Rick Bloom has been helping people with their money for decades, and he often gets asked the same questions frequently. Today, he answers the top ten financial questions people ask him.
Note: Bloom Asset Management is now Bloom Advisors. Find Rick and the team at https://www.bloomadvisors.com/ or call (248) 932-5200.
Rick: Hello and welcome. I'm Rick Bloom and welcome to Rick bloom talks money. I'm an attorney certified public accountant financial advisor. The goal of our podcast is real simple. Just make sure that you make better decisions with your money, because I believe money looks better in your pocket than it does anywhere else.
Independent financial advice. That's what you're going to get from this podcast at all times. And I guarantee you no theoretical discussions, no geek speak simple everyday advice. That you can apply to your own individual situation. Also want to remind you about our email address. Rick at Rick Bloom talks, money.com.
If you have any comments, suggestions, questions, please feel free to email me. I was recently asked what are the most frequent questions I get as a financial advisor? And I thought I'd make a great podcast. So that's what today's podcast is about is the 10 most frequent investment questions I get. So starting with number one.
How much do I need to start an investment portfolio? And when should I start investing? Somehow there's a belief that it takes thousands and thousands of dollars to start investing. That is not true. Not in today's world. Literally you can open a investment portfolio for $10. So money is no longer a barrier to invest in your money.
If you want to invest money, you can do it. The second thing is there's no magic formula as to when the markets are going to go up. And when they're going to go down, you cannot time the market. When you time the market, you gotta be right twice. Once when you buy once, when you sell. And no one has been able to do that successfully, I believe more what Warren buffet always says.
It's not timing the market. It's time in the market. That's going to make someone successful. So if your goals are long-term, if you're in your twenties and your thirties, and you're saving for retirement, which is 20, 30 years down the road, you should be investing in the market and you should do it now, invest based upon your goals and objectives, not where the market is on a day to day basis, because you're not going to be able to figure it out too.
Can I do it on my own? And if not, how do I choose a good financial planner? Well, of course you can do it on your own. This isn't brain surgery. Lots of people are very successful doing it on their own. The question you need to ask yourself is first, do you want to do it? I can shovel my own walk. I can cut my own grass, but I'd rather hire someone to do it.
So the question is, do you really want to do it? If you don't want to do it, if it causes you aggravation frustration, then you know, you need a professional. If you say to yourself, I am going to do it on my own. I want to, then you have to make sure you're going to do it. You're going to stay committed when it's difficult to do, to make sure you stay current on what's happening in the investment world.
Make sure that you have a strategy that you're following that you're rebalancing your portfolio on a regular basis. So if you're going to commit yourself to do that, then you can do it on your own. If not, you should look for a professional. Now the problem is not all financial planners are the same trust me.
And so I think in doing your search, you have to start narrowing the focus. And so the first thing I would tell you is to focus on how advisors are compensated. Typically financial advisors are either commission-based or they're fee-based when they're, commission-based, they're make money by buying and selling investments for you.
And then they can also make side money on. They call it trailers the longer you're in an investment, they can get sales incentives like free trips the whole bit. I'm not a big fan of commission salespeople because I believe it creates a conflict of interest. When I go to my doctor, I don't want them doing what's good for the drug companies.
I want him doing what's good for me and only me. So I believe that with commission salespeople, that there is a conflict of interest fee, only advisors charge you a fee for their services. So you know how the fee is calculated. It's typically based upon money under management, they don't make more money in buying and selling securities or anything of that nature.
So that's why I like fee only. I also think you look for a fiduciary there's different standards of how a financial advisor has to act on your behalf. A fiduciary has the highest standard they have to operate for your best interests. Brokers have a much lower standard. They have to do things that are suitable.
Well. I want someone who has my best interest at heart. So I want a fiduciary. I also think when you talk to financial advisors, you should look at their investment philosophy. What type of investment products they use? One of my rules of investing is I always want to make sure I understand it investment for, I get involved in it.
Well, if you're going to a financial advisor, that's using exotic type of investments while it may not be one that you would want, so you should know what type of investments they're using. And do you feel comfortable with those investments? And ultimately when you hire a financial advisor, you want to be able to communicate with them.
You don't want them to intimidate you or anything of that nature. So as far as I'm concerned, One of those things is a gut feel. How do you feel when you're talking to that person? Can you communicate? I think you use that as your guideline to find a good financial advisors. Remember you don't want a sales person.
This is much too important to trust your financial affairs to a salesperson three. I don't want to lose money. How do I invest? Risk-free. Let me tell you right off the bat, I have never met an investor, whether they're Altru aggressive or ultra conservative that wants to lose money, no investor wants to lose money.
That being said, there is no such thing as a risk-free investment. It just doesn't exist. And it's important that in
Rick: investments, you always understand the different risks involved. Most people understand when we talk about stocks there's risks because they see the stock market go up or down for some people they don't like that.
So they say I'm going to go into a CD because at least in the CD, I can't lose money, but that's not true because you're not looking at different types of risks. One of the risks that people forget about is purchasing power, risk. That's the risk that money today is going to be worth less 10 years down the road.
And I always compare it to a postage stamp. You go back 30 years ago, a postage stamp for first-class mail was 29 cents today to mail the exact same letter is 55 cents. It's nearly doubled in that 30 year period. So if your money doesn't keep up with the increased cost of living, you're losing purchasing power.
So when you look at CDs today, paying half a percent and you got to pay taxes on the money and you compare that to what your increased cost of living is, the purchasing power of your money is going down. So you have to recognize every investment has risks. What we always want to do is to manage risk by diversifying having different investments in different asset classes.
That's a way that you manage risk and you attempt to lower your overall risk, but unfortunately, to be an investor, you just cannot eliminate all risks. It just doesn't exist for what are some of the red flags I should know about in investing. Well, there's a lot of them, but let me tell you the rules that I live by when I look at investments and remember a red flag could be because it's just a scam or it's a bad investment product, or it's bad for your individual situation.
So the rules and I live by one, I don't invest in anything that I can't check out independently. Independent to me is the key. If I can't get independent information, I'm walking away from the investment too. I don't invest in anything that doesn't have a track record. I want to see how something is done.
I don't believe that just because something's brand new, it's going to be the greatest thing since sliced bread. I want to look at track records and generally what I do is I look at three, five and 10 year track records. Three. I don't invest in anything unless I understand it. And when I say understand an investment, I want to know how I can make money, how I can lose money and how I can get my money out when I want, if I don't understand those three things about an investment I'm walking away from it.
And when these salespeople sometimes try to tell you, well, it's a very sophisticated strategy. You'll just, can't under you. Won't be able to understand it. That's my sign that I ought to walk away from that investment. I want to make sure I understand my risks involved for, I don't invest in anything unless I understand the costs.
High costs equal low returns. When you see investments with high costs, it's investments you ought to avoid and high cost could be in commissions. It could be ongoing management fees. And that's why it's important that if you're doing it on your own, you have an idea what's happening in the industry.
What average costs are for different types of investments, but costs are important. When you deal with some of these annuity salespeople and they tell you, well, don't worry, you don't pay me. That ought to raise the red flag and you ought to run. My last rule is you gotta be reasonable. I mean, if CDs are paying 1% and someone tells you they can get five or 6% in a CD, the red flag ought to go up.
We have to be reasonable with returns and. If something smells too good to be true. I guarantee you it's smelly. Also. I think another red flag is when you deal with aggressive salespeople, when you deal with people and they tell you, you have to make a decision. Now they're pressuring you to sign something, walk away, that's assigned.
And I will tell you that some of the best investments I ever made are the ones I've walked away from five. What should I use a Roth 401k or a traditional 401k? Well, first I think it's important to understand the differences between the two and it really is a tax difference in a traditional 401k plan you were putting in pre-tax money.
So if you made $50,000 and you put $5,000 into your traditional 401k, you would only be taxed on $45,000. That 5,000 that goes in your plan is pre-tax that money would grow tax deferred. And then when you begin to withdraw it, you would pay income tax on the entire amount of the money in a Roth IRA, you were putting post-tax money in what that means is if you made $50,000 and you took $5,000 and put it into your 401k plan.
In the traditional where you're taxed on the 45,000 in the Roth, you're taxed on the full $50,000. However, the benefit is is that when you retire all that money now is tax free. So all your contributions and all the income that accumulates over the years is tax-free. Another benefit of the differences between a Roth 401ks and traditional, is that in a traditional 401k, whether you roll it over into a traditional IRA or not, when you turn 72, you must begin taking required minimum distributions from the portfolio.
And it's a formula that you follow in a Roth 401k. You have the opportunity to have that money rolled over into a Roth IRA, which means that you can let it grow tax free for as long as you choose. You're not subject to those 72 minimum required distribution rules. And if you pass away money in a Roth, IRA is income tax free to your beneficiary.
Where in a traditional 401k situation, your beneficiary would pay income tax on that money. The younger you are, the more beneficial the Roth 401ks are. So if someone in their twenties or thirties asked me about it, I would tell them slam dunk. You should go into the Roth 401k. You're taking a short-term hit today for a long-term gain in the future.
Now if someone is five years away from retirement, I would look at more their individual situation as to what their tax bracket is going to be during retirement and right now. And when will they need that money, but I think more and more people ought to use Roth 401ks. It gives them great flexibility down the road.
Six, what is the best investment for a newborn's college education? Well, when it comes to saving for whether it's a newborn child or grandchild, there are two options that most people use. One is uniform gift to minor accounts and accounts like that. And the second is five 29 plans. Now in a UGMA account, as we call it a uniform gift to minors accounts, you put money into a plan and you don't have to have any special paperwork, basically.
But you can invest the money wherever you want. You, the person who puts the money in remains as a trustee of the account over the minor, when the minor turns 18, and in some situations you could extend it to 21. The money is theirs. There is tax consequences on a year by year basis. When you use an Agua account.
On the other hand, five 29 plans or education plans generally established by the States. These plans have a lot of different advantages. One, let's say you're a Michigan resident and you use the Michigan education savings plan. You can write off part of your contribution on your Michigan income tax returns, but to in a five 29 plan money grows tax deferred.
You don't pay any taxes on it year by year. And the only tax consequences is when money comes out. However, if money is used for a qualified education expense, it comes out tax free and lots of things qualify for qualified education expense. You know, you could use it for room board books to wishing the whole bit.
And so. It gives you tax-free versus the , which there's taxes. Another benefit of the five 29 plans is that if your child doesn't want to go to college at a certain age, that UGMA account is theirs. There's nothing you could do about it. And they can use the money for whatever they want. When the money is in a five 29 plan, you are always controlling that money.
And so if the child doesn't use it for college, you can transfer it to another relative. We'll use it for college. And a worst case scenario can take the money back. You're going to pay taxes and a penalty, but at least you remain in control. So all things being equal, I certainly favor five 29 plans over UGMA accounts.
However, not all five 29 plans are the same and you have to make sure you shop around for the best plan for yourself. Some plans are state specific, which means that you could only use that money for universities in those States. I'm not a big fan of those. I think kids today need greater flexibility. So I want to use one that basically allows me to go to any public or private institution in the country.
And I'm concerned with costs and performances like every investment. So there's different ways that you can go into five 29 plans. Some you can go on a commission-free basis. Others you're going to pay commissions. Obviously I like the, uh, commission free because more money will go to work for your loved ones.
Now take like Michigan, for example, my home state. You could buy a Michigan education savings plan through a broker, or you can go directly. If you buy through a broker, you pay higher fees and commissions, you do it directly. You don't pay those, obviously I'd rather do it directly. So I'm a big believer in five 29 plans.
And if you're a new parent coming up, I would tell people as opposed to buying baby gifts or things of that nature, why not put it into the five 29 plan? Saving for a college education, because we all know how expensive college is and think about what a great gift it is to give a child or a grandchild being able to graduate without the excessive debt.
So between those, I think for sure, five 29 plans are the way to save for a child or grandchild's college education seven. What does it mean to diversify? I own five stocks is that diversification. Well, we talk about diversification. It's really a strategy to reduce risks when you're diversified, you're spreading your risk out in a variety of different asset classes, such as large company, U S small company, U S midsize us.
And also in different industries, financial healthcare industrials, you know, you're spreading risk out into a variety of different areas. And in today's world, we talk about diversification. You also have to be diversified internationally, not only within companies, large and small midsize, but also within countries.
And nowadays, not only do you want to be in the more developed world, but you also want to be in emerging new markets, new economies throughout the world. So to me, five stocks, you're not going to be able to be diversified. You're going to need more investments than that, but you have to be diversified in the type of investment stocks and bonds diversified within stocks, large, small mid-sized companies.
And also different types of industries. That's how you can have a diversified portfolio. And it's something that I preach to people all the time, because I think it's a way of controlling the roller coaster ride that we know investing is. If you can make, you know, the ups and downs a little less scary, I think it makes for a better investors.
So I would encourage you always to have diversified portfolios. If you don't diversify. Then I think really, sometimes you're really gambling and I would tell you, you don't want to gamble on the market. How do I know when I should sell an investment? Well, again, there's no magic formula that if the market does this or market does that you should sell.
I think that you need to look at your own individual situation. One, I think you should sell on a regular basis when you're pruning your portfolio. When you're readjusting it. I was talking about the importance of rebalancing a portfolio. So if you allocated 20% of your money to large company, us and large company, you S did great.
And now it represents 30% of your portfolio. I think you need to sell 10% to bring it back down to the allocation. And I know it leads into a strategy of selling winners, but that's exactly what you want to do because when you sell winners, it means you've made money and it's important that you have the discipline to maintain your allocation.
So I think one, you sell to restructure and rebalance your portfolio. Mostly Busher do it twice a year. Some people only do it once a year. That's one reason you sell. Another reason you sell is because your goals and objectives change. You were a growth investor, and now you're going to change and you're going to be an incoming growth investor.
Well, when your goals and objectives change, that's when you should start selling things in your portfolio. And the third reason I think is for underperformance. I know like with mutual funds, I generally give them a two to three year period. I do my research going into an investment, but if it's underperforming similar mutual funds in that same category for two to three year period, I'm generally going to sell the investment.
And I always tell investor this, I don't love my investments. They don't love me. Why should I love them? Investments are a tool. We sell them. We don't fall in love with them. So I would look at that with every investment, judge it against other investments in its same category. I'm not going to judge an emerging market fund to a large company, us fund.
But if my emerging market fund is up 10%, but the average emerging market fund that same periods up 20%, I'm looking at making a change. So I want to compare similar funds to similar funds. And I want to also make sure I have a strategy when to sell. I don't sell just because the markets are going down.
No, to me, that's not a strategy. That's panic. And when you let fear dictate your investment decision, you're going to make the wrong decision. Nine, how much do I need to retire? And when should I start? How much should I say for my retirement? Well, one, there is no magic number that, you know, if you have a million dollars year, okay.
For retirement, it's all based upon your own individuals situation. You have a number of what I tell people that there are a few years away from retirement. How you calculate your number is. You look at what it's going to cost you to live in retirement. And that's the hardest number to come up with because people estimate, and they really don't make informed decisions, but you need to come up with the number when you factor in.
Are you going to spend the winter in Florida, you know, gifts you're going to give, so you look at what you're going to need monthly. You look at what's coming in social security and a pension, and you then have a gap. So let's say that you annualize that and that comes out to $40,000 a year. You need $40,000 a year to maintain yourself.
Well, if someone was retiring in their mid sixties, I would say they need 25 to 30 times that number. So they're gonna need a million to 1.2 million at least to put them in the ballpark to say they can retire. Someone retiring in their fifties. Well, that number is not going to be 25 to 30 times. It may be 35 to 40.
The number is based upon what is costs you to live. That really is the most important number. How much did you save for retirement? I think most people, when they start their careers should be saving 10 to 15% of their wages for retirement. And I know that sounds like a lot of money, but retirement is expensive.
And especially for those of you that are millennials, think about, you may live 40 years in retirement. You'll live more years in retirement than you were. And because of that, the importance of starting soon, I can't stress it enough and you need to put enough away so that you can enjoy retirement. I always say we live in the greatest country in the history of the world, but there's nothing worse in America than being old and poor.
And you don't want to be in that situation. And the sooner you start investing, the sooner you can be assured that you're going to be able to retire. Now what some people do. Is they'll save for retirement, but the only save
Rick: much as the company matches in their 401k. No, that's not what it should be.
You know, you should go the full amount possible. 401k plans are great ways to say free retirement. You need to put the max away. It is a problem we're going to have in this country, in the future. It's a problem we have today is that people can't afford to retire. And they can't afford to stay retired. If you want to be in the situation where you can take care of your finances, start saving for your retirement 10 to 15%, as soon as you can.
The last, uh, question number 10 is buying a house, a good investment. Well, The short answer is no houses are not great investments. They could be great quality of life, but they're not great investments. And I'll give you a perfect example. I met with someone recently, we did a zoom meeting and he was telling me that he sold this house and how much money he made on it.
He sold his house for half a million dollars. He paid two 50 for about 20 years ago and he said, you know, at least I, uh, I doubled my money on the house. And I said to him, well, I don't really think you doubled your money. He said, what do you mean? So we went through all the improvements. He put on the house from new bathrooms, windows roof, the four seasons rooms redoing the kitchen twice.
And also sudden we had over $300,000 of bills. He realized he didn't make money on the house. What people do in the house. They forget about. All the costs. It costs to maintain the house and have property taxes and homeowners, insurance, all those additional costs. So when you add those all up and then you factor in that a dollar 20 years ago, it was worth a lot more 20 years ago than it is today.
Houses are not great investments. But that I don't tell people not to buy a house because I think a house is a great quality of life. So when I think about whether someone should buy a house, they obviously have to look at the finances and you want to make sure that you can afford the house, but what some people tend to do, they tend to overspend on the house and they do that.
And they justify it by saying, well, it'll be a good investment. I'll always get my money out. That is not true. Owning a house is not a substitute for saving for your retirement or saving for your child's college education. I know it's tough, but you got to do both. So I would tell you what I buy a house for a good investment.
No. Would I buy a house for a good quality of life without question? I would. And I always remember this when it comes to your money, we should never forget how important quality of life is. Our email address at, uh, the Rick Bloom podcast is Rick bloom at Rick Bloom talks, money.com. I want to thank you for the company.
I enjoyed it. Hope you did too. Take care and we'll see you soon. Bye now.