How should I invest my extra income?
I'm a 47-year-old married man and I have approximately $97,000 tucked away in only 3 stocks (which I am aware is against most people's advice). Regardless, they have performed well over the last eight years. I also have $20,000 in certificate of deposit accounts. I do not have a 401(k) because I personally don't see the use in them. My house and two cars are paid off. I have no outstanding debt. I have approximately $20,000 combined between my checking and savings accounts. Between my wife and I, our yearly income is $45,000. I have some extra income leftover consistently and I'm not sure what I should do with that money. Should I invest in an IRA, mutual funds, or more stocks? Should I hire a financial advisor to help me decide what to do?
Joshua Escalante Troesh CFP | MBA
To answer your questions directly, yes, you would want to invest next in an IRA for each of you and your wife. The IRA will allow you to receive tax free growth as well as either tax deductions now or tax-free income in retirement - depending on if you chose the traditional or Roth options. For 2019 and 2020 you can invest up to $11,000 ($6,000 for you and $6,000 for your wife) in IRAs.
Hiring an Adviser
Regarding hiring an adviser, you definitely should. A good adviser can help you put together a diversified portfolio with lower cost investments. It may be difficult to find an adviser who will work with you unless you turn over the stock portfolio, but there are advisers like myself who will work on an annual fee basis just to give you advice. You should also review this nonprofit’s guide to hiring a financial advisor before contacting companies.
A comprehensive advisor will also help you with many aspects of your finances beyond just investing including multi-decade tax planning, employee benefits advising, making major purchases (like a home or cars), planning for major goals (like sending a child to college), and much more. Be wary of advisors who are legally sales representatives for insurance companies or brokerages as they often present sales pitches for financial products as financial advice.
The adviser should be a Registered Investment Adviser, as these are the only types of advisers who are legally required to give advice in your best interest as fiduciaries. The adviser should also have a valued designation such as the CFP designation. Realize many designation in the financial services world are meaningless marketing gimmicks. You can verify this information as well as an adviser’s or company’s background, regulatory history, complaints, or other problems at the SEC’s consumer website - BrokerCheck.org.
3 Stock Portfolio Presents a significant Risk
The heavy concentration in three stocks is a massive risk. If something happens to one of the three companies, you could see your portfolio drop by a significant margin and never recover. While you may have chosen companies wisely there is too much unknown to have any true confidence in the choices. Changes in the economy, new laws, hidden scandals, changing consumer preferences, and many other factors can lead to ruin for an individual company.
If you don't want to sell the investments, you will want to have a good adviser who can help you manage that risk — potentially through adding a more diversified portfolio to the existing investments through future contributions. While you may think the companies are well run, established, and successful companies; the investing public never truly knows the details behind the scenes of an individual company.
Examples of companies who surprised (and devastated) confident investors abound including Enron, General Motors, Lehman Brothers, Worldcom, and many, many more. Companies don’t have to go out of business to have a massive impact on your retirement plan as concentrated investors in Wells Fargo, General Electric, and many other companies have experienced.
Pro Tip: If you interview an adviser and they don’t try to educate and encourage you to sell some of the stocks and invest in a more diversified way, then you should not work the the adviser. Part of an adviser's job is to help you make better choices. If the adviser agrees with everything you want to do, then they are charging you money for very little value in return.
Double Check The 401(k) Option
I will assume the reason you don't like your 401(k) plan at work is because the company doesn't match funds and the investment choices are poor/expenses. If your company does match some of your contributions I suggest contributing to the plan enough to get the free money from your boss. This article will give you nine reasons people commonly give for not investing in their 401(k). Although you are in a great financial position a few of the reasons will apply and may help you make a better decision.
A good adviser will also review your 401(k) option at work to help you make a better decision. And if your plan at work is poor, with high fees and poor investment options, you can also ask your HR department to contact us to do a fiduciary review of your 401(k) plan. They are required to do this regularly anyway, and you may end up with a better plan when a fiduciary advisor provides guidance.