Invest. Don’t invest. Buy gold. Put your money in a safety deposit box. It’s a bull market. It’s a bear market. There’s a recession coming. We are actively in a recession. Buy a house now before the rates get higher. Now is the worst time you could think to buy a house.
It seems as though the opinions and advice regarding how to best use and safeguard your money are as varied as colors of azaleas blooming in Mobile springtime. Though the options and decisions around your finances are seemingly infinite, we’ve asked a couple of financial advisors to weigh in on the available paths and how to make the right decision for you or your family.
William Nicrosi, of Leavell Investments in Birmingham, says the asset allocation, or money you choose to invest, can be the most important decision you make on your financial journey.
“The younger you are, the more risk you can take,” Nicrosi says. “Always make sure you’ve got that safety net for maybe six months of living needs someplace — in a savings account, money market account, CD, U.S. Treasuries. Make sure that’s secure. Obviously, you can be more conservative there, but we encourage the younger clients that the real way to increase your wealth is to take some risks. That typically means investing in stocks, and that can be done through mutual funds and exchange-traded funds.”
With rising interest rates from the Fed, U.S. Treasuries and CDs are becoming more attractive investment vehicles for many who are risk averse, Nicrosi says, adding that it’s a good general practice to focus on asset allocation first and then look at keeping your fees down.
“I think looking at bonds you’re looking at low-cost mutual funds or exchange trade funds,” Nicrosi says. “On the stocks side, you’re looking at actively-managed mutual funds and then index mutual funds and then exchange-traded funds. We highly encourage people not to day trade; you’re in it for the long term. You do your daily job; let the investment professionals work on the investment side. Don’t try to outguess the market, because we don’t feel like you can do that.”
Shaw Pritchett, a CPA and principal at Jackson Thornton Asset Management in Montgomery, says he encourages his clients to be disciplined with their savings rates as they are frequently more important to the success of an investment plan than what stocks you pick. He also discusses taxable investment accounts and how they are used.
“In a taxable account, income generated by your investments is taxable to you in the year you receive it,” Pritchett says. “In this type of account, you are able to get the beneficial capital gains tax rates available for qualified dividends and long-term gains from the sale of investments. A traditional IRA, 401(k), SIMPLE IRA or 401(k) or SEP IRA are all referred to as tax deferred accounts. You generally are allowed a tax deduction for contributions to these types of accounts and the income and growth earned in the account each year is not taxable.”
When you take a distribution from one of these accounts, Pritchett adds, the money you receive is taxable at ordinary income rates. Each of these accounts has annual limits on the amount of contributions you can deposit to them. Tax-free accounts operate a little differently.
“A Roth IRA or 401(k) is referred to as a tax-free account,” Pritchett says. “Income and growth in these accounts is never taxable if the account has been in existence for five years. These accounts also have annual limits on the amounts you can contribute.”
Pritchett says each of these account types allows for the investor to buy individual stocks, which may seem risky but allows for more potential for gains. There are other account types to consider when looking to expand your portfolio.
“Mutual funds and ETFs are diversified pools of investments that can invest in stocks or fixed income,” Pritchett says. “Fixed income can carry some risk due to changes in interest rates, but are generally thought of as safer and more stable investments. Since the risk is typically lower in fixed income, the growth of those assets is slower.”
As far as asset allocation into these various investment accounts, Nicrosi strongly emphasizes not making knee-jerk reactions to the news or market trend reports.
“You should change your investment strategy based on what’s happening in your life from a needs standpoint, whether it’s sending children to college or getting close to retirement or buying a new house — things like that,” Nicrosi says. “So, right now with the market being very volatile, now is not the right time to make an emotional decision or change your asset allocation. Yes, the market’s going to go down, and yes, the market’s going to go up. If you look at any long-term investment chart, the equities and the bonds have positive returns over time.”
Pritchett echoes the advice — don’t let market noise affect your investing strategy. Instead, he advises, the only thing that should make changes to your allocations are changes in circumstance.
“I’ve heard someone say that the best time to invest in the markets was yesterday and the second-best time is today,” Pritchett says. “We all have financial obligations we need to meet, but as I said earlier, the best way to ensure a successful result in your financial plan is to be disciplined in saving and spending. It’s fine to reduce your savings rate if you experience a temporary threat to your budget, just keep in mind that the tradeoff is less retirement income later.”
Overall, no matter what you are thinking of investing in and despite all other information out there, the most unanimous advice given is to start your savings and investment journey as soon as your able to protect your future.
“It’s never too late to start saving,” Pritchett says. “We all need to be able to provide for ourselves when we don’t work any longer. I’ve spoken to many people who expect to work for the rest of their lives, but what happens if your health doesn’t allow for that any longer? If you are late to start saving, the reality is that you may need to work longer to make things work in retirement, but it is still an achievable goal.”
Crystal Castle is a Mobile-based freelance contributor to Business Alabama.
This article appears in the May 2023 issue of Business Alabama.
