Financial Foundations: 3 Ways to Invest in the Stock Market

Episode Summary

There are three main ways to invest in the stock market. Each approach impacts how much money you're able to walk away with at the end of your investing journey—and depending on which strategy you choose, your decision might mean a difference of millions of dollars, when all is said and done.

Episode Notes

There are three main ways to invest in the stock market. Each approach impacts how much money you're able to walk away with at the end of your investing journey—and depending on which strategy you choose, your decision might mean a difference of millions of dollars, when all is said and done. 

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Transcript

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  Think of it this way. If you keep your assets with an advisor for over 40 years or around 40 years, that 1% fee, that's compounding year after year is essentially you giving up 25% of your portfolio to that financial advisor. This is Allegra Moet Brantley, and you're listening to the coffee and coin podcast where women talk wealth. I'm the founder and CEO of Factora have company on a mission to lead 1 million women to 1 million in net worth. Because when women have more money, we'll have more power to be the change we want to see in the world. If you're ready to hear real women share their real numbers and investment journeys and have a sneaky feeling you should be doing a little more with your money, you are in the right place, just sit back, relax and turn me up.

  All opinions expressed by Team Factora and podcast guests are solely their own and do not necessarily reflect the opinions of Factora Incorporated. This podcast is for informational purposes only and should not be used as the basis for investment decisions. Team Factora. And podcast guests may maintain positions in the securities or investments discussed in this podcast.

  Welcome back to another episode of Coffee and coin, today, we have a snappy little episode for you, where I'm going to be explaining the three ways to be investing in the stock market. That's it only three options to invest. And those are to hire a financial advisor to do it for you to do it yourself, or to use what's called a robo advisor, which is kind of like the Goldilocks because if you're hiring a financial advisor, they're going to do everything start to finish, but they're going to cost the most. If you're doing it yourself, it's gonna be the lowest costs. But you have to figure out all the selections you want to make, and do a lot of research to get a quality diversified portfolio. Well, this little thing called a robo advisor came around, I think they only really got started around 2008. And they're pretty awesome. Because they are in effect a robot advisor. They do what the person does, but they charge a nominal fee, because you will just be answering a bunch of questions just like the human would ask you. And then it's going to spout out a portfolio for you based on an algorithm. And you might be thinking why don't trust the robots. But you should know financial advisors are pretty much doing the same thing to whatever company they work at. They are going to pick from the securities available to them. And they probably have similar algorithms to put through your profile and help determine the exact portfolio. All right, so I thought I'd start this episode out with my personal story of investing in the stock market. And it dates back to 2009.

  I was working for the Estee Lauder companies, I had a 401k. I didn't really know what it meant, but I knew it was good. And I knew that I was glad to have it. And HR sent me through the paperwork, I got it all set up. And then crickets, I have no idea if I even properly made sure that that money was invested. Because here's what I see happen with a lot of Factora women that come into a wall circle. They open up their 401 ks and they realize alarm bells, their money is not invested it is sitting in cash or cash alternatives might be called Money Market CD settlement fund. So it's not actually in securities invested in a way that it can bring you compound returns, which is exactly why we have the money in these accounts right there in investment accounts to be invested. But oftentimes, if you don't make your selections, they default to sitting in cash or cash alternatives. So you don't want that and we see it all the time. I can't tell you what that initial 401k I had, or what I had in it was because I left my job at the Estee Lauder companies to become a fabulous fashion designer in New York City. Well, a robe designer. That's right, my company before this was luxury, upscale robes, and I needed capital to get started, where did I have six grand available to me, which was big money back in these days in my 401k. So I cashed that out, not my best money move, because the whole point of a retirement account is to use it way in the future after your career is over, during quote, unquote, retirement. So retirement accounts are also called tax advantaged accounts. That's what makes them so attractive, that the government wants to incentivize you to invest for yourself and grow a pot of money over the span of your career, so that they don't have to pay for you want to motivate you to be self responsible. So you can start taking that money out at 59 and a half, without any penalty. But if you do it before 59 and a half, unless it's for a qualified reason, a first time home purchase, maybe there's some education reasons, there is a potential to borrow against it, that's conversation for another time wouldn't recommend, you know, borrowing against your retirement money, because you can't get loans in the future, you can get loans. Now, all of that to say you are not supposed to take money out of these accounts. And if you do, there will be a large tax penalty. So I didn't even get the full six grand because I took a major tax hit for extracting those funds for a non qualified reason, like starting my own company only a few years after I'd open up the account to begin with, after I had my first foray into stock market investing, using my 401k. And again, don't even know if I was fully invested in the market, because I may have been stuck in a cash alternative. I didn't invest for years. My next job didn't have a 401k I was at a startup. And when I got to a point where I realized I was making six figures and had nothing to show for it is when I went on my financial revolution and learned everything I possibly could about money. Most glaringly that I had terrible habits with money, as a lot of us do, we might not come from a household where money was properly saved and or invested and or talked about how this was done. So I didn't know anything, I was pretty clueless. And when I started making money, not enough of it to live in New York, I just kept thinking, Well, when I make more money, I'll be better with money. Not true. Don't get stuck in that cycle. Because you have the same habits you have today, tomorrow unless you change them. So when I went on this personal finance revolution, I really realized I had to change a lot about not just the knowledge gap that I was filling, but how I behaved with money, because I was making over six figures and I was spending all of it and more a very common story. So I learned about investing, I knew I needed to invest. And the second time I invested I opened up this robo advisor account. There's a ton of different companies who are really prominent for Robo investing. I chose Betterment first time around, there are a lot of Factora women who use them but also a ton that use the likes of Wealthfront. Well, simple Elvis, there are so many and now the discount brokerages that not to confuse you. But if you wanted to do the do it yourself method, which we'll talk about shortly, like a Vanguard or fidelity or Charles Schwab and many more, they also are getting into the robo advisor game so so basically everyone's doing this and Factora is completely agnostic as to what financial institution you use, we just want you to be adequately and properly invested. So I use betterment. I started investing in my own brokerage account. It wasn't a tax advantaged retirement account. And I was pretty frickin scared when I put that first $250 In, I felt like I was gonna wake up the next morning and it was all going to be gone. Like I was just going to do it wrong. Even though I wasn't doing it. The robo advisor was doing it for me. But sure enough, I made a penny or something when I checked it a week later and I was off to the races. I started increasing those contributions month over month and suddenly I had $20,000 invested in the stock market and I felt so dang proud. Today I'm on to the next evolution of my paper asset investing, and my husband and I DIY it We took our money out of the different robo advisors and we put it into Vanguard. And we use Vanguard to house our retirement accounts. So any old 401 K's have been rolled over into an IRA, another tax advantaged retirement account that stands for an individual retirement account, anyone can have that you don't need your employer to have it like you would for a 401k. And between that where we have mostly funds, so that it's very well diversified.

  We also do a little bit of stock picking, we use Robin Hood for that. I do not stock pic. And I am very vocal, in Factora and on the socials, that stock picking is very risky. stock picking is like investing in companies, because that's exactly what you're doing, you are picking a company. And if you don't pick a lot of them, you are saying this is the company that I need to make all of my returns, it's putting the phrase all your eggs in one basket, or a few. However, if you believe you have an edge, if you have the time to do excessive research, if you are going to read about the financial fundamentals and the public statements and quarterly reporting that these companies are doing, then maybe stock picking is for you. But I'm not doing any of that, nor am I interested in it. So my husband does our stock picking, we have agreed to a very small percentage of our money that goes into our overall paper assets is, quote unquote, his play money. And we don't care if we don't get that back. It is our small way of being like little angel investors, before we have the Bucco bucks to go and invest in actual companies we believe in, we are investing much smaller amounts into public companies offered in the stock market, I looking at what we think is happening in the world, and what we think is going to be quality companies to have for the long haul. And so that's a curated stock portfolio that he makes a presentation to me quarterly, and we discuss and agree whether we are going to change out some of our automations to those curated picks with some other ones or if we're gonna leave it as is, okay, something else to note, if you are someone listening who has a retirement account, such as a 401 K, or an IRA, you already are doing the DIY into the stock market method. Because hrs job is just to set you up with the account, it's your job to make the selections as to what the account is invested in. So so many women tell me, Oh, I'm not capable of doing that I let's just that's too much for me, and you are capable, you are absolutely capable of it. Because I'm not gonna get into the stats of professional investors not being able to beat the market, the market is very, very efficient and good at what it does. Warren Buffett is the first one to say if I die, wife put everything into a low cost index fund. And pretty much call it today. And if that's one of the best investors saying, Let the market do its thing. We could learn a lot from that. So that's my story of how to how I've invested had my 401k then we did the then I robo advisor did for awhile and then now we do a DIY approach again for everything. But I started this by saying option one is to hire a financial advisor. To do that you would sit down with a real human person and they would work with you one on one to understand your personal investment goals. Your current financial situation what are your assets were your liabilities, your risk tolerance,

  and based on that information, they create your personal customized portfolio. Sounds great comes with a hefty price tag, but that's totally okay for people who simply want peace of mind that their investments are being professionally managed by someone else. It is on this person to make sure your allocation stay as needed. rebalance your portfolio so it's in alignment with those original goals you told them and make trades on your behalf. As the market moves around. You don't need to pay attention because you have given someone else's job. It's very low lift on your end. But if you do decide to go this route and hire a financial advisor, or if you have one today, pause me and write down some questions that you definitely need to have answered. For starters, in sure Are they your financial advisor is a fiduciary, meaning if they are going to manage your money for you, a fiduciary legally means they must act at all times in your best interest, even if that means they make less money. By contrast, a non fiduciary advisor or broker of some sort only needs to choose investments that are suitable for your needs, and not necessarily in your best interest. You also need to understand what exactly are you paying for some advisors charge hourly for their services, or they might charge a specific fee for a specific service, or a commission on sales of certain products, which you definitely want to be wary of. But most commonly, financial advisors are going to charge you a percentage of your assets under management, meaning however much money you have, under their management, they get a portion. And as that money grows, the portion that they get grows, so the fee will stay the same, a typical fee would be between one and 2%. But as your portfolio grows, that one to 2%, in relation to your total assets under management gets larger and larger. So you also want to know exactly how much you are paying in total for this advisors work, because they might say it's the 1% fee. But you need to understand if there any other hidden or stacked fees, ask them to directly break down all the fees, because you will be surprised, there's their management fee. And then there might also be some paperwork filing, like you wouldn't even believe what are in these breakdowns. And then of course, whatever funds they are putting you into. So they've comprised a portfolio for you have a bunch of different securities, likely some funds, if they are putting you in expensive funds, something that's actively manage, say, a mutual fund, you're now paying their fee, and you're paying for that actively managed funds fee. So all of this adds up, right. So you really want to get a breakdown and understand your full fee structure. And then like any relationship, you want to ensure that the two of you align, a good financial advisor should be tailoring their advice to fit your needs, they need to be able to do something better than you can do, right. So do note, their overall investment philosophy, or their approach to investing is definitely going to influence your recommendations. But that's why I'm saying it really should be tailored to your needs. Because if they're putting you and every client into pretty much the same portfolio, that's not very customized, right, and you're paying a lot of money for the service. And then finally, always understand how the relationship with your financial advisor is going to work. What kind of access do you have to them? How frequently are you going to meet up to discuss portfolio changes? Can they answer questions as they come up outside of scheduled meetings, just,

  you know, really figure out what you get for utilizing their services, and paying for him. So as I mentioned, financial advisors are the most expensive option out of the three ways to invest in the market. And they typically have a required minimum investment amount that is quite high. So a lot of financial advisors aren't going to work with you unless you have a million dollars to invest with them, or at the very least a quarter million dollars. There are definitely plenty, that might just be a one time fee based or willing to work with less than that. But that's the majority of them. They're looking for people with a lot of money so that they can actively manage a lot of assets. That's what's worth their time, so to speak. And everyone on this call, even if you don't have that you will and you don't need them to get it, I assure you because we're going to move on to the other ways shortly. But the last thing I really wanted to say on financial advisors is just helping you understand the cost in that example 1% fee, so if you do have $250,000 assets under management with a financial advisor, that means you are paying them $2,500 In year one. But like I said, those investments should earn your return they should compound over time and as that portfolio, that total asset number goes up in value, so does the fee amount that you're paying them So, think of it this way, if you keep your assets with an advisor for over 40 years or around 40 years, that 1% fee, that's compounding year after year is essentially you giving up 25% of your portfolio to that financial advisor. So if for example, you would have had $4 million, at the end of your 40 years of investing with that person, you wouldn't know it, you wouldn't see it, because those fees would have already been removed as you go, making the walkaway number only $3 million. And I don't know about you, but I'm not willing to give up a million.

  So just be sure that you recognize that financial advisors are humans. And, yes, they are professional investors. But like I already said, and there's so many articles on this, that you can go and check out for yourself, professional investors have a really hard time beating the market. So that is why these robo advisors is the Goldilocks option that use an algorithm to create your portfolio. They're just using ETFs. And index funds primarily, that are benchmarking against the market and different sectors and keeping you well diversified. And you're probably going to get pretty good returns there, the financial advisor would have to have a serious edge and be able to continue that serious edge for year after year. And this is why I love Robo advising and think it is a really great place for people to start. I've used it so many Factora women use it, it's like the perfect place to get your feet under you and get that experience of investing without having to have a lot of money to be able to go get a financial advisor, or do it all yourself, right? Like it's going to do it for you. So here's how robo advisor works. You go on to nerdwallet.com. And you type in best robo advisor month, year, and you see what comes up and you start checking them out. And when you pick one, or are on the site, comparing a few, you'll see that you go through a questionnaire asking you exactly what that human financial adviser would? What are your investment goals? What is your current financial situation? When do you want to take this money out? What is it for? What is your risk profile? Are you willing to be aggressive because you're this age, and you don't need it for this long, et cetera, et cetera, et cetera. And then it's going to use that algorithm to craft your portfolio for you. And so the typical robo advisor fee is point two 5%. So we said that the financial advisors typically one to two, well, this is a quarter to an eighth of that. And then yeah, your data has been analyzed, your algorithm has crafted your portfolio into a diversified mix of like I said, these typically it's primarily index funds and ETFs, that are gonna try and meet your goals. And then your portfolio in this case is still automatically managed for you. You just set up an automation to contribute a certain amount of your income into whatever robo advisor you pick, and it will automatically invest that money across his portfolio it created for you rebalance it so that your allocations stay close to their original targets, it's got some tax harvesting options, we're not gonna get into that, but But basically, they're the robot advisor. And then last, but not least, there's the third option of doing it yourself, which means all of this stuff that the financial advisor or the robo advisor would be doing for you, you need to do yourself. So you need to do your own investment research, you need to determine your own asset allocation, you need to select all of your securities on your own. And you need to make sure that you have enough selections so that you're properly diversified. And then you will be managing. So making changes as time goes on, and rebalancing your portfolio on your own. So it is the heaviest lift, but it definitely gives you the most control over your selections, and it's by far the cheapest option because you don't have to pay yourself to do this. At this point. All you are paying for is the expense ratio attached to any fund that you're in. So every fund has a slight expense ratio for being in it and so you're just paying that as opposed to paying that and an advisor fee or that and a robo advisor fee Okay, I feel like I hopefully expressed the three ways as simply as possible with a little bit of color on my story. And what we see a lot of Factora women do. So many of them are already DIY, hang it with their retirement accounts, but their retirement accounts weren't well allocated. So they look into that and re jigger those investments so that they do feel good about meeting their retirement goals. And then they go and open an additional brokerage account so that they can do some paper at paper asset investing outside of their retirement accounts. And they have the same three options, use a financial advisor, use the robo or DIY, and a path that we see a lot of Factora or women take is starting with the robo, and then when they get comfortable, DIY it. But there is nothing wrong with leaving it with the robo or handing it to a financial adviser to start with. It's whatever makes you comfortable. And as a reminder, paper asset investing is only one of three buckets, you can focus your investment, dollars on, there's also real estate investing and business investing. And there's a lot in each of these buckets. So paper assets, you're probably doing it and it's a great place to be. And I definitely suggest learning more about it and finding, you know, the right way to invest for you. But don't just think that the stock market is the only way to invest, because it's certainly not. But it is a really great place to build wealth over the long term. And that is why it is used for your retirement accounts. Right,

  your 401k doesn't let you buy an investment property. No, your 401k just offers you different securities inside the stock market. So this is a really hard episode, I'm realizing to explain without all beautiful slides that we share in the Factora community. But I hope that was helpful to kind of break down your options, and also remind you that there is no right way of investing. The point is that you are investing and that you are investing as much as you can as early as possible so that you have the ability to earn returns compound your income into additional passive income, and not always depend on a job because that's really the riskiest of it. All right, depending on one place for your entire financial livelihood. So fear can hold us back. And the best way to combat fear is with education. That is how intimidation can decrease and action can increase. So if you're looking to become a more competent ambassador, you can always check us out. We love welcoming more people into our community, and you know where to find us in all the places. That's it for me. See you in the next episode. If you enjoyed this episode, come join us in a well circle. It's our live online 12 week course and community where we teach you how to create a personalized financial plan alongside hundreds of other women building wealth. It will change your life and your money for good. You can apply at factorawealth.com forward slash wealth circle. That's factorawealth.com forward slash wealth circle. See you in the next episode.