Investing on Your Own

By Tosha Dunn, Spring 2016 Student Intern

Should you?  I mean, maybe.  You have read my articles after all.  Personally, I would say “no, no way, man.”  But that’s my personal preference and not advice.

But okay, let’s say that you do want to go it alone and avoid fees and the worry of giving your coffee can of money to anyone else.  What might you consider as a lone-wolf?  First, I would want to really, really research the available products and strategies.  I’ve discussed some, like the index fund and a 401(K).  But there are other things available, like IRAs, and Roth-IRAs, and mutual funds, etc.  Seriously, there are tons of financial products available, and some are even considered exotic, like derivatives.  Then there are various things like stocks versus bonds, over-the-counter markets, and commodities futures markets.

I’ll leave the more exotic sounding items to you, but some of these are somewhat straightforward.  An IRA, or an Individual Retirement Account, isn’t exactly an investment.  It’s an account where you put your investments to benefit from tax breaks.  This means that all of your products, like stocks, are placed in the account and grow in value without you paying taxes over the growth period (you pay when you cash out).  However, you only get this benefit if you cash out before you’re age 59.5–yes, it is that specific.  A Roth-IRA allows you to pay taxes as you go and cash out without a tax payment.

Overall, I would consider and investigate the topics I have mentioned–creating a diversified portfolio is a difficult trick that you may have difficulty managing on your own, but, one last time, it’s all about your risk tolerance.  Not to mention, there are always index funds with low fee rates.  Because fees can be a serious risk as well.  Yes, PBS’ Frontline did an entire story on the issue of fees, and every investor will face fees whether at cash out or for every trade, and fees eat away at the overall value of your investments – even the SEC says there’s an impact. So take a deep breath, research, and make an educated decision.  Investing isn’t easy, and it’s a major life decision because period 2 is closer in time than you think.  You can’t always be in period 1. (If you’re interested in understanding period 1 and period 2 from an economic modeling sense: http://faculty.chicagobooth.edu/eugene.fama/research/Theory%20of%20Finance/Chapter%206%20The%20Two%20Period%20Consumption%20Investment%20Model.pdf).

Diversification: The Biggie

By Tosha Dunn, Spring 2016 Student Intern

Now let’s move along to a term that I have been sort of dancing around: diversification.  This is definitely a term that you may, or may not, hear but one that should be in your mind, even if it isn’t in your adviser’s mind.  Simply, diversification is investing in a true portfolio, so your investments aren’t concentrated in a single industry or a single market.  Instead, you have a portfolio that represents industries that balance one another out, meaning that if one goes down, the other goes up.  The goal is mitigating losses.

If you have a properly diversified portfolio, you may have a certain percentage of money that is invested in risky stock, but you may balance that risk against the investment in an index fund (index funds are meant to return whatever the market returns are from an index, like the S&P 500, so the investments are pegged in a way to a stable market; there’s no promise of 100% returns).  And an index fund isn’t the only option, again, the goal is to create a portfolio with industries and risks that counterbalance one another.  You want to have a wave pattern where if one wave peaks, the other is at a trough, that way, you are receiving a steady flow of returns.  Of course, that is assuming you invest in only two financial vehicles, but you get the idea–balance.

Diversification comes from the idea of Modern Portfolio Theory, which you can investigate to your heart’s content at: http://pages.stern.nyu.edu/~eelton/papers/97-dec.pdf, http://post.nyssa.org/nyssa-news/2011/12/harry-markowitz-father-of-modern-portfolio-theory-still-diversified.html, and http://money.usnews.com/money/blogs/on-retirement/2012/12/13/why-i-am-clinging-to-failed-investment-strategies.

All of these articles delve into different levels of detail regarding the theory and its future, but hey, the guy who came up with it was a Nobel Prize Winning Economist, so there may be something to it.

So you have made some decision about a planner, what’s next?

By Tosha Dunn, Spring 2016 Student Intern

When you meet with a broker/adviser/planner, again, they will ask questions about what your ultimate investment goals are, and these questions may sound like jargon.  Things like “risk tolerance,” “time horizon,” etc. may be a foreign language to you.  However, just nodding along and trusting everything to a person who explains a product and gives you some papers is a terrible, terrible idea.  Terrible.

Risk tolerance is the amount of risk that you are willing to accept when investing.  Do you want to engage in speculation in a particular industry or market, meaning do you want to take the risk by investing in a shaky start-up or a company that is just issuing an IPO (an initial public offering–this is the first time that a company makes an offering of its stock to the public, generally, and the prices associated with the stock may be overvalued, quickly spike, and drop before you have the chance to sell them at a gain in the secondary market)?  Right, all of that sounds scary.  So you not only need to have an idea of what risks you are willing to take, but you also need to be wary of an adviser person who doesn’t fully explain the product to you because, seriously, did you know what an IPO was; do you know that most IPOs are expected to “pop?”  And what is “popping” anyway?  Or a “secondary market”?

What about your time horizon?  Your time horizon is the time between your initial investment and when you plan to cash out the investment, so depending on the financial goal, the time horizon can be very short (you’re saving for a new car and plan to cash out in two years) or it can be long (i.e. your plans for retirement).  Time horizons and risk tolerance are linked–if you have a long time horizon, you may want to pursue a more aggressive investment strategy because if you lose, you have more time to make the money back and vice versa.

You may also hear comments about “volatility,” “business cycles,” and “concentration”…and what are all of these things anyway?  Simply, volatility refers to price shifts in the market; however, those shifts can be severe and seriously affect your investments without some proper attention from your adviser.  This is where the word “concentration” comes into play; if you’re invested in a single stock, then you have 100% concentration in a single financial product.  Stemming from that, concentration is simply the percentage amount of your investment portfolio represented by a specific stock, or within a specific industry, or within a specific market, etc. (so it roughly means what you think it does).

And 100% of your portfolio in one stock may or may not be a problem for you depending on, that’s right, your risk tolerance.  You may think that oil investments in a foreign, war torn country are the ONLY investment you should be involved in, and that’s fine.  Your adviser may warn you otherwise.  However, you may have a portfolio of investments across different industries, and you may be concerned about the concentration of your investments in a particular industry.  But that assumes that you know about concentration in a specific, rather than general, way.

Business cycles are also something akin to what you expect; they are cycles within business where business goes up and down in a somewhat predictable pattern–you know, a cycle.  Right, so generally a business cycle moves in a wave pattern with highs and lows.  You may be investing in a down market but with the expectation that the market is going to go back up.  However, you want to consult with your adviser about your tolerance when the market seems to be really climbing–do you sell because the market cycle may be peaking and about to move downwards fast? Or do you ride the bull?  Again, it’s all about your risk tolerance and your rapport with your adviser.

And if you really want some overly detailed information about business cycles, the National Bureau of Economic Research has you covered.

Financial Planners…Helpful?

tosha2By Tosha Dunn, Spring 2016 Student Intern

Broadly, financial planners are professionals who you pay to manage your investments.  They come in many different flavors from investment advisers to brokers to Certified Financial Planners.  All of these are people who you may consider leaving in control of your money because, hey, you maybe feel like you shouldn’t be the one making these decisions.  Given this, how do you decide who is right for you and your money?  What do any of these people actually do?

Financial planning, in a nutshell, is essentially about lifestyle: do you want to be eating cat food or people food?; do you want to work until you’re 90 or actually retire and have hobbies (I know, painting and the great American novel)?  A financial planner is someone who can look at your current salary, current spending habits, current debt, current assets, etc. and measure financial items against the future that you have in mind.  They can then determine what level of savings you need to attain the desired retirement lifestyle.  Your age also plays a factor in this calculation: if you’re younger, you can save at a lower rate over a longer time to reach your goals, and if you’re older, you will likely be looking at saving a higher rate of your salary over a shorter period of time.  And to be clear, you aren’t going to be just saving money in a bank account; you’re going to be considering investment strategies to reach your goal.  This is also where a financial planner comes in–depending on your age or goals, they can recommend the sort of investments that will best suit you.  You may want to pursue a more aggressive strategy or, if you are looking for safer investments, you may prefer a more conservative strategy.  Again, this is where advice is helpful.

But who is the right advisor for you?  According the SEC some planners will get into all the details of who you are as an investor, but some will ask you just very basic questions.  This, of course, can be a risk for you–do you want someone to go through your financial background and hopes with a fine tooth comb or do you just want someone who will ask what your “risk tolerance” is and move along with some suggestions of some items that you may not even fully understand?  That issue is more of a personal decisions, but a more informed and careful planner is likely to be more helpful than one who isn’t.

So Certified Financial Planners sound fancy, and they are to some degree.  Being a CFP requires training and certification for membership, and the CFP Board also enforce ethical requirements on their members, meaning that were a member to violate one of their ethical rules, the member can be sanctioned by the Board.  The CFP Board’s ethics include issues of professionalism, competence, and diligence among others.  The CFP also makes its sanctions publically available, so you can investigate the background of a person you are considering as a financial planner.  CFP’s may also hold the same qualifications as investment advisers and brokers because the titles are not mutually exclusive.

Investment advisers and brokers are required to participate in training.  They are also held to the standard of their state’s securities laws.  Investment advisers generally work solely in the area of recommending investments, while a CFP may take a more holistic approach to your investment and savings needs.  Still, investment advisers and brokers are required to take specific tests to sell securities and more complicated financial products, and to find out the qualifications of an investment adviser or a broker, you can simply visit Broker Check or the SEC.  This will let you know what certifications the broker has and if there are any current or past consumer complaints against the adviser/broker.

Of course, you are the master of your destiny, so choosing a financial planner or a broker, etc. may not be the route for you, but we’ll cover that later.  Overall, selecting a financial person is difficult and can be scary, but researching the person is helpful and can give you some piece of mind about the person who will be calling some shots about your nest egg.

Stuff Offered by Your Employer

By Tosha Dunn, Spring 2016 Student Intern

Right, let’s start with the easiest thing.  Your employer will likely offer some sort of benefits package that you should carefully consider.  For one thing, benefits packages are essentially a sort of additional salary, even though they aren’t included in that magic per year earnings number–think of them as the icing on the cake.  Benefits packages on the whole generally include healthcare, sick leave, etc.

But let’s move along and imagine Company A offers you a salary of $46,000 per year plus benefits that include healthcare and investment opportunities (maybe they offer a matching plan, more about that below), and Company B offers you a salary of $51,000 with only healthcare–how do you compare the two on your own?  Remember, the benefits are a form of salary, and you need to be able to assign proper values to each because the $46,000 per year may actually be worth more than $46,000; in fact, it may raise the salary beyond the $51,000 depending on how good the benefits are.  So two questions: (1) what are the most common plans offered, and (2) how do you compare the plans?

The plan you are most likely to encounter will be the 401(k).  Insert scary music because whaaat is a 401(k)?  Again, sorry, your biology degree isn’t going to help in deciphering this one.  However, the IRS supplies the most interesting definition of a 401(k) ever: “[it] is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax.”  Right-o, what that definition is trying to say is that a certain amount of money (determined by you) is removed from each paycheck received, and that money is set aside in an investment account.  The investments are generally some financial vehicles offered by your employer that you select from, so maybe there’s a fund or maybe there’s company stock.  The definition also gets at the removal of the money before or after taxes are removed–we won’t be discussing the full ramifications of taxes here, so consult a tax professional.

Besides the 401(k), a secondary perk/common form of investment to check for is if the company offers any sort of matching plan.  “Matching” means that whatever percentage of your paycheck that you determine to set aside in the 401(k) account, the company will match up to a defined percent.  See, this is where you need to carefully look at the benefits offered because some employers will match up to 100% of the funds you put into the account (up to some level and then there may be a reduced amount of matching).  Nonetheless, a matching plan of any sort means that whatever amount you invest will be increased by your company, and this results in a greater amount of funds to grow over time (which is extremely important because the more funds you having growing a longer period of time, the greater the amount you will have at retirement).  However, matching is not always offered, but where it is, you would generally value a matching plan more highly than a plan not offering matching.

These two options are the most common retirement benefit plans offered, and for information about other less common plans a study from the Society for Human Resource Management provides a comprehensive list.  The IRS also offers more dry definitions and a comprehensive list of benefit plans.

Investing as a Young Professional: Introduction

By Tosha Dunn, Spring 2016 Student Intern

So you’ve finally graduated for the last time, and you’re about to cash in at some totally sweet job that has, you know, benefits or whatever.  And come on, you took intro finance like 2 years ago, so you definitely know what’s up when you’re looking at that contract.  You totally have this one, bro.

Right, so do you actually though?  The goal of this series is to give young professionals some hand holding regarding finance and investing.  Because, while you may have taken one finance class, you aren’t Warren Buffet, and (again, sorry) you aren’t Leonardo Dicaprio in The Wolf of Wall Street–you can’t just be a hedge fund manager, or a flash trader, or a day trader, etc..  I mean maybe if you have the right background, but hey, for everyone who majored in biology or marketing, here’s some stuff that’s helpful. Of course, remember that we don’t provide investment advice, so this is for your information only and a starting point for your own homework.

Think of this as a jumping off point to actually become savvy about the grown up topic of financial investment.  This is not investment advice.  I am not suggesting what stocks to buy so that you will be a millionaire in less than a week–you’re entering the no-scheme-zone.  I’m presenting sources of information, explanations of some important terms, and general persons you may want to contact on your own for further information and actual investment advice.  We’re the tech generation, so why not have some links that you can refer to?

Next week, we’ll start at the beginning.  First, you have a job with a contract that includes a benefits package, so what’s really in a benefits package?  What is a 401-K?  What are some of the other common forms of investments that companies may offer?

Second, who can you talk to about financial planning?  What certifications might be important?

Third, what are the terms that might come up?  For instance: risk tolerance, time horizon, volatility, and business cycles.

Fourth, diversification.  Yes, it’s a term that’s regularly used, but it’s a term with some serious magnitude that requires focused discussion.

Fifth, investing on your own.  What are some of the products offered (IRAs, Roth-IRAs, etc.)?  What fees may apply, and what fees mean for your investment when you want to cash out?

Reflecting on my Semester in the Clinic

By Tosha Dunn, Spring 2016 Student Intern

Working in the Investor Advocacy Clinic was my first chance to act as an attorney. It was my first chance to have an actual impact on clients—to help them, to serve them, and to guide them. This experience has been something of a stepping stone. I didn’t know how to do everything I was asked to do on the first day, and yet, somehow, I managed to get things done. I knew before that there were references and guides and forms, but working in the clinic has demonstrated to me time and again, that those things are base guidelines. They never really speak to your exact case or your exact client or their exact needs. So as an attorney, you have to be prepared to be flexible. You need all the basic tools of an attorney: (1) writing, (2) knowing where to look, and (3) bringing a measure of skepticism when listening to even your own client’s story. But once you have the basics you’re ready to set off. You can build the documents you need because you know where to look for guidance, and you know how to write (like a lawyer, that is), and you know when to ask questions and probe a little deeper with your own client and with opposing counsel. And probably the last thing in the basic tools of a lawyer is something I learned before clinic, but nonetheless, don’t let anyone foist anything off on you—their duties are their own and yours are your own. You have to be prepared to keep it that way too, with opposing counsel, with co-workers, etc.

And while I say these are the basic tools of being an attorney and now you can “set off,” at the same time, it took having an experience like the clinic to give me the certainty that I could set off. Clinic presents all the issues of the real world, even though you are still technically in the law school (a very nice part of the law school, by the way if you’re thinking of joining), and while still being in the law school gives a measure of comfort, you’re still in the deep end. You’re still responsible for meeting client needs; you’re still responsible for knowing filing deadlines; you’re still responsible for comporting yourself with candor and professionalism. The clinic makes you feel like you’re in a protected environment, practicing law, but not quite—but really, you are practicing. You really are an attorney, and you have to be ready to run the race. Your worries and doubts have to be left at the starting line because it really is a long run over rough terrain in humid weather. There are some rest stops between here and the finish line, but really, once you start, you can’t just stop. You’re on the course, and if you stop, you’re stuck in the woods somewhere. Going on, navigating the hills, reading the trail signs, that’s the only way you get back to the finish line. And once you’ve done this little part of it, this little beginning run, you know the runner’s high, and you just want to keep going. The hills aren’t so steep, and even when you run face-first into a spider web, you just shake it off and keep going. You think clinic will be training—a chance to apply your skills in a protected environment . . . not really. You’re entering grown-up, job land. It’s no joke, and nothing to blow off. You’re actually doing the job. That’s the experience that I carry forward from the clinic. I actually am an attorney. I can do the job. I have the skills, and I’m not afraid.