Phase 3 & 4: Working to secure your Long Term Financial Strategy

What’s better, passive investing vs. active investing – Fund Company A vs. Fund Company B? There are many important factors to consider when investing; the majority tends to focus on the wrong thing –expenses of funds for example. Generally speaking, it doesn’t matter how inexpensive a fund is if you are in the wrong asset allocation mix. We want to keep expenses as low as possible and you wouldn’t want to pick a more expensive fund over a less expensive fund that had the same rate of return. Also, just looking at the expense is, often times, not a sound basis for choosing an investment strategy. One could metaphorically equate this to the reason why you might buy a Mercedes vs. a 1971 Ford Pinto, I believe performance matters. Let’s look at the statistics of what’s truly impactful to your overall investment strategy.

The following numbers make up the variance of a portfolio’s return:

  • 91.5% Asset Allocation (meaning what your money is invested in stocks, bonds, etc)
  • 4.6% Stock Selection (ie. Fund Company A vs. Fund Company B)
  • 1.8% Market Timing
  • 2.1% Other

Source: Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, 1986. “Determinants of Portfolio Performance.” Financial Analysts Journal, Vol. 42, No. 4 (July/August 1986), pp: 39-48.

After examining the percentages above, we’d obviously want to pay attention to how we are allocating our dollars. However, many employers provide little education prior to when you sign up for their 401k or 403b and make their investment elections. Target date options became popular inside 401ks because you only have to answer one question: when do you want to retire? You pick a year, 2040 for example, and the fund starts off with the majority of it being invested in equities and as time goes on it becomes more conservative, adjusting more of the percentage to bonds. It gives you the sense that your retirement is on autopilot however it’s not taking into consideration your overall goals. For example, if someone retires at 60 and could potentially be living for another 30 years, they could still benefit from that money’s continued growth. Keeping the majority of their investments in bonds and cash could lead to them running out of money without them realizing it. It is important to keep in mind that all investments fluctuate and may be worth more or less than originally purchased. Principal Invested is not guaranteed at any time, including at or after the fund’s specific target retirement date.

Source: Target Date Funds: The Good, the Bad, and the Unknown

Phase 4

Saving for children’s college. I’ll write more on this specifically in a later article but in general I don’t include this as a necessity to someone’s financial plan. However, it’s important for many people to have it in their plan. We know there are loans that we can lean on for college, but there is no loan for retirement and we can’t rewind the clock. The goal is first make sure your plan is secure: you’re on pace for retirement and you have extra dollars to save for your children.

If you’re saving in a 529 plan you want to be careful not to overfund it. Any dollars that you don’t use for college will acquire a 10% penalty and taxes**.

In summary, there are many factors when considering your options for funding both retirement and paying for your kid’s college. Many people struggle with that balance, but it is manageable with the right strategy in place.

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Tanner Fedell

Author: Tanner Fedell

I am an independent financial consultant working through North Star Consultants in Dallas, Texas, but I also work virtually with clients throughout the U.S. Whether you are an individual or a business, we have a whole host of solutions to fit your needs that I won’t bore you with listing here. If it impacts you financially, we can help.

Tanner is a registered representative and investment advisor representative of CRI Securities, LLC and Securian Financial Services, Inc.

**A 529 college savings plan is a tax-advantaged investment program designed to help pay for qualified higher education costs. Participation in a 529 plan does not guarantee that the contributions and investment returns will be adequate to cover higher education expenses. Contributors to the plan assume all investment risk, including the potential for loss of principal, and any penalties for non-educational withdrawals. Your state of residence may offer state tax advantages to residents who participate in the in-state plan, subject to meeting certain conditions or requirements. You may miss out on certain state tax advantages should you choose another state’s 529 plan. Any state based benefits should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other advisor to learn more about how state based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state’s 529 plan Program Administrator to learn more about the benefits that might be available to you by investing in the in-state plan.

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