Author Archives: Chris Costello

The Single Most Important Piece of Financial Advice

There is no shortage of advice on this topic. A quick google search on “ financial advice ” reveals roughly 65 million hits on the topic. I intend to share the one piece of financial advice that – if followed – will have the single largest impact on you becoming financially independent at some point down the road. This advice comes from my years of working with investors as they approached their own retirement.

Prior to blooom, I spent 20 years advising, planning, and managing investment portfolios primarily for baby boomers. Most of these clients were 55-65 years old and almost all of them had more than $1million in their portfolio. Often times I would meet these folks when they were within 5 years of the finish line and were looking for someone to help them plan out the financial transition from work-life to retirement. With just a few years (or months) left until retirement, there wasn’t a whole lot I could do to alter their ability to retire. Most of these folks had, for the most part, “won the race to financial independence.” Candidly, I was not their advisor when they were younger and working towards their retirement. Rather, I stepped in to help them make the transition into retirement and captain the management of their finances from that point forward.

But that begs the question…how did they amass this wealth? How did they arrive at the point in their life where they could stop earning an income and live on their accumulated savings? The answer is simple. They lived below their means during their working years. Translation – they spent less than they made. It wasn’t an inheritance, it wasn’t a big salary (as most of my millionaire clients NEVER made more than $100,000 per year) and it definitely wasn’t because they knew how to time the market. Rather, it was the simple in concept but hard to execute lifestyle of buying less “stuff” than their incomes allowed. These were the kind of people that would go to take out a mortgage in their early working years and buy a house that they could afford to buy, not the house that they could qualify to buy.

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Drowning in Student Loan Debt!

One of the frequently asked questions we get from our blooom clients is – “I am still paying on my student loans, how much should I contribute to my 401k, if anything?” Unfortunately, piles of student loan debt are hindering retirement savings for a huge segment of millennials and Gen Xers. Paying down your student loan debt instead of being in a position to put those dollars towards your retirement savings can translate into hundreds of thousands of less dollars in your 401k by the time you reach retirement. If anything this problem has been getting worse as the average student loan balances have risen steadily over the past 20 years from less than $10,000 owed upon graduation in 1993 to $35,000 for the unfortunate class of 2015. (source Mark Kantrowitz, wsj.com) Personally, when I walked down the Hill at my college commencement in 1995 I was also dragging along $29,000 in student loans. My point is, you are definitely not alone with this burden.

For those of you in the workforce with access to participate in your employer sponsored retirement account such as a 401k or 403b you are likely juggling your student loan re-payment and retirement contributions, potentially wondering what balance should be struck between these two. Fortunately, the advice is fairly straightforward when it comes to this subject. IF your employer offers a match on contributions that you make into your 401k, – PLEASE, PLEASE DO NOT miss out on this free money! So even if you are saddled with student loan payments, I still strongly encourage you to contribute to your 401k but ONLY enough to get the maximum employer match. Although the employer match can take on many different shapes and sizes, often times it looks something like this: For the first 6% that you contribute to your 401k, your employer will match $0.50 on the dollar. In other words – if you contribute 6%, they will match another 3%. Put in different terms, if you make $50,000 per year and you elect to put 6% of your paycheck into your 401k that would mean you are saving $3,000 towards your retirement (6% of $50,000) AND your employer is contributing another $1,500 into your account (3% of $50,000). Try this one on for size – your $3,000 contribution just received an automatic 50% return before any investment return!

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I Guarantee that….

In the financial industry, most advisors are trained at a very early age to essentially remove the word “guarantee” from their vocabulary. For obvious reasons, when investors are dealing with managing portfolios that have any exposure to the stock market, there is never such a thing as a guaranteed return. If you want guarantees, you generally look to a Certificates of Deposit (CD) with FDIC protection or US Treasury Bonds that are guaranteed by the full faith and credit of the US Government (all jokes aside). So uttering the word “guarantee” anywhere in the same vicinity as a discussion about stock market investments is totally off limits.

Well, I am going to run head-on into the forbidden term and come right out and guarantee you something. I GUARANTEE THAT IF YOU HAVE A PROPERLY DIVERSIFIED PORTFOLIO THAT YOUR ACCOUNT WILL LOSE VALUE OCCASIONALLY.

That’s right, I said it and I will say it again. I GUARANTEE THAT IF YOU HAVE A PROPERLY DIVERSIFIED PORTFOLIO THAT YOUR ACCOUNT WILL LOSE VALUE OCCASIONALLY.
When you have a properly diversified portfolio, it means that a portion of your account will be invested in the stock market (likely both US and International markets). There has never been a period greater than a few months where a diversified portfolio didn’t lose value. Markets never just go straight up. And while historically the decline in value is temporary, it does happen and will continue to happen. Over the years, I have often told our clients that it isn’t IF your account will lose value it is WHEN and HOW MANY TIMES it will lose value over an investor’s lifetime.

Now before you start to panic I want to digress and point out that there is a difference between losing value v. losing money. As stated above, your 401k will drop in value from time to time. But for you to actually lose money in your 401k takes an additional action on your part. It is only when you sell while the market is down that you are taking the temporary decline and making it a permanent loss. That is when you lose actual money in your 401k, not simply when the market declines. (For further explanation on the difference between losing value v. losing money read my blog, If You Don’t Sell You Don’t Lose.)

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target date funds why

Why Target Date Funds Miss the Mark

First, let me give this disclaimer – Target Date Funds are a great solution if the alternative is leaving your retirement money sitting in a Money Market Fund. That said, there are three problems with almost all Target Date Funds inside of employer sponsored retirement accounts like 401k and 403b plans. Before I begin, let me explain what a Target Date Fund is, or is intended to be.

Target Date Funds were meant to make investing for a specific date in the future – like Retirement – a simpler process. In theory, an investor can select the Target Date Fund with the year closest to when they are planning/hoping to retire. For example, a 35 year old planning to retire at age 60, might select a 2040 Target Date Fund. This single fund election is comprised of a handful of individual Mutual Funds to give instant diversification across asset categories: Large Company Stocks, Small Company Stocks, International Stocks, Bonds, Money Market, etc. Target Date Funds automatically adjust the risk profile of the fund (the weighting of stocks vs. bonds) inside the portfolio as the years progress. So, a 2040 Target Date Fund may have 80-90% of the portfolio in stocks, but by 2039 it will likely have adjusted the ratio closer to 50% stocks and 50% bonds/money market. This happens automatically for the investor, without them doing anything on their own. In theory, it seems fairly intuitive and a decent strategy for retirement saving. Now let’s discuss the shortcomings.

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how to choose 401k investments

This 401k Plan is a Joke! – How to choose 401k investments

I have been in the investment advisory business since the mid-1990s. I am a CFP (Certified Financial Planner) and I co-founded a wealth management firm from scratch to over $500 million of client portfolios. Despite all of this experience – when I look at this fund menu of 403b investment options below even I can’t figure out what most of these fund choices are!! What the heck is “VEEDOT” or “VALUE”? Prime Money Market sounds good but Premium Money Market sounds even better. What about Global Gold – is that better than cheap old US Gold?

My point here is this. If someone with almost 2 decades of in-the-trenches investment advisory experience can’t tell what the heck some of these 401k options are – why in the world would we expect the average person to be able to decipher these choices? Don’t forget, their future ability to retire will largely rest on the performance of their retirement savings. With all of this at stake – THIS mess is the best we can do for the Baltimore Public School employees on how to choose 401k investments!

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