Simply Money Advisors: Fewer expensive lattes or takeout meals could help millennials save for the long term Simply Money Advisors
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to firstname.lastname@example.org
Tom: I own a lot of Macy’s stock in my 401(k). I know it’s lost a lot, so I’m starting to get really nervous. What should I be doing right now?
Answer: The Simply Money Advisors rule is that no individual stock should make up more than 10 percent of your total investments. If you work at Macy’s you may want to consider owning less stock (perhaps no more than 5 percent). Think about it: If a company struggles, this may mean the stock could go down, and there could also be future layoffs for employees. If you have too much money invested in Macy’s stock this could have a large impact on both your current job situation and your retirement savings – the proverbial “too many eggs in one basket.”
Simply Money Advisors believes that you should typically sell a stock for one of three reasons:
- There is something fundamentally wrong with the company. Currently, Macy’s is facing significant, but not impossible, long-term challenges. As you and your fellow shoppers shift to buying more online like through Amazon, Macy’s will need to adjust its business model for the future. Company leaders are aware of this challenge and say they are working toward a solution.
- You need the money. An example of this would be if you underestimated your tax bill and need a little extra cash to cover the excess.
- Another investment option is a better fit for your financial plan. By developing a financial plan that is in line with your financial goals, you may discover that your stock in a certain company doesn’t fit anymore. There may be another option that is more appropriate for your goals.
Working with a trusted financial planner (we recommend a Certified Financial Planner) can help you determine if Macy’s stock is a good investment option for your future. If your employer has not provided a financial planner to help you with your 401(k), reach out to your company’s human resources department to see who you need to contact for help with your financial plan and investment mix.
Here’s The Simply Money Point: If your investments in your 401(k) are not in line with your long-term financial goals or the investment falls into one of these three factors, it may be time to look for other investment options within your risk tolerance.
Mike and Susan from Newport: We recently read where Warren Buffett said that the average investor is better off investing in index funds. Could you explain what index funds are and the pros and cons of investing in them?
Answer: An index fund owns a group of different investments, such as stocks or bonds. It is built to resemble the components of a benchmark market index like the S&P 500 (America’s 500 largest companies), for example. Having this broad exposure gives you a diversified investment mix and lowers your risk.
Index funds are considered passive funds because there isn’t a fund manager picking stocks to be in the fund – they’re just mirroring their respective benchmark index. On the other hand, if a fund has a manager, those are considered active funds. Active fund managers believe that by picking the best stocks at any given time they can “beat the market.” But according to Standard & Poor’s, a whopping 83 percent of U.S. active stock funds failed to outperform the benchmark index they were trying to “beat” over the past 10 years.
Since index funds are passively managed there are fewer transactions. This results in fewer capital gains distributions and fewer taxes. Additionally, most index funds have internal fees that are considered to be relatively low. You also know what you are getting when investing in an index fund. You don’t need to worry about a fund manager buying and selling securities that may cause you to take too much risk with your money.
The Simply Money Point is that we agree with the legendary investor Warren Buffett: Because of their lower costs and lower risk, index funds can be a smart choice for investors like you. As always, work with your financial planner to determine if index funds (in the form of exchange-traded funds, or ETFs) are right for your investment objectives as well as your future financial goals.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email email@example.com.
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