Reader QA – Investment Talk

Did you know I can help you with your money troubles? If you’ve got a question for the Basic Bitch, drop a comment below or e-mail me at basicbgettingrich@gmail.com

Reader Mike writes in:

“I am going to meet with my stockperson (Edward Jones) next Friday. For the past 7 years I have been on what’s called the Very Low Aggressive speed of making money in stocks – They referred to it as a 1 -10 scale, 1 being the super safe route, and 10 being bet it all on a table at Vegas, I am about a 2 – 3 range. I’d like to start growing my money faster for a retirement plan with my stocks since my IRA is only growing at a $3 a year. What should I ask them / what should I know before going into the meeting?”

This is a great question and something I’m sure a lot of people wonder about.

First things first, what are we talking about when we talk about risk, aggressive stocks, etc… Well, you can classify the types of stocks and mutual funds you invest in as either low, moderate, or high risk. That means that if you invest in low risk stocks they’re rate of return is more stable – say an even 3% across many years (just an example). While a higher risk investment may have the potential to grant you 10% in returns, but also has the potential for you to lose just as much money.

So, the easiest way to answer Mike’s question to throw out a blanket statement which says that the younger you are the more risk you should (or could) take on (so on your number scale, Mike, would be between a 7-10) and the older you are (or the closer to retirement you are) the less risk you should take on (somewhere between a 1-3).

Mike, if your portfolio is only making you $3 a year, something is terribly wrong. Is that an average increase? Did you have a bad year in which you lost a lot of money and that $3 increase is the average of some high and low years? Even so, $3 a year is a really poor return.

I wrote back to get some clarification on his actual finances, because something didn’t sound right to me.
Mike says:

“I have a Roth IRA with 30K in it. I started it in 1995 and contributed to it every year for about 10 years before I could no longer afford to contribute. This Roth only earned $2 last year. I have another 5K in a savings account with [xxxxx] bank. For my investments, I opened the Edward Jones account in 2007 with 16K in stocks. It’s now at 22K. ”

Okay, now we’re getting somewhere. Let’s break this down and look at some questions Mike should probably find the answers to before he goes much further:

1. What is your average rate of return per year?

We can tell from the above, that he is making some money. His “stocks” portfolio is growing. Slowly though. If he’s made 6K since 2007, that means he’s only made $600 a year on average. That’s a little over a 2.5% rate of return. I’d argue that’s really… not good over the course of 10 years. However, if we look at the last decade and the market in general, it could be that a lot of Mike’s issue is the fact that he rode out the recession with those stocks and probably lost A LOT of money at one point – this makes the return percentage above a little nebulous as he’s probably had some pretty wide swings.

As to the Roth, that’s interesting. Without knowing exactly how much was put in each year and what his balance was when he stopped contributing I can’t say too much here other than I’m ASSUMING that Mike is only earning interest on his Roth contributions and has not invested any of that money into mutual funds or ETFs or stocks or anything like that. If that’s the case, I’d strongly encourage him to invest some of that 30K into ETFs to see a better return on his Roth other than just interest paid.

Making sure you review your portfolio’s growth throughout the year is important. I’d encourage Mike to take a look at his portfolio and really try to glean some good insights on his true rate of return. If he hasn’t been seeing at least 5% the last two years or so, he should ask his Edwards Jones guy why that is.

2. What type of fees are you paying?

Sometimes, you can get fucked when you let another company manage your portfolio for you. If you’re not sure what types of fees you’re paying on your investments, FIND OUT NOW.

Here is an amazing breakdown of the types of fees you should be concerned with. TL;DR – What this boils down to, though, is that you could be losing significant money over time, depending on your fees. 1% does not sound like a lot – but 1% over the course of 40 years can compound into hundreds of thousands of dollars that you’re losing to fees.

3. The money that’s sitting in the savings account is not going to earn any money for you.

Most banks have less than a 1% interest rate on money in your savings accounts. So, if that 5k is NOT an emergency fund and/or the extent of your savings, I’d say you should put that into your Roth this year. You can contribute up to 5K a year and that money is just sitting there already post-tax. Just dump it in.

4. Your investment strategy of low risk stocks was probably not a great idea

Realistically, I have some bad news for you. You should have been using at least a moderate risk portfolio while you were younger (and therefore had a longer time to retirement) and then stepped down the risk factor as you got older and closer to retirement.

You went through some volatile swings in the last 10 years and that shows by the minimal growth in your portfolio. A higher risk portfolio may have performed better over the past 10 years (or worse! That’s the risk!) but I doubt it would have performed too much worse than your low-risk portfolio did.

Again, this is something a person has to determine for themselves. If you’re super risk adverse, you know you can’t handle the volatile swings from an aggressive strategy and you’d be tempted to cut your losses and move your money then low-risk is good for you. But if you KNOW your money is going to be sitting there for the long haul, you don’t need to be low-risk because the swings will balance out over time.

So Mike, this is maybe not the best news in the world – but hopefully it gives you some idea of where to go from here.

The good news is that, you have SOMETHING! You have almost 60K in retirement funds when the average American has barely $5,000 socked away! So, you are doing good!

You might be a little behind where you need to be, depending on when you retire. But you can definitely start picking things back up. If you haven’t already considering auto-contributing to your Roth. Even $25 a month adds up. If you get a windfall of any kind, throw that into your Edward Jones investments in order to really help yourself out.

You are asking the right questions which is always the first step to making a change!

 

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