Lately, I have been getting this question frequently. For some folks, it’s the first time they’re hearing about tax-free growth. For others who have been saving in a Roth for a long time, or are converting pre-tax dollars to Roth IRA, they have never really considered just how beneficial tax-free growth truly is. This is especially true when you have a 10, 15, even 20+ year timeline.
From where did you learn most of your life skills? How did you learn to brush your teeth, read, write, or drive a car? Personally, I learned these things from my parents and teachers. Here is a topic that affects just about every facet of our lives and many parents have limited knowledge of it and it is often not covered in school: finances! Finances are consistently listed as one of the top reasons for divorce, and money is one of the biggest causes of stress for Americans.
As a financial and retirement planner, I have learned that people hate paying taxes. The truth is, the history of taxation is a complicated one full of wars, audits, jail time, and factions of society that were created in rebellion to the idea itself. To make things worse, the “rules” laid out by the IRS when it comes to tax are extremely complicated, ever-changing, and leave a ton of room for discretion. So, how might one go about reducing or entirely removing the IRS as a benefactor to their retirement investment they have worked so hard to save?
Following an explosive 9 month run, small cap stocks slowed their pace of growth allowing large cap stocks to nearly close the gap for the year. Meanwhile, international markets underperformed U.S. markets. This is not surprising. To many other nations, the U.S has had a fairly productive vaccine rollout and therefore many components of the U.S. economy are back to a semblance of normalcy. As international stocks become even cheaper (relative to U.S. stocks), at some point that may present investors with an opportunity.
If I asked you what your objective is when it comes to investing, what would your answer be? In my years as a financial advisor, I have found the answers I have gotten to this question to be far too broad to be meaningful. Whether it is “retirement,” “saving for my children’s college education,” or (the worst answer) “making money”. When it comes to anything in life, including investing, your success is in the details.
After a recent phone call from my 21-year-old son, I realized that some things never change. With the advancements in technology, it has never been easier to invest with an account on apps like Robinhood, SoFi, and Stash. Many of my son’s friends (Gen Z) are using these platforms on their quest to get rich quick and retire early. For young inexperienced investors, I equate this to the euphoria around the tech bubble of the 90s or even certain pyramid schemes.
For a long time, many of our portfolios have had a slight bias towards small cap stocks (stocks with a total market value under two billion dollars). Sometimes this bias helps performance and sometimes it hurts. We believe that over the long term, in exchange for a small amount of additional risk, small cap stocks will provide better returns than their large cap counterparts.
Don’t put all your eggs in one basket. I have no idea where that idiom originated from but it is perhaps the best and simplest way to describe diversification. Instinctively investors know they should diversify their portfolio and most do this. Having looked at hundreds, if not thousands, of portfolios, I can tell you that diversification amounts to more than just owning multiple funds. A common mistake that investors make when trying to diversify their IRA or 401k is that they, inadvertently, create a portfolio that has the illusion of diversification. Let me explain.