Getting Started With Your New Portfolio

This weekend I had a friend contact me and she wished to ask some questions about getting started in investing and beginning her first ever portfolio.  GREAT for her.  Definitely the right step towards her short and long term goals and saving for that day when she wishes to retire.  Of course this being the first time for her to start investing and having little knowledge I advised her we had to start first focusing a good base and foundation to begin her portfolio.  That is the first place where every new portfolio must begin.

Before starting that first step of building a foundation some questions need to be answered.  Based on the answers will help determine what kind of account you need to start in your portfolio.  The most significant questions are; Do you have a 401K or 403B plan at work?  Does your employer match any contributions you make to your 401K or 403B plan?  Do you plan to retire at age 62, 65, or 70 or do you plan to retire early before the age of 62?  These are very significant questions that must be asked and must be thought about when setting up you first account in your Portfolio.  Why?  Because of how you are going to be able to manipulate you account in your best interest in the future, especially when you get to the point of wishing to retire.  Also, you want flexibility in your account that is going to work to your advantage.  For the sake of privacy, lets call my friend (Tammy). 

Tammy currently works a full time job.  Here employer does offer a 401K plan, but does not match contribution.  Should Tammy continue to have money taken out of each check and put in her 401K plan.  Why?  Because money taken and put in her 401K from her check is done before taxes.  Thus reducing the taxes on each of her paychecks and the money she puts into her 401K is not taxed at all.  Well not until she retires or starts drawing it out in the future.  So yes, even though the employer does not match any of her contributions it is in Tammy's best interest to continue to use her employers 401K plan as she has always done.  So now we know Tammy has a 401K with her employer that does not match, how is this going to help her portfolio in the future when her 401K plan is with her employer and her new portfolio is with Financial Company XYZ (Edward Jones, JP Morgan, LPL, etc.).  Good question by Tammy.  That as why we had to ask all those beginning questions to find out your status so the right account can be set up for Tammy that is in her best interest.  Based on the questions asked I felt that a Traditional IRA or Roth IRA account would be best for Tammy to start out.  Either of these accounts will give her significant Tax benefits and will give her a lot of flexibility between her 401K account with her employer and with her Financial Company XYZ.  But which account is best for Tammy and for you to start out with as the first kind of account in your portfolio?  That draws more questions that need to be answered.

If you do not have a 401K or 403B plan with your employer and you are contributing money to your portfolio via cash or check each time you get paid then I feel a Brokerage Account is best.  The reason for this is that you have already paid taxes on this money and now sliding it into a Roth IRA or Traditional IRA no longer holds as much advantage and takes away from you some flexibility in the future.  But we know Tammy has a 401K or 403B with her employer which gives her a tax advantage even though this employer does not match contributions.  So what should Tammy do?  Her best choice in this case is to open either a Traditional IRA or Roth IRA account in her new portfolio.  But how do you decide which one?  Here is my criteria.  If you feel in the future you will retire before age 62 and are not in poor health of which you may become disabled and not able to work in the future, then I would suggest a Traditional IRA for Tammy.  If on the other hand, Tammy has a goal that she is going to contribute a lot of money towards her retirement or she is in poor health and may have to retire early on disability, then the Roth IRA is the best choice.  In my friend Tammy's situation I know she may with to retire early some day or at age 62 which is early for females.  Sorry, not trying to discriminate, but that is a subject for another Blog posting.  Thus the Roth IRA may not be good for Tammy, as you must be employed in order to make a contribution to a Roth IRA.  If she retires early as she wishes to do in the future she cannot add money to the account and only gets to add to the account dividends that are acquired by her previous investments (mutual funds and stocks).

So now that we have determined in this case that opening a Traditional IRA as her first account in her portfolio with her financial advisor, XYZ company lets look and see what Tammy can do in the future with her new account.  First think Tammy needs to do is have money to open her new Traditional IRA account.  Where does Tammy get the money when it is all tied up into her 401K plan?  Easy answer, she gets it from her 401K that she has with her employer.  She has her financial advisor open up a Traditional IRA account with the company he represents.  Lets say it is Edward Jones.  She talks to her financial advisor at Edward Jones, opens up a Traditional IRA and asks him to submit paperwork to transfer money from her 401K with her employer to her new Traditional IRA account with Edward Jones.  This is a tax free move with no financial consequences to Tammy as she is moving money from one 401K plan to essentially another.  So why should Tammy move money like this?  A great question.  Because of flexibility and the ability to in most cases make more money in her new account than she was making in her 401K.  Tammy and her Financial Advisor now get to pick and chose among thousands of investment opportunities instead of just a very few offered by her 401K plan that may not provide Tammy with the best results in the market place.  Tammy should continue to transfer money on a periotic bases as her 401K grows.  Build the 401K up and then once or twice a year transfer at least half to three quarters of that money to her Edward Jones, Traditional IRA account and invest it.  This method will absolutely work best for Tammy and she will soon see her money growing much faster over time than if she left it all in her 401K account with her employer.

Now what should Tammy invest her money in once she has it transferred into her Traditional IRA account with Edward Jones.  Well, different financial advisors will tell you a host of different things.  But I have found each financial advisor will give advise on things they are most familiar with.  If they are most familiar with Franklin products they will suggest Franklin, if they are most familiar with JP Morgan Chase products that is what they will suggest.  That is also why Tammy should seek information from her friends and see what kinds of good balanced mutual funds work for them and then Tammy needs to research and look at them herself and see what looks good to her.  Or have her new financial advisor bring these funds up on his/her computer and advise her which the computer says would be in her best interest.  Often you will surprise your financial advisor as I have done mine in the past on many occasions.  My personal selection for Tammy was to AMECX and PRHSX.  To divide her money equally to begin her base in her portfolio.  I think Tammy will find much stability and moderate returns with AMECX and will enjoy a little deeper dividend rate of return with PRHSX, which is a Healthcare Mutual Fund and guys, healthcare is going to always be here and this fund is the best performing of all healthcare funds and has been for many years.

I wish to talk about one more thing because I feel this is very important.  What if Tammy gets a raise at work or gets a bonus which both could very well happen for her.  My advise to Tammy is very simple and very much to her advantage and this applies to EVERYONE!  Take that bonus and take the money you get in your raise and put it in your Traditional IRA or 401K plan.  If you get $50 extra dollars on your check each pay period due to a raise, put $50.00 extra dollars in your employer 401K plan each pay period and live off the same money you were living off of before.  If your employer gives you a $100 bonus for a job well done.  Take that money directly to your financial advisor and have it invested into your account.  If you get a $100 Bonus check and you go out and blow it all on dinner and drinks it is gone and never to be seen again.  Invest it and that $100 may make you hundreds or even thousands times that in the future.

I advised Tammy, when she got these things done and she had her 401K with her employer built back up again get in touch with me and we would move to the next step.


Gus S.


Disclaimer: Make sure to review any information found on this blog site with your personal financial advisor before making any decisions. I am providing general information and not financial advise. I am not a licensed stockbroker or financial advisor.