When I decided to start one, I was banking with USAA and spoke with one of their financial representatives.
I told him I would like to open a Roth IRA which required a minimum of $500 to fund and an automatic monthly contribution of at least $50.
I said ok, and in February 2016 I started my Roth IRA.
3. Took Someone Else’s Advice
I trusted whatever the guy from USAA said, not really knowing what I was doing. Once I signed the papers, I was just glad I had started one.
This later turned out to be a big investing mistake.
The person from USAA told me what he thought would be a good investment for me and I took his word for it.
Even though I later found out why taking someone else’s advice was a bad idea, I diligently maxed out my Roth IRA of $5,500 (the contribution limit for 2020 is $6,000).
4. Didn’t Know What I Was Invested In
Because I was young, being somewhat aggressive was important to me. I went with the most aggressive 100% equity mutual fund (so I thought), which was called the USAA Cornerstone Aggressive Retail (UCGAX).
I started tracking my returns over those few years and wanted to understand how it all worked but it somehow always ended up being quite a bit lower than benchmarks such as the S&P 500 or Russell 2000.
Looking back, I honestly had no idea what I was invested in. At least I got started and was putting money into it every month, right?
5. Didn’t Pay Attention to Fees
Fees were not something I considered when I opened a Roth IRA. It was something we didn’t discuss on the phone, I just took the reps word for it.
However, a year or two later, I started learning about fees and the impact they can have on a portfolio over an investing lifetime.
I dug into the fine print of the USAA Cornerstone Equity Fund and figured out how much I was paying in fees (more on that later).
Turns out, companies like to make it difficult to find how much you’re paying in fees and what the long-term impact on a portfolio would be.
6. Bought Actively Managed Funds
While digging into the fine print years later, I discovered I was invested entirely in actively managed mutual funds and was being charged a 1.2% expense ratio!
Meaning, they charged 1.2% of my portfolio annually.
These are high fees! And I didn’t even have access to a financial advisor.
And the fees were even higher when you factored in trading costs, cash drag, etc.
The person on the phone told me, “don’t worry so much about fees because what you’re paying for is someone to actively manage your investment instead of just letting it sit in some boring old index fund.” I thought, “what’s an index fund?”
Here’s what’s funny, I actually believed him. I thought, “of course, if you pay more in fees you’re going to get a higher rate of return, right?”
Over 90% of the time that’s false. Unless you’re Warren Buffett.
7. Left Too Much In Cash
When I first started transferring money from my bank account to my Roth IRA, I was making the mistake of thinking that was all I had to do.
After some time, I realized the cash I transferred was sitting in a money market account which is basically the same thing as a savings account!
The money you deposit has already been taxed. So when you go to withdraw the funds at age 59½ or for qualifying reasons before age 59½, you don’t have to pay taxes on what you withdraw.
How Are Roth IRAs Taxed?
Imagine you’re a wheat farmer. You plant seeds and harvest the wheat.
Would you rather pay taxes on the seed or the harvest?
Your decision is solely based on whether you think taxes will be more in the future.
You’ll pay tax on the seed now if you think taxes will be higher in the future or pay taxes on the harvest if you think taxes will be lower in the future.
I’m a big fan of the Roth IRA, especially if you’re young, even if your employer offers a 401(k) (which you should be contributing to also).
However, if you also open a Roth IRA, instead of contributing more to your 401(k) above and beyond the employer match, you could put that extra money in a Roth IRA.
Why would you want to do that?
Can You Access Money In a Roth IRA?
You can take your contributions out of a Roth IRA anytime you want.
You may withdraw your contributions penalty-free at any time for any reason, but you’ll be penalized for withdrawing any investment earnings before age 59 ½ unless it’s for a qualifying reason such as purchasing a house, education, or the Coronavirus pandemic.
Age 60 may sound like an eternity and who knows what’s going to happen between now and then. Wouldn’t it be nice to be able to access your funds if you really needed them?
I recommend not taking the money out but isn’t it nice to have options?
If you have all of your money tied up in a Traditional IRA or 401(k), the only way you can access any funds before age 59 ½ is paying a 10% penalty or taking out a loan against it. Or if something like the CARES Act comes along.
I Jumped On The Vanguard Bandwagon
After learning about fees, asset allocation, and risk tolerance, I sought out the best investment for myself. I stuck with USAA for about a year and decided to start looking at Exchange Traded Funds (ETFs).
The fees are lower, I could have my target asset allocation, and they’re more tax efficient.
But even the funds I was finding had an expense ratio of ~0.30%.
So after exhausting my options, I decided to jump ship and transferred my Roth IRA to Vanguard.
Vanguard was started by a man named John Bogle in 1975 with the goal of bringing to the individual investor the option to invest in broad-based low-cost index funds.
And as the name implies the company has been a vanguard in the financial services industry. Their average net expense ratio is 0.10% (U.S. asset-weighted fund expenses as a percentage of 2018 average net assets).
Why a Vanguard Roth IRA?
Their core purpose is, “To take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.”
I’m a big fan of Vanguard and when you combine it with the benefits of a Roth IRA, the chances of investment success start to look really nice.
I invested the majority of my funds in the US stock market with a little exposure to the rest of the world.
Now I wake up every morning knowing every person in America goes to work to make me rich. By owning the entire stock market, I own a small share of every publicly traded company in the U.S.
And if you’d like to read the book that opened my eyes to investing and helped me realize all of the investing mistakes I’ve made, it’s called the Simple Path to Wealth.
This information has been presented as general education purposes. I am no longer an investment advisor and have not taken your specific situation into account so please don’t take any of the information presented today as investment advice. Consult with an investment professional if you’d like to learn more about investing for your future.
We may receive a commission for referring new users. If you decide to sign up after reading my Personal Capital review, you’re helping support our free content at no cost to you, so thanks!You should sign up because it could change your future.
We got a call from someone in Denver, Colorado and they asked if we would be willing to place a financial calculator on our website that was created by Personal Capital. I politely declined because I had never heard of the company before and didn’t want a bunch of noise on our website.
After the call, I looked into it and decided to create an account. I connected a few accounts and then completely forgot about it for about 6 months. It felt very overwhelming at first and I didn’t want to take the time to learn it.
After 6 months, I was reading a post from Millennial Money and saw that he was a big fan of Personal Capital. A lot of bloggers were big fans!
Because of the online positivity, I spent a little more time setting it up and I’ve been hooked ever since.
Here’s my Personal Capital review and why I think it’s the best free financial planning software of 2020.
What is Personal Capital?
Personal Capital is an online wealth management company that believes the power of technology can make the financial services industry more affordable, accessible, and honest.
You can think of the company as two main divisions:
Free financial planning software
Online wealth management
I have never used their paid online financial planning and wealth management services and so I’m not going to be reviewing that today, only their free tools.
They also offer their free Personal Capital app that I’m guilty of logging into nearly everyday.
After the initial set up, and once I became comfortable with Personal Capital, I discovered some powerful features.
Here are 5 powerful features that I love about Personal Capital.
1. Accurate & Visual Graphs
One of my favorite features is seeing my complete financial picture in one simple dashboard.
By connecting all of your financial accounts, it’s able to create a nice-looking picture of your where you are with your finances. And it updates on a daily basis to give you accurate information and visuals.
Seeing how my assets are going up and my liabilities are going down is super motivating to me.
It’s nice to see each bank account along with my credit cards, mortgage, and investments.
If I wasn’t able to see all of my accounts in one place I would probably forget that some of them existed.
It also shows you all of your spendings and compares that with the previous month to see how you’re doing.
As you can see, it automatically categorizes transactions and shows you what percentage of your spending that category represents. It will compare what you’re spending this month to what you spent last month.
To be honest, I think Personal Capital is lagging when it comes to robust budgeting tools. For that, I use my favorite free budgeting software.
When I first created an account, I was also in business school learning about investments.
I was becoming very familiar with terms like index, benchmark, blended, S&P 500, DOW, foreign markets, and so on.
At the time, none of these terms meant anything to me personally.
After connecting my investments to Personal Capital, I started understanding these terms better. I was able to see how my portfolio was doing compared to the S&P 500, foreign markets, and so on.
Before that, when I would hear how the markets did today on the radio, it didn’t make sense to me. But because of the Portfolio and the Holding & Allocations section of the app, these things began to make sense.
I could see the percentage change of my investments for the day and see the dollar amount change as well.
Certain days when the markets did well, and I saw how it impacted my net worth, I was a happy camper.
On days when markets are volatile and down, I try not to let it bother me.
Each week, I continue to get a summary email like this.
4. Net Worth Tracker
When you track your net worth, you’re more motivated to make better financial decisions.
Personal Capital has literally forced me to make better financial decisions because I want to see that graph going up.
I will mention that checking your net worth too frequently can cause undue stress and I do try and limit how much I log into the app.
Anyone else know what I’m talking about?
I also find ways to have a balance between saving and spending. Because of the way I manage my money, I force myself to spend money on fun things as well.
You shouldn’t bee 100% extreme all the time with your savings. You have to have balance.
5. Fee Analyzer
I never really knew how much I was paying in fees until I was able to see the expense ratio for each individual security within the Personal Capital fee analyzer.
Investment companies make it difficult to see what exactly your expense ratio is. The fee analyzer made it really easy to see how much money I was paying for each investment and get rid of the ones that were too expensive.
It was one of the main motivating factors that pushed me to invest in an ETF at Vanguard (VTI) with an expense ratio of 0.03%.
Personal Capital is safe to use. They use many layers of security to keep your money and your information safe and private.
Like Mint, the don’t actually have access to any funds. You’re simply aggregating the information and then they’re able to analyze it.
Of course, nothing is un-hackable but they definitely take extra safety precautions. So much so that I would have to update my USAA connection every day by logging into my bank with 2FA if I wanted to see accurate bank information.
How Much Does Personal Capital Cost?
After everything I’ve mentioned, you may be thinking, “is Personal Capital really free?”
And the answer is, yes! It really is free. But if it was completely free they wouldn’t be in business. So that brings up the next question.
How Does Personal Capital Make Money?
Personal Capital uses it’s amazing software to draw people in. They’ve been able to amass quite a large amount of users who use their tools frequently. But if it’s all free, how. do they make money.
Once a user has over $100,000 in investable assets, that person then becomes a lead for their wealth management department. You don’t ever have to invest any of your money with them if you don’t want to.
But if you decided to invest with them, they charge an asset management fee of 0.89% for portfolios between $100,000 and $1 million. Which is actually quite high for a robo-advisor. Once you have over $10 million, the fee becomes 0.49%.
Personal Capital is different than Betterment or Wealthfront in a sense because it is more expensive but they promote their Certified Financial Planners being willing and able to meet more frequently.
What Are The Downsides of Personal Capital?
There are two major downsides to Personal Capital:
As soon as you have $100,000 in investable assets, their financial planners will start reaching out to you. You don’t have to work with them though unless you want to. You can politely decline and they won’t reach out to you again.
Their budgeting software is not as user-friendly and easy to use as many of the free budgeting apps out there. I recommend using Mint or even Qube Money.
I’m a big fan of Personal Capital’s free tools and I think it’s the best personal finance software to help you reach your retirement goals.
If you haven’t signed up for an account before, I encourage you to get started by clicking the link below!
98% of active managers can’t outperform the market. Perhaps you’ve heard this.
I’ve always told clients not to try and outperform the market because they will almost always end up failing.
But my thinking was challenged.
A few colleagues and I attended the Foundations Conference in Austin, TX in June 2018 to learn about how this company has been trying to outperform the market for 30+ years.
From their website:
“Dimensional Investing is about implementing the great ideas in finance for our clients. We aim to beat the market, not outguess it.”
I’m not recommending Dimensional Fund Advisors. I simply want to present a few things I learned. This post won’t appeal to a majority of my readers but I if you’re in finance or have thought you could outperform the market, it may be applicable.
What is Dimensional Fund Advisors?
Their focus is the wisdom of academics over the experience of active fund managers. The DFA philosophy boils down to using academically sound research to consistently outperform the market. Here are a few things I picked up on while I was there that makes them different.
1. History shows that some riskier stocks — those of small companies and those considered undervalued — produce higher returns on average over time than other types of stocks.
“But on average doesn’t mean every year,” says David Booth, CEO of Dimensional.
DFA employs what’s considered value-based investing. You have two types of stocks. Growth stocks (overvalued in price) and value stocks (undervalued in price). DFA screens out many growth stocks and underweights them so they have more exposure to value stocks that are underpriced.
2. They also overweight small-cap stocks. A small-cap stock is a company with a market capitalization (shares outstanding x price per share) of less than $1 billion.
Small-cap stocks are riskier and because of that, you would expect to earn a higher rate of return by investing in small-cap stocks over a long period of time and underweighting large-cap and mid-cap stocks.
3. Dimensional employs what they call momentum. When they see momentum in the market they take advantage of it, even on a daily basis. If they see movement in certain sectors of the market they will buy and sell to profit from the momentum.
DFA illustrated how they make small trades on a daily basis instead of one big trade every quarter which is what most index and mutual funds do.
4. The other dimension that they try to focus on is finding high profitability stocks. Companies that are generating a lot of cash will potentially have a higher return versus accompany that may be slowing down in their earnings.
When you combine all of these factors to your investments, theoretically what should be able to outperform the market. If you’re investing in value stocks, buying a good price, finding the momentum, and focusing on high-profitability, based on history you should have a higher return than the market.
Index Investing on Steroids
They preach active management can’t outperform the market. They say they’re not active managers, but they are.
We went to dinner one night with Dimensional Fund Advisors and I asked them, “with all of your research and scientific strategies, how do you keep yourself from becoming active investors?” They said, “David Booth, DFA CEO considers them active managers.”
Anytime you deviate from passively investing in a market index by definition you are an active investor.
Learning about DFA’s investing approach challenged my thinking. But I’m not sure I 100% buy into it. Their fees are still a little too high and at the end of the day, it’s really hard to consistently outperform the market.
They have received some heat for the past few years because they haven’t been able to outperform the market here in the U.S. But they’re sticking with their philosophy and only time will tell if they can deliver what they preach in the future.
Last week was a busy week as far as new companies going public.
What is an Initial Public Offering (IPO)?
When a privately held company starts selling stock to outside investors, making it a public company.
As small companies start to gain traction, they may need outside financing to continue growing, and decide to go public.
It can be a long and complicated process transitioning from a private to a public company. To name a few reasons: the company now has investors that can vote on the direction of the business, it’s now regulated by the Securities and Exchanges Commission (SEC) and has to follow more strict accounting procedures under Generally Accepted Accounting Principles (GAAP) .
So what does this mean for individual investors like you and I?
This means that investments in companies which had previously been unavailable are now able to be purchased. But is it smart to invest in IPOs? We’ll get to that in a minute.
Which companies have recently gone public?
Snap – I wanted to highlight Snap first because I know a lot of millennials who thought this was going to be the best investment ever. You know, the company behind SnapChat? On the first day, in March 2017, it jumped from $20 to $30 and everyone wanted in on it. But since then the stock price has consistently fallen to a price of now $11.48 as of writing. That means you would have now lost 61% of your investment if you bought snap on the first day and still owned it.
Spotify – Spotify is another example of a company going public that hasn’t worked out too well. They have lost nearly 17% since going public last year in April 2018.
Lyft – Lyft just recently went public on March 29th, 2019 and is another example of why investing in IPOs can be really risky. Lyft started selling at a price of $87.24 and it’s now at $59.39. That’s a 32% loss if you had invested money on the first day. It’s still too early to tell what will happen to the price of Lyft, but I’m predicting the price will continue to go down because is all Uber has to do is set their price lower and everyone will start flocking to Uber.
Uber – Uber has not officially became a public company yet but it’s right around the corner. Analysts are predicting the share price to be lower than Lyft’s but may be the biggest one of 2019.
Pinterest – Pinterest went public last week and I’m sure you’ve heard of them. Their share price was listed on the New York Stock Exchange on April 18th at $23.75 and has gone up 3%. It’s still too early to tell what it will do.
Zoom – Lastly, Zoom is a video conferencing platform that also went public last week and saw some growth on the first day. Both Pinterest and Zoom went public on Thursday and since Friday was a holiday have only had one day of trading. This week should be interesting to see what happens.
Should you invest in IPOs?
Though IPOs can be good for the companies behind them, they’re not always great for investors — especially the inexperienced kind.
I’m not going to say that IPOs are always a bad investment, especially if it’s a company that you know, like and trust.
But I have to give a word of caution and say most of the time they’re just too risky and you’re better of investing in index funds.
I’m going to give you five things to consider when it comes to investing in IPOs.
5 Things to Consider
1. Don’t just follow the crowd
Going back to our Snap example, this is a good example of avoiding the herd mentality. Just because everyone is buying the stock does not make it a good investment.
2. Avoid them for the most part
Investing in individual stocks requires a lot of work and may not yield the best results. No one really knows what the share price of a company is going to do after an IPO and you’re safer avoiding them all together.
3. Pay attention to the financials
If you are going to invest in an IPO make sure to do your research and don’t just do it because it’s a cool company and your friends are doing it. Read over the prospectus which you can find on the SEC’s website. You should be able to explain your reasoning if you do buy a new company’s stock.
4. Be ready to lose money
Be ready to lose the money that you invest in an IPO. If you can’t afford to lose it then you shouldn’t consider investing in new companies. You’d be better off keeping the money in savings or paying off debt.
5. Consider investing in index funds
It’s hard predicting when to buy a new company’s shares and what’s even harder is knowing when to sell. Because of the added and unnecessary stress, it’s best to stick to a strategy that will allow you to sleep better at night and will most likely be more successful in the long run.
And that’s investing in thousands of companies at once. Take the S&P 500 for example. This is a benchmark made up of the 500 biggest US companies based on market capitalization. So if a new company has a market cap big enough to be in the top 500, one of the companies falls off and the new company is added in. So if you own a similar index fund you may be investing in the new company just with less exposure allowing you to avoid unsystematic risk.
You have a lot to consider when investing in IPOs and nobody likes FOMO. Do your homework and decide if investing in individual stocks aligns with your goals.
Unless you’ve been living under a rock, you’ve probably heard about the ups and downs in the stock market that’s been going on the past couple of months.
Should you be worried about it?
It’s a hard question to answer but today I’m going to try and dispel some common beliefs and help you understand that it doesn’t matter. In only a few circumstances should you be worried.
What is market volatility?
Volatility is the opposite of stable, it means there is a lot of change taking place. Almost all assets see volatility at some point in time. From real estate to bonds, commodities to the stock market. Volatility is the most famous in the stock market.
These day-to-day and sometimes month-to-month fluctuations in the market are normal occurrences.
If you have an investing strategy, the ups and downs of the market should not phase you. It shouldn’t even be worth bringing it up in conversations because you have the confidence that if you stick with your plan for the long run, you’re going to be better off.
Investors get hurt when they start trying to time the market.
“It’s not about timing the market that matters, it’s about time in the market.”
Some people may be successful in predicting market changes but it’s very unlikely because they have to be right twice. When they sell and when they buy.
This is nothing new. Market corrections are as predictable as the rising of the sun.
Warren Buffett once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.”
So why all of the ups and downs?
Volatility can start to creep in when investors start to feel uncertain about the future when it comes to things like interest rate risks, trade wars, company leadership changes, political changes, etc. Each of these are going to happen at different points in time. Sometimes they can seem a little scarier than other times.
How does it affect young people?
If you’re young, the markets dropping could be the best thing for you. You may have just started investing some savings and you’re worried because it seems to keep dropping.
The reason that this could be a good thing if you’re young is that you are buying stocks at a discount. For example, if you just put money in an investment and you see it drop 3% it may hurt because it appears 3% of your money is now gone. But if you’re putting money into an investment every month, the next month, the same investment is now 3% cheaper. One successful approach many young people take is investing a set number, for example, $150 a month, no matter what, even if the markets are up or down. This takes the stress out of it because you’re sticking to a long-term plan.
How does it affect old people?
If you’re old, the markets dropping could be the worst thing for you. The reason most financial advisors suggest that people approaching retirement start transitioning their investments into a more conservative investment with bonds is because bonds are less risky. You’re less likely to have your money grow fast but you also won’t lose money as fast if you just invested in 100% stocks.
A stock market crash could be devastating for someone getting close to retirement because they don’t have time to recover and the money they currently have saved for retirement won’t be able to sustain their living expenses. This is exactly what happened in 2008 when the market crashed. A lot of older people had to keep working because they lost such a large percentage of their portfolio.
Why you shouldn’t care
The bottom line: Such reactions (or overreactions) are not unusual. Day-to-day market volatility is part of the normal market cycle. Not getting caught up in the day to day churning of the market is actually one of the best things you can do as an investor.
Despite such big occasional falls, stocks historically have risen significantly over the long run. So your best bet is to stick with them and give your portfolio a chance to recover.
This is not specific investment advice. I have not assessed your personal situation. Please consult with your financial advisor for specific recommendations.
It was early on a Tuesday morning. June 21st. My birthday.
My wife had a gift for me and told me I had to open it before I went to work. I told her it’s ok, I’ll just open it with the other gifts after I get home from work. She looked at me and said, “no Scott, open this gift now!” So I said ok. As I opened the gift it appeared to be a gym shirt inside but as I pulled it out it was a long sleeve shirt for a little baby.
This was how my wife let me know last year that she was pregnant!
I was so excited but completely freaked out at the same time.
When I found out my wife was pregnant, I decided I was going to work an extra 3 hours a week until my son was born so I could put money towards his future education. By the time he was born, we had about $1,200 saved up.
I opened an investment account with Wealthsimple and the funds were invested in a low-cost index fund. I wanted to keep it in an account where I could access the money because I didn’t know if my son was going to want to go to college. What if he says no to college and just wants to be an entrepreneur? I didn’t want all my money tied up in a 529 college savings because I had heard once you put the money in you can’t take it out unless it’s for that child’s qualified higher education expenses.
This is probably the biggest reason most parents don’t start a college fund for their kids. Because the future is unpredictable.
The Benefits of a Tax-Advantaged 529 College Savings Plan
As I started looking deeper into the benefits of a 529 College Savings Plan a few months ago, I realized it’s an excellent option for parents to save for their child’s education. So I decided to create an account and transfer the funds, here’s why:
The money that you contribute grows tax-free. So you can contribute money to the fund before you pay taxes on it.
When you use those funds to pay for qualified higher education expenses you can withdraw all funds tax-free. Higher education expenses include things like tuition, books and supplies, room and board, and even things like a laptop computer.
You get double tax savings!
Most plans allow you to ‘set it and forget it’ with automatic investments that link to your bank account or payroll deduction plans.
529 plans have no income limits, age limits or annual contribution limits.
How Can I Predict the Future?
What if your kid doesn’t want to go to college? This is a perfectly normal concern for a lot of parents. Here are a few options:
Transfer the money to another child. Any funds that go unused for your first kid can be used for the next child
You could transfer those funds to another relative. Even a grandkid in the far-out future
You could use the funds for yourself if you ever decided to continue your education
Lastly, (this is the one that changed my mind) if you decide not to use the funds for education you can withdraw your original contributions at any time for any reason. But, if you withdraw investment gains then you would be subject to a 10% penalty. For example, if I contribute $5,000 and it grows to $7,000 over 18 years, I can withdraw the $5,000 for any reason that I want but the $2,000 I would have to pay a penalty on.
How To Apply:
Look into what your state has to offer but keep in mind that you’re not just limited to your state.
I did some research into the best state tax-advantaged 529 college savings plans and learned that my home state has one of the best in the country with the lowest fees. Even though I live in Texas now I decided to open up mine through the state of Utah.
One of the other reasons I decided to open up a 529 plan through my home state is I discovered that the funds can be invested in a Vanguard low-cost index fund. So for me, tax advantages and super low costs of investments makes it worth it for me and my kids financial future.
Have you decided to start a 529 plan for your child’s future? Why or why not?
Hi, I’m Scott. Welcome to my website! I’m an Accredited Financial Counselor, husband, and father. I hope you’ll join me on the journey of reaching financial independence through simplifying how you manage your money.