  • You can track goals and tracking goals aids in motivation to achieve them.
  • Investing can be adjusted when you consider time horizon and risk level of each goal.

It’s crucial to commit to action whatever approach to investing that you prefer. You cannot not just leave your financial health to chance.

When looking at your financial health many people like to work with financial advisors. Financial advisors are professionals who provide financial advice and guidance.

Financial advisors can help you to navigate your options and assist in finding investments that match your risk level.

While it makes sense in many cases to work with a financial advisor, you may want to consider becoming your own financial advisor. While it takes some time and effort you may find that it works better for your own particular circumstances.

In this series of articles on becoming your own financial advisor we will look into the various things you will need to consider when investing.

Keys To Your Financial Success – Goal Setting

Your very first step in successful investing – and really anything that you want to achieve in life – is creating measurable, realistic and attainable goals.

Ask yourself “Why do I want to invest? What do I hope to achieve? What am I willing to do to reach my goals?”

There are lots of goals – all of them worth setting. But you can’t do it all. Really give some thought as to what you are hope to do financially.

Are you:

  • Saving for retirement?
  • Saving for a home?
  • Setting passive income streams during your retirement?
  • Giving a portion of your earnings to charity?
  • Saving seed money for a new business?
  • Establishing a legacy gift for your family?
  • Saving for your dream wedding?
  • Paying for your child’s education?
  • Taking a “bucket list” vacation?

All of the above or more?

Prioritizing Your Financial Goals

The next thing you should do it prioritize your goals by when you want to achieve them – are they short-term, mid-term or long term goals. This gives you a “time horizon” to achieve them.

I find that by using mind-mapping software, putting them down in a table or going old school and using a legal pad and pen make a pro/con list I can get organized.

Here is an example of different financial goals:

Short TermMid-TermLong-Term
Emergency FundFunds for new businessNest Egg For Retirement
Financing a WeddingDown Payment on homeIncome for retirement
VacationKid’s EducationFinancial legacy

As you might guess getting your goals “on paper” makes them more concrete and real. Statistics show that when people write down their goals they are more likely to achieve them.

You can make yourself accountable by sharing your goals with your spouse, family or friends. That extra motivational push and fear of embarrassment at not working toward your goals will help you keep going.

How Much Will You Need To Reach Your Goal?

After you establish your goals you will need to flesh them out and get more specific.

You will need to attach a dollar figure to each goal. It may be easier with some goals to say how much you’ll need.

As an example let’s say you want to help your daughter pay for her wedding. You decide to give your daughter $5,000 to help with that.

Or perhaps you want to save $10,000 to go on a European cruise for a few weeks.

These are easy to define monetary goals, and perfect for goal based investing.

It might not be as easy with other goals. Because of the nature of the goals, it’s a bit trickier to nail down a specific amount – so you’ll have to spend some time doing research and calculations.

With your list of goals – and remember the more specific the better – and their concomitant financial objectives you will find it easier to plan, budget and choose the right investments.

Choosing Your Investment Strategy

As you might suspect after defining goals and calculating how much money you need, we now need to figure out how to make it all happen by creating an investment strategy.

An investment strategy is your blueprint that guides your decisions based on the parameters you set in your goals. It also includes considerations for your risk tolerance, and future capital needs.

How to create a rock-solid investment strategy

  • Do it now. Seriously. Get. It. Done.
  • Leverage compounding as part of your strategy.
  • Regard anything with high costs/fees as a suspect investment. These types of investments can kill your bottom line
  • Diversify, Diversify, Diversify

Let’s discuss diversification

One of the best ways to reach your financial goals is to put your money in a variety of investments balancing risk and return. This builds in “fault tolerance” to your investment strategy.

Consider this – If you are all in for one stock, what happens when that company goes belly-up? Ugh.

Best practice would be to diversify within asset classes. You could, for example, choose an index fund that covers a broader swath of the market rather than focusing on just one or two stocks, and goes across asset classes, by diversifying your investment by placing a percentage of your savings in each of the asset classes, i.e. stocks, bonds and cash.

It goes without saying that the more educated you are about your investment options, the better decisions you make.

We are going to take a deeper dive and look at some of the retirement and tax-advantaged accounts that are available for incorporation into your investment strategy.

So, let’s look at some common types of investments. We’ll also look at some tips for picking assets so you can achieve your investment goals.

As a recap – you’ve pondered and established goals, plotted your time horizon and risk tolerance, done you due diligence in researching your options and finally made your investments.

It’s time to kick back and relax, right?

How to manage your investments

Hold on there, Tex!

You’ve done some good work, but in order to maximize the performance of your all of your investments and ensuring you’re on track with your stated goals you need to establish a way of monitoring your portfolio to make changes and reallocate if and as needed.

Sure you can keep an eye on each investment by meticulously reviewing your statements. You can track ticker symbols. There are also a couple of other options worth considering.

How about investing on your mobile phone?

You can harness the power of your Android or iOS mobile device by using a mobile app designed specifically for the purpose of tracking investments. An ever increasing number of apps are available that provide up-to-the-minute details on all your investments in a unified display. You can stay always connected with how your portfolio is doing.

A lot of these apps also automatically sync with your brokerage, IRA and 401(k) accounts.

Portfolio management apps

It’s up to you to choose which app best suits your needs. But the following are several of the apps which I’ve found to be superior than others.

  • CNNMoney Portfolio
  • Personal Capital Money and Investing
  • SigFig Investment Optimizer
  • Ticker: Stocks Portfolio Manager
  • USA TODAY Portfolio Tracker

Robo-advisors for Investing

Another great way to stay on top of your investments is to use a robo-advisor​.

While robo-advisors are relatively new, these online weath management services can be ideal for self-directed investors.

Robo-advisors provide automated, algorithm-based portfolio management advice using the same software that traditional advisors use. They are typically low-cost with low account minimums.

There are about two dozen robo-advisors, and their business models, plus their specific offerings, all differ. For more information on robo-advisors see my in-depth article on them).

  • Some robo-advisors don’t charge a fee for smaller portfolios – but do to manage greater asset sizes.
  • Some robo-advisors are completely automated, while still others use a combine automation and access to specially trained human financial advisors.

Here are examples of robo-advisors

A lot of robo-advisor functionality is being integrated into many traditional money-management and investment firms.

Again, for more in-depth information on robo-advisors and their pros and cons you can check out my previous article that discusses these services.

Developing Your Investment Strategy

You have to be willing to put in some elbow grease to become your own financial advisor. It’s imperative that you understand the various types of retirement accounts and investment vehicles before risking investing any money

Always, always do your homework and research your options. Learn from your mistakes and failure and don’t rest on your laurels but strive to get even better with your successes.

Just because you are your own FA doesn’t have to mean you go it alone.

You might be good at picking stocks but your understanding of tax laws might, well, suck. And honestly picking stocks is a loser’s game.

You should always consult with a qualified tax specialist to make sure you understand the tax implications of your investment decisions. You need to make sure that you report everything appropriately.

Don’t let your enthusiasm trip you up. There’s nothing wrong with –and it’s good to do- consulting with a professional advisor, whether it’s just once, or even occasionally.

There’s no shame in asking for help If you have questions or are unsure about a strategy. Or even if you just want a little hand-holding. Be sure however that you hire a fee only advisor.

Approach your financial health with intention and deliberate action. Successful investing – and meeting your short- and long-term financial goals – requires you to be all in and steering the ship.

401(k) Retirement Account Investing

What is a 401(k)?

401(k)s are employer-sponsored plans that offer:

  • Automatic savings
  • Tax incentives
  • Matching contributions (if employer participates)

There are of course some pros and cons associated with 401(k) plans.

Some of the pros include:

  • Contributions may be tax deductible
  • Tax-deferred growth
  • Matching contributions
  • Possible to borrow from plan or use funds for “hardships”

Some of the cons include

  • Early withdrawal penalties
  • Annual contribution limits.

How can you invest in a 401(k)?

You will need to contact your employer’s human resources department.

Pro Tip: You will want to contribute at a level allowing you to fully leverage your employer’s match if your employer offers it. Failure to do so means you are leaving free money on the table.

The plans provided by your company, 401(k)s and other plans, are known as defined-contribution plans. This is because you – as an employee – contribute to the plan. This is normally done through regular payroll deductions.

It is up to you to decide how much to contribute, taken as a percentage of your salary. The contributions are then automatically deducted from each paycheck.

Depending on the company’s or organization’s structure, what is available to you in a defined-contribution plan can vary.

Here are some examples of defined-contribution plans.

  • 401(k) -public or private for-profit companies
  • 403(b) – tax-exempt and non-profit organizations
  • 457 – state and local municipal governments, some local and state school systems
  • Thrift Savings Plan (TSP) – U.S. government civil and military service

401(k) Plan Contribution Limits

The limits to contribution change periodically depending on cost-of-living index increases.

In the 2021 tax year the IRS allows for contribution up to $19,500 to a 401(k), 403(b) or TSP, and most 457 plans.

You can make a “catch-up” contribution if you are age 50 or over- $6,000 to any of the listed plans.

Matching Contributions For Plans

Your may have matching contributions as a perk to your employment. This has the power to dramatically increase the value of your retirement account.

Find out if you company has a match and how much it is. A common was that employers contribute to employee funds is via a percentage.

As an example, let’s say you make $100k a year and contribute up to 5% of your salary – $5k – to your plan. If your company offers a 50% match, they’ll kick in another $2500 to your account.

Keep in mind that your employer’s contribution may be limited by the plan or by the annual contribution limit as set by the IRS.

Investment Options in Your Defined-Contribution Plans

Though you know the amount of your contribution, what you reap from that contribution- the benefit or retirement amount – is unknown. The benefit  depends on the performance of the investments.

How you invest the money that is contributed to the plan – both by you and your employer – is your decision. In most setups you get to choose from a variety of investments offered by the plan –

  • Mutual funds
  • Stocks
  • Bonds
  • Guaranteed investment contracts – not unlike certificates of deposit

If for some reason you aren’t thrilled with your investment options, you may be able to transfer part of your plan to another retirement account. This is something known as a partial rollover.

Of course as you select investments, consider your risk tolerance and investment time horizon. A nice rule of thumb is that you should invest more aggressively when you are younger – giving you more time to recover from any losses – and more conservatively as you approach retirement. Therefore you need to plan on changing your allocations as time progresses.

You can make changes to your allocations whenever you want for most 401(k)s. However some are limited – you can only make changes once a month or even once per quarter. Make sure you ask your employer if there are any caveats to allocation changes.

401(k) Investment Considerations – Expense Ratios

Something else that you will need to consider for your investments in a 401(k) are the expense ratios.

Investments such mutual funds and ETFs charge shareholders a fee – known as an expense ratio – to cover the fund’s total annual operating expenses which include cost for things such as administration, compliance, distribution, management, marketing, shareholder services, recordkeeping as well as other operational costs.

As you might guess, the expense ratio directly reduces your returns – and the value of your investment.  This means you cannot assume an investment reporting the highest return is automatically the best choice for your 401(k). A lower-returning investment that comes with a smaller expense ratio may yield more money in the long run.

401(k) Investment Vesting

While the money you contribute to a 401(k) is yours right away, funds from matching contributions are not 100% yours until you are fully vested.

Funds vest over time. So for instance you might be 25% vested after one year of employment, 50% vested after the second year and so on.

As you might suppose, once you become fully vested, all the money in your 401(k) is yours and it moves with you if you switch employers or retire.

401(k) Distributions

When you take an early withdrawal from your 401(k) or other qualified plan you – In most cases – will owe a 10% penalty tax if you do so before you are age 59½. .

There are some allowable exceptions to the 10% additional tax penalty and they include

  • You have a complete and permanent disability.
  • You have died. Distributions are made to your beneficiary or estate.
  • Your deductible medical expenses exceed 10% of your AGI (adjusted gross income (7.5% if you or your spouse are age 65+)
  • Military reservists called up for active duty.
  • You must make court-ordered spousal payments.
  • You are separated from service at age 55+, or age 50+ for public safety employees.
  • IRS levy
  • Substantially equal periodic payments (SEPP) as disbursements

You have to start taking distributions from your 401(k) by April 1 of the year after you turn 70½. – these are called required minimum distributions (RMD).

Afterward your RMDs are  based on your life expectancy and the value of your account –and these have to be made by Dec. 31 each year.

There is an exception to RMD rules. If you continue to work, you may delay taking RMDs from your 401(k) until April 1 following the year you retire. This exception holds unless you own more than 5% of the company that is the sponsor of the plan.

If you own more than 5% of the sponsoring company then, you still have to start RMDs after you turn 70½, whether or not you continue to work.

If you ignore the requirement for RMDs the penalty is substantial – you will be required to pay 50% federal tax on any amount you should have withdrawn in addition to your regular income taxes.

IRA Investing Basics

The individual retirement account (IRA) is a tax-advantaged savings accounts for individuals. They come with both pros and cons and it’s important before investing in one to understand both.

Some of the pros include –

  • Tax benefits
  • investments grow tax-deferred and contributions may be deductible
  • numerous investment choices with range of risk/reward characteristics.

Conversely some of the cons are

  • Early withdrawal penalties (plus income tax)
  • annual contribution limits
  • some eligibility restrictions.

You can invest in an IRA directly through a financial institution of your choice – banks, mutual fund companies and brokerage firms.

Pro Tip: If you start an IRA early and then allocate as much funding as you can, you can take advantage of the power of compounding.

The IRA is really a savings account on steroids – it has tax advantages and the glorious magic of compounding interest.

IRAs are opened by individuals – spouses have to open separate accounts.  Keep in mind that an IRA is not an investment itself -rather it’s an account where you keep investments like stocks, bonds and mutual funds.

In an IRA you choose the investments in the account and switch them up as you need or want to. IRAs come in many flavors – traditional, Roth, SEP and SIMPLE.

As long as you meet certain requirement you may have more than one type of IRA.

IRA Showdown – Traditional vs. Roth

Traditional IRAs and a Roth IRAs differ mainly on when you are required to pay taxes on your contributions.

Traditional IRAs require you to pay taxes as you withdraw the money during retirement. On the other hand in Roth IRAs, the taxes are paid as you put money into the account. Regardless of whether it’s in a traditional or Roth IRA, your money grows tax free.

Another way where the traditional IRA and Roth IRA differ is who is eligible to contribute to the IRA. Just about anyone with earned income can contribute to a traditional IRA but if you make too much income you might be prevented from contributing to a Roth IRA. Here are the IRS limits for tax year 2017

Your Filing StatusYour MAGI*Allowed contribution
Married filing jointly or qualifying widow(er)< $186,000Up to the limit
≥ $186,000 but < $196,000A reduced amount
≥ $196,000Zero
Married filing separately and you lived with your spouse< $10,000A reduced amount
≥ $10,000Zero
Single, head of household, or married filing separately and you did not live with your spouse< $118,000Up to the limit
≥ $118,000 but < $133,000A reduced amount
≥ $133,000Zero

*MAGI – Modified Adjusted Gross Income

For the 2021 tax year, total contributions to all of your traditional and Roth IRAs can’t be more than $7,000 if you’re age 50+-or your taxable compensation for the year if it was less than this limit.

The last important difference is that in a Roth IRA – unlike other IRAs – there are no required minimum distributions (RMDs). If you are above the limits for a Roth contribution look here to learn about a legal way to do it. It requires one additional simple step and is referred to as the backdoor Roth IRA.

Other Variations of the IRA

Some other popular types of IRAs include:

Simplified Employee Pension (SEP)

This is a type of traditional IRA that is set up by an employer for its employees.

SEPs may be an option if you are self-employed, earn freelance income or if you are a small business owner with one or more employees.

SEPs have the same general features as traditional IRAs, but allow much higher contribution limits

For the 2017 tax year, contribution limits are 25% of your compensation or $54,000, whichever is lesser.

Savings Incentive Match Plan for Employees (SIMPLE)

This is an IRA set up by a small employer for its employees. Where they differ from SEPs is that employees can contribute to SIMPLE IRAs.

For the 2017 – and 2016 – tax year salary reduction contributions can’t exceed $12,500.  In addition, employers are generally required to match this contribution on a dollar-for-dollar basis, up to 3% of the employee’s total compensation.

Spousal IRA

This type of IRA is a traditional or Roth IRA funded by a married taxpayer on behalf of a spouse with no earned income.

In the 2017 tax year you can put a maximum of $5,500 into a spousal IRA. This goes up to $6,500 if the non-working spouse is age 50+ by Dec. 31, 2017.

IRA RMDs (Required Minimum Distributions)

With IRA accounts – traditional, SEP and SIMPLE IRAs you are required to make minimum distributions (RMDs). This is just like it is with a 401k. The rule of thumb is that you must make withdrawals before April 1 of the year following the year you turn 70½.

After the initial RMD for every year thereafter you must take the RMD before Dec. 31 of that tax year. As I mentioned before, Roth IRAs are not subject to RMDs. Also, like 401ks, the amount you are required to withdraw as RMDs depends on your age, your life expectancy and your account balance.

The RMD is typically calculated by dividing the prior end-of-year balance by a distribution factor listed -by age- in IRS Publication 590, the Individual Retirement Arrangements.

There are some cases where you may end up using a different table. For instance, if your primary beneficiary is a spouse more than 10 years your junior you use the Joint Life Expectancy Table.

Investment Options – Exchange Traded Funds or ETFs

Now let’s turn our attention over to Exchange Traded Funds (ETFs)

ETFs are uniquely structured investment funds that track broad-based or sector indexes, as well as commodities and baskets of assets.

There are of course some pros and cons to ETFs.

Some of the pros include –

  • Provide diversity in a single investment
  • Traded on a regulated exchange
  • Can be traded on margin
  • They have no short-selling restrictions
  • Low expense ratios
  • Some brokers offer commission-free trading
  • They are tax efficient

And here are some of the cons

  • Broker commissions can erode returns
  • Bid-ask spread can be large
  • Some ETFs may be subject to contango (a situation where the futures price of a commodity is above the expected future spot price)
  • Certain ETFs are taxed at a higher rate (for example those holding physical precious metals).

How to invest in ETFs

Here is a pro tip. Target-date ETFs are designed in a way to adjust allocations based on where you have set your target retirement date.

As an investor, target-date ETFs are an easy way to manage investments based on the number of years you have left until retirement.

There is only one decision you need to make on this type of ETF. You simply select the target-date fund that most closely matches the year you expect to retire.

With ETFs you are able to access nearly any asset class or sector. This gives investors the ability to gain exposure to markets that have traditionally been challenging to tap. For instance, commodities and emerging markets.

If you are interested in equities there are ETFs that target stocks, stock sectors, foreign stocks and emerging market stocks.

If you would rather have something that is fixed-income you have the option when using ETFs of trading broad-based U.S. funds, municipal funds, international bonds, Treasury funds and emerging market debt.

You can do the same with commodities.  Using ETFs you can access broad-based funds, agriculture, industrial metals, precious metals and energy.

Inverse and leveraged products

If you crave other variations of the ETF you can invest in inverse and leveraged products.

Inverse ETFs are constructed by using various derivatives with the purpose of profiting from a decline in the value of the underlying benchmark. This is counter what we normally think of when we think of profiting – we think of profiting from a rising market.

On the other hand leveraged ETFs use derivatives and debt to magnify the potential returns –and potential losses as well- of an underlying index.

You can find many funds that are double or even triple leveraged. In addition there are some funds which are both inverse and leveraged at the same time.

As best practice it’s smart to steer away from leveraged ETFs unless you are very familiar with the way they work.

Pro Tips for Choosing ETFs

Here are some quick tips when looking for ETFs

  • Decide which asset classes you want to invest in and consider your overall diversification
  • Look for ETFs that track those above asset classes you want to invest in
  • Compare the options in the ETFs
    • Examine expense ratios – less = better
    • Look at volume and assets under management – more = better
  • Buying and selling frequently? Find  brokers that offer commission-free trading for your desired ETFs

Investment Options – Mutual Funds

Mutual funds are professionally managed pools of stocks, bonds with other instruments that are divided into shares and sold to investors.

Some of the pros of mutual funds include –

  • Diversification
  • Liquidity
  • Simplicity
  • Affordability – a low initial purchase
  • Professionally managed.

Some of the cons of mutual funds include

  • Fluctuating returns
  • Over-diversification
  • Taxes
  • Potentially high costs
  • Professional management is not necessarily an accurate predictor of good performance.

You invest in mutual funds directly through mutual fund companies or you can use full-service and discount brokerages, banks or insurance agents.

Like ETFs, mutual funds are also available as target-date funds. Target-date funds automatically adjust allocations based on how long you have until you retire. These types of mutual funds start out more aggressively and gradually become more conservative as your retirement approaches.

Mutual fund companies work by pooling money from different investors and then investing that money in a portfolio of stocks, bonds and other securities. With mutual funds you have professional money managers -or teams of managers –who work for you researching, selecting and monitoring the performance of the funds’ portfolios.

As an investor, you own shares of the fund, which represent a portion of the fund’s overall holdings. A mutual fund’s price is its per share net asset value (NAV) and adding any shareholder fees the fund imposes.

Many mutual funds calculate their NAV at least once daily. This is usually done after the close of the major U.S. exchanges. Mutual fund shares are redeemable – any business day you can sell your shares back to the fund.

To make money from mutual funds you have three options

  • Dividend payments: If your fund earns income in the form of dividends and interest, it will pay shareholders close to all of the income it has earned, minus any disclosed expenses.
  • Capital gains distributions: if your fund sells a security that has increased in price, it will distribute the capital gains -less any capital losses of course – to investors at the end of the year.
  • Increased NAV: When you have a higher NAV this represents an increase in value for your mutual fund investment.

You have the say so if you want to receive dividend payments and capital gains distributions. You can also choose to reinvest the money to purchase additional shares.

Of course, it goes without saying that the higher the potential returns, the higher your risk. There are several different types of funds, each with its own risk profile. Let’s take a look at these.

Money Market Funds

Money market funds are considered lower risk than other types of mutual funds.

They are limited by law to investing in certain high-quality, short-term investments issued by the U.S. government –like Treasury bills – U.S. corporations, and state and municipal governments.

Money market returns tend to be twice what you would expect to earn in a savings account, and slightly less than a certificate of deposit (CD). These funds attempt to maintain a NAV at a stable $1.00 per share. These funds pay dividends that generally reflect short-term interest rates.

Bond Funds

Bond funds are higher risk than money market funds in part because they seek to obtain higher returns.

There are many different types of bonds, and all vary greatly with their risk and reward.

Bond funds come with the same risks associated with regular bonds

  • Credit/default risk
  • Prepayment risk
  • Interest rate risk

Equity Funds

Equity funds are the largest category of mutual funds and invest in stocks.

Individual equity funds use different investment strategies.

For instance growth funds, focus on stocks with the potential for large capital gains.  Income funds invest in stocks that pay regular dividends.

Equity funds have the same market risk as individual stocks. Their prices fluctuate in response to a variety of factors, including the overall strength of the economy.

Tips for Picking Mutual Funds For Your Portfolio

Here are some considerations for picking mutual funds for inclusion in your portfolio

Be aware of your diversification in relation to your time horizon and risk tolerance and look for funds that match these objectives.

For example, if you are willing to take on a fair amount of risk don’t need access to your money for a while, you could consider a long-term capital appreciation fund as part of your portfolio

Pay attention to fees. You want to opt for no-load funds, which don’t charge a front- or back-end load fee, and also look for funds with low expense ratio.

Mutual funds and IRAs are commonly used tools for investing, but at times may be misunderstood. Clarifying mutual funds and IRAs is step four in becoming your own financial advisor.

Investment Options – Stocks

Stocks are securities that represent a portion of ownership in the corporation that issued the stock. Stocks are also called equities.

Some of the pros of stocks include

  • Capital appreciation
  • Many stocks outperform other investments
  • Stocks may pay dividends
  • Owning stocks incurs voting rights

Some of the cons of stocks include

  • Prices can fluctuate dramatically
  • You have the potential to lose your entire investment.

You can get involved in investing in stocks through full-service and discount brokerages or through a Dividend Reinvestment Program (DRIP). Many investors who pick stocks and pinpoint good times for buying and selling use a combination of technical and fundamental analysis.

Many companies issue stock to raise money for various purposes such as debt payment, launching new products, market expansion and building new facilities.

When you purchase stock shares, you buy a piece of the company no matter what the size of that piece.

Most stock purchased by investors gives shareholders the right to vote at shareholder meetings and to receive dividends. This is called common stock. 

On the other hand, preferred stock doesn’t come with any voting rights. However preferred stock shareholders have priority over and receive dividend payments before common stockholders.

You can actively trade stocks – for instance day traders get in and out of a trade during the same trading session. I advise against this as you need to beat the market plus the costs of buying and selling. I don’t know about you but I can’t predict the future.

The most common tactic is to buy and hold. This is where investors seek gains over the long-term. If you own stock, you make money if it appreciates in value and you sell it, and/or you will earn income through dividend payments.

Here is an easy to start investing with only $1,000.

Market Capitalization

You can categorize stocks by the size of the company. This is known as market capitalization. Market cap represents the total dollar market value of all its outstanding shares.

While the lines between different caps are not set in stone, general guidelines are:

  • Mega cap: $200 billion+
  • Large cap: $10 billion to $200 billion
  • Mid cap: $2 billion to $10 billion
  • Small cap: $300 million to $2 billion
  • Micro cap: $50 million to $300 million
  • Nano cap: less than $50 million

You can also group stocks by certain performance characteristics:

  • Growth stocks: Earnings grow at a faster rate than market average but rarely pay dividends. Investors instead seek capital appreciation.
  • Income or dividend stocks – these consistent dividends, providing income for investors.
  • Value stocks – these stocks have low price-to-earnings (P/E) ratios. Investors will purchase in the hopes that price will rebound.
  • Blue-chip stocks – These stocks are large, well-known and well-established companies with solid growth histories. These always pay dividends.

Tips for Picking Stocks For Your Portfolio

Here are some tips for you to consider when purchasing stocks.

  • Look at your overall diversification as well as your time horizon and risk tolerance.
  • Stock analysts who take a fundamental approach consider price and valuation, financial reports and dividend history.
  • More technical analysts look at price charts and technical indicators to analyze past – and predict future – price moves.
  • As I mentioned above many investors consider both the fundamentals and technical.
  • Finally do your own due diligence. Advice from friends and analysts is great but don’t rely too much on it.

Investment Options – Bonds

Bonds are debt securities where you lend money to an issuer – e.g., a corporation or government -in exchange for the receipt of interest payments and eventually the future repayment of the bond’s full face value.

There are, of course, pros and cons to investing in bonds.


  • Can be virtually risk-free or low-risk
  • Predictable income
  • Better returns on bonds compared with other short-term investments
  • Some bonds are tax exempt


  • Potential for default
  • Selling bonds before maturity can result in a loss

You can buy bonds in over-the-counter (OTC) markets including securities firms, banks, brokers and dealers.

Corporate bonds may be listed on the New York Stock Exchange (NYSE) and US government bonds can be purchased online at If you buy municipal bonds (“muni’s”) the Interest payments are exempt from federal taxes and sometimes state taxes as well.

As I implied above, a bond is an IOU issued by a corporation or government so it can finance certain projects and activities. When you buy a bond, you are essentially floating a loan to the issuer for a certain amount of time. In exchange for the loan, the bond issuer pays you a set interest rate – known as the coupon rate- at regular intervals until the bond matures.

When the bond matures, the issuer repays the full face value- par value- of the bond. In general, the higher the bond interest rate, the higher the risk involved with the bond.

Bond Risk Types

Investing in bonds comes with several types of risk.

Bond Default Risk

This type of risk is the possibility that the issuer will not be able to make interest or principal payments when they are due.

Bond Prepayment Risk

This bond risk is the possibility that the bond will be paid off earlier than expected, in which case you lose out on any remaining interest payments.

Bond Interest Rate Risk

This type of risk is the possibility that interest rates will be different than you expected. If rates decline, you risk prepayment if the firm exercises what is known as a call feature. If rates go up, you risk holding a bond with below-market rates. Investing in bonds at below-market rate means you could be earning more money with something else.

General Advice For Investing in Bonds

Bonds come in different maturities and have different risk profiles. Are you willing to take on more risk to get higher rewards and how long are you willing to hold a bond?

U.S. Treasury bonds are considered one of the safest investments in the world.

Investment-grade corporate bonds pay more than Treasuries. They also come with a higher risk of default.

There are bonds known as high-yield or “junk” bonds. These bonds have even higher yields and come with a corresponding higher risk.

As I stated before, there is no federal tax on municipal bond income. If you’re investing in bonds issued by your own state, there’s no state tax, either. If you want to diversify your bond investments, you might want to consider a bond fund.

What Is A 529 Plan?

529 plans are college savings accounts that are exempt from federal taxes.

Some of the pros of 529 plans include –

  • No income restrictions for contributors
  • Investments grow tax-deferred
  • Distributions are tax-free at the federal level.

Some of the cons of 529 plans include-

  • Contributions greater than $14,000 can trigger the federal gift tax.

You can invest in a 529 plan through participating state and university providers.

529 plans are a good way to help a child financially with education expenses while at the same time limiting your own tax liability. A 529 plan is an investment that lets you save for the future college costs of a beneficiary –like your child or grandchild –while at the same time potentially reducing your own tax liability.

Even though contributions aren’t tax deductible on your federal return, they may be on your state return. In addition, your investment grows tax-deferred. Any distributions from the plan that are used to pay for the beneficiary’s qualified education costs are tax-free at the federal level.

Your maximum level of contribution to a 529 plan is dependent on the state in which the 529 plan is established.

Annual contributions are treated as gifts. Therefore contributions up to $14,000 each year – as of the 2017 tax year- can be made without triggering the federal gift tax.

Lump sum contributions that covers five years’ worth of contributions can be made to front load the investment and reap the rewards of compounding. This comes to a total of $70,000, or $140,000 for married couples – provided no other monetary gifts are made to that beneficiary during the five-year period.

529 plans come in two flavors.

529 Savings Plans

These 529 plans are similar to some other investment plans – your contributions are held in mutual funds and other investment products.

The 529 plan account earnings hinge on the performance of the underlying investments. Most 529 savings plans also offer an age-based investment approach that gradually becomes less risky as your beneficiary nears college age. This means you’ll have a higher concentration of stocks in the beginning of the plan that gradually shifts to more cash and bonds.

You can also choose a more static approach – the investment fund or group of funds keeps the same allocations.

529 Prepaid Tuition Plans

529 prepaid tuition plans –also known as guaranteed savings plans- let you lock in today’s rates by pre-purchasing tuition.

These programs pay out at the future cost to any of the state’s eligible institutions. This may be a good deal when factoring in the rising costs of college.

If the beneficiary chooses to go to an out-of-state or private school, you can transfer the value of the account or get a refund.

529 prepaid tuition plans may be administered by the state and higher education institutions.

Investment Opportunities – Life Insurance

Life insurance is a contract with an insurance company that provides your beneficiaries with a given amount of money when you die.

There are some pros and cons that are associated with life insurance –


  • Beneficiaries are protected from the financial impact and burden of your death
  • Benefits pass to beneficiaries’ income tax–free and may be estate tax–free
  • Cash values grow tax deferred


  • Confusing products
  • High associated fees
  • Agents may push products you don’t need

Life insurance is bought from a local life insurance agent or online firm. There are several ratings agencies you can check to determine how good a particular firm is. For example, check out A.M. Best or Moody’s.

For most life insurance purchases, a term life policy is the way to go.

Policies should be worth 7 to 10 times your annual income – that is, enough for your family to live off 4% interest earned on the lump-sum payout from the insurance.

As I noted above, a life insurance policy is a contract with an insurance company. You pay premiums to the insurance company. In exchange for that premium, they make payments to your beneficiaries. The payouts are known as death benefits. Generally speaking, they are income tax-free and may even be estate tax-free.

There are two main categories of life insurance:

Term Life Insurance

Term life policies offer protection for a specified period of time, typically in ranges of between one and 20 years.

The proceeds from term life policies are usually used to replace lost potential income during working years and thus provide a safety net for your beneficiaries.

Premiums -based on your health and life expectancy at the time of coverage application-are guaranteed during the term. You may be able to extend coverage beyond the term – but you’ll pay a much higher premium.

If you stop paying the premium, the insurance stops. Term life policies pay a lump-sum benefit if you die during the policy period, but they don’t build any cash value. They tend to be – in general- less expensive than permanent life insurance. Much less expensive and usually very inexpensive.

Permanent Life Insurance or Whole life Insurance

Permanent life insurance combines death benefits with a savings or investment account. This type of life insurance policy is intended to protect your beneficiaries as long as you are living of course providing you pay the premiums.

Depending on the policy, the premiums for permanent life insurance may be fixed or not, and, like term life they are based on your health and life expectancy.

Permanent life insurance policies accumulate some cash value through a savings or investment component. As you can expect, they are generally much more expensive than term life policies.

Usually these policies are complicated and if you don’t understand something you shouldn’t buy it. I keep my investments and insurance separate. I see no reason to mix them and this case is far too expensive.

How To Purchase Life Insurance

What will happen to your children or other dependents when you die? If you have dependents who won’t be able to pay for college tuition, mortgages or other bills, consider life insurance.

When purchasing life insurance, you should ask yourself these two questions:

  • What kind of insurance should I get?
  • How much insurance do I need?

Permanent life insurance policies, like whole or universal life, are often used by wealthy individuals as estate-planning tools. These policies help preserve the wealth they plan on passing to their beneficiaries. This argument is flawed.

These policies are substantially more expensive than term life. In general, these types of policies that you would choose unless your income is more than $250,000 a year or you have over $1 million in assets.

In contrast, term life insurance is the way to go if your main goal is to protect your family against the loss of your income.

As the name implies, term life policies last a certain amount of time – such as 20 years – and after that, the biggest need for the insurance is gone. For instance, the mortgage is paid off and the kids are through college.

How much insurance should you buy?

One school of thought says your policy’s death benefit should be 7 to 10 times your annual salary.

This is not very precise; however, it does provide a good starting point.

Another option is to calculate how much is needed for a lump-sum payout to create income for your family indefinitely. This option assumes your family would live off the interest from your payout – assuming 4% interest a year.

As an example, if you make $50,000 a year you would need to obtain $1.25 million in insurance for your family to continue with your “salary” ($50,000 ÷ 0.04).

Expanding our example further, if you make $100,000 a year, you’d need a $2.5 million policy ($100,000 ÷ 0.04).

Yet another option is to calculate how much money your family would need to cover normal monthly expenses and pay off debts –like the mortgage or credit card debt-as well as money to pay for your funeral and your children’s future education.

Becoming Your Own Financial Advisor

Now that you have some knowledge of investing for your future, you are well on your way to being your own financial advisor. This starts with investing in your own education so that you understand how to be better prepared for your future.

Start by taking a hard look at your current income and expenses. Then, see how you can save more money and where you should invest. Follow these simple steps to get started as your own personal financial advisor.

Knowledge and consistency are some of the most important aspects of growing your net worth and becoming financially free. Good luck!

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