Education

When you start your professional career, most employers give you the ability to opt-in to their employer-sponsored retirement plan, usually a 401K.

For most people, it’s a no-brainer. However, as you progress through your career, you are thinking about retirement goals and whether or not you should max out your 401k.

In this article, I’ll discuss reasons why you should and should not max out your 401k and other financial considerations to take into account.

A Brief History Of The 401K

The 401k was created in 1979 by benefits consultant Ted Benna. Benna designed the plan for a client who declined to use it because he feared it would be appealed once the government found out about the potential tax loss.

The first 401k was started in 1981. Fast forward 30 years, and there is approximately $6.9 trillion invested in 401(k)s and is the primary retirement vehicle for most Americans.

Ok. History lesson over. Let’s get to the good stuff.

Why You Should Max Out Your 401K

1. To Take Advantage Of Tax-Deferred Investment Growth

You can contribute up to $19,500 tax-deferred, or $26,000 if you are 50 or older. Many people view this as an advantage as they expect to be in a lower tax bracket when they retire and can enjoy years of tax-free growth.

2. To Recieve An Employer Match

You don’t necessarily need to max out your 401k to get your employer match. Still, you’ll likely need to contribute significantly depending on your employer.

Many employers match between 4% – 6% up to a certain amount, say $10,000. For example, if you made $125,000 and your employer matches up to 6% contribution, up to $10,000. In that case, you would need to contribute $10,000 to receive the full employer match. Otherwise, you’re leaving money on the table.

3. It’s Easy to Employ A Set It & Forget It Strategy

Employer-sponsored retirement plans make it incredibly easy to contribute to a 401K. The contributions are automatic, and your fund sponsor often helps you pick an asset allocation that is right for you. Automatic contributions eliminate the temptation to use the extra funds to go on vacation or clothes shopping.

Out of Sight, Out Mind works for many people.

I’m sure some personal finance snobs disagree, but this strategy works for most Americans.

Moving On…

Why You Should Not Max Out Your 401k

1. You Have High-Interest Consumer Debt

Suppose you have high-interest consumer debt such as credit cards or an expensive auto loan (5%+). In that case, you should dedicate any additional income towards reducing your debt burden.

With the average credit card interest rate around 16%, that’s a risk-free return that’s hard to beat in any investment account.

2. You Don’t Have Emergency Savings

I’m not a huge proponent of holding significant emergency savings, but if you don’t have between 1-2 months of cash on hand, it’s wise to start saving before you max out your 401k.

It’s not a question of IF there will be unexpected expenses; it’s more of a matter of WHEN—car repairs, medical bills, etc. You should have at least 3-6 months of cash on hand as mandatory home repairs can happen quickly and be quite expensive if you are a homeowner.

3. You Don’t Earn Enough Money

The reality is you need to be a high-earner to max out at your 401k. Controlling for major cities such as NYC and San Francisco, if you make around $130,000 or more, you should comfortably be able to max out your 401k.

On the other hand, if you earn $50,000, it would be nearly impossible to max out your 401k. It’s all relative to salary, my friends.

We hear about way too many people who achieved financial independence seemingly too easily. Unfortunately, most of those people already had very high-wage jobs to start with. So, maxing out any tax-advantaged accounts isn’t much of a challenge for them.

4. Existing Financial Obligations

Perhaps you have a mortgage, a family to care for, college tuition, or other childcare expenses. Sometimes you may need to sacrifice for today and reduce your 401k contributions.

It’s important to note, If you are consistently sacrificing retirement goals for living today, you may need to revisit your spending habits. Saving and investing for retirement should be a priority for all Americans.

Retirement Stats

The number of 401k millionaires soared 84% year over year, with the number of 401ks over $1million topping 412,000. Sure, it’s comparatively tiny to the millions of retirement accounts out there, impressive stat nonetheless.

Meanwhile, non-millionaires are also doing well. The same study also shows the average 401(k) held $129,300 at the end of the second quarter of 2021, up 24% from a year ago.

The most recent publicly available IRS data from 2018 shows that only 3.5% of wage-earning taxpayers contributed the maximum elective contribution amount.

And while nearly 40% of wage-earners made elective retirement contributions in 2018, which sounds good until you realize there are even more people who are not contributing.

Frequently Asked Questions

Other Important Financial Goals To Consider

If you’re maxing out your 401k, you’re in an excellent position financially. As noted above, only 40% of Americans contribute to an elective contribution.

That said, it’s essential not to leave any blind spots in your financial planning. Additional financial considerations Include:

Life Insurance

Proper coverage is critical, especially if you have a family. Experts recommend 10X your salary in coverage and an additional $100,000 for each dependent. There are plenty of online companies that make life insurance applications seamless.

Disability Insurance

Most people are often underinsured or not insured at all when it comes to disability insurance. Many employers offer disability insurance, but it’s often inadequate, and private coverage is needed. I recommend coverage from a company called Breeze.

Having a Will & Trust

Should something happen, it’s essential to have a will, so your assets are not stuck in probate. Fabric offers life insurance and wills so that you can knock off two birds with one stone. Alternatively, Trust & Will also offers estate services entirely online.

Make your money work for you. If you have $20K to invest, here’s how to invest your hard-earned cash wisely.

Perhaps you have an excessive amount of money in your emergency savings, inherited some money, or had an unexpected windfall.

While $20K is undoubtedly not a tiny sum, don’t quit your day job yet. But with the right strategy, you can set yourself up for long-term financial success.

1. Max-Out Your Traditional Retirement Accounts

If you are unsure how to invest $20K, the wisest approach is to max out your traditional retirement accounts. The most common retirement accounts are 403B and 401K plans.

These plans are funded with pre-tax dollars via payroll deductions. If you have $20K in your bank, one of the wisest ways to invest $20K is by increasing your retirement contribution percentage at your employer. You effectively do a 401k swap by using the cash on hand to supplement your decreased paycheck.

However, it’s important to note the contribution caps for those under 50:

401(k): Most for-profit companies sponsor this type of plan. It allows you to contribute pre-tax dollars to your account. The maximum contribution amount for 2023 is $22,500.

403(b): Also called a tax-sheltered annuity or TSA plan. If you’re a teacher or work at a non-profit 501 (c) (3), you most likely are offered this type of retirement plan. The maximum contribution amount for 2022 is $20,500.

Most employers make it reasonably easy to increase your contribution amount. Contribution adjustments can generally be made through your company portal or a form provided by your retirement servicer.

Once you have invested your desired amount, decrease the contribution amount to avoid exceeding the contribution cap.

This brings me to my next point…

2. Open A Backdoor Roth IRA

Backdoor Roth IRAs allow you to invest up to $6,000 in after-tax money. The withdrawals are tax-free once you reach age 59 1/2 and the account has been open for at least five years.

You could use your $20K to fund three years of Backdoor Roth IRA contributions!

One exciting benefit of Back Door Roth IRAs is that you can withdraw up to $10,000 in earnings if you make your 1^st home purchase (you need to have your account for at least 5 years).

Back Door Roth IRAs had generally flown under the radar until Pro Publica recently published an article documenting how investor Peter Thiel has a Roth IRA worth $5 Billion! Thiel’s case is extreme and highly unusual compared to your average investor.

3. Open A Traditional Brokerage Account

When you open a taxable brokerage account, you fund the account with after-tax dollars. You will pay capital gains taxes on any realized earnings, e.g., when you sell a stock or mutual fund and make a profit. Online brokerages offer stock, bonds, index funds, mutual funds, ETFs, REITs, options trading, and margin accounts.

Taxable brokerages allow for the most flexibility when it comes to investing but also are the least tax advantageous.

There are quite a few brokerage accounts for stock market investing options, and most of them offer similar services. Hence, it’s usually a matter of preference for which company is considered the “best.”

A few online brokerages are:

• TD Ameritrade
• Charles Schwab
• E-Trade
• Vanguard

To name a few. In addition, some fintech firms, such as M1 Finance, offer bonuses for opening accounts with them if that appeals to you.

Alternatively, if you are ready to invest $20k but don’t know where to start, an ETF like VOO or SPY is a great option. These ETFs track the performance of the S&P 500. By investing in this type of ETF, you already have considerable diversification – buying into an index of the 500 largest companies.

Furthermore, they have the lowest expense ratio of any other actively traded ETF.

4. Fund A 529 Savings Plan For Future Education Costs

The cost of college tuition has risen by more than 25% in the last 10 years, so it’s never a bad idea to invest 20K for future education expenses.

After-tax dollars are used to fund a 529 plan. Withdraws are tax-free when they are used for qualified education expenses. Qualified expenses are amounts paid for tuition, fees, and other related expenses required for enrollment or attendance at an eligible educational institution.

Benefits of Funding A 529 Savings Plan

• You can open a 529 before you have children and start investing for them now.
• No limits on the number of 529 accounts you can fund
• Possible tax deduction if you open a 529 account through your state

In addition, investing in a 529 plan is also a great way to create generational wealth because there are no limits on the number of 529 accounts you can fund.

Time is our best friend in the investing world!

Many states also offer their own 529 plans, but it’s not always required to open through your home state. However, tax deductions or credits may open through your home state.

Alternatively, most major retail brokerages also offer 529 savings plans, such as the companies listed above in point 3.

5. Consider Investing With A Robo Advisor

Not everyone has the investment acumen to jump into the deep end.

Perhaps you are interested in investing but don’t know how or where to start.

A Robo-advisor makes automated investment choices on your behalf that involve limited human intervention. The decisions are made on your behalf through information collected in a survey you fill out. A robo-advisor is a good choice if you are unsure where to start, but are turned off by the high fees of financial advisors.

When using a robo-advisor, they will survey you to understand your financial goals and your current financial situation.

Some Robo Advisors charge a management fee of around 0.25% – 0.50% of assets invested, and some are free.

A few popular Robo Advisors include:

• M1 Finance
• Acorns
• SoFi
• Vanguard

Note: The critical thing to consider is that you are getting investment advice based on your situation and eliminating the decision-making process from your end. In exchange, you may be required to pay a management fee. If that trade-off is worth it based on your unique circumstances, then perhaps Robo-advising is wise.

6. Invest in Real Estate

Real estate is another great way to invest $20K for passive income.

Until a few years ago, buying physical property yourself was the only way to invest in real estate. Luckily, things have changed since then. Quite a few companies offer the opportunity to invest in real estate without buying property.

Private real estate, in general, tends to be a more stable, income-generating type of investment with a low correlation to the stock market. There are publicly-traded REITs, but they tend to have a much lower dividend payment than private real estate and fluctuate more in line with the overall stock market.

Over the past 20 years, NPI (the index that tracks private real estate performance), has averaged a higher rate than the yields of other major asset classes, such as publicly-traded REITs, Bonds, and Stocks.

And to that end, my favorite real estate investing platform is a company called Groundfloor. They specialize in short-term loans to flippers, with a time horizon of 6 – 12 months, while earning an average interest rate of around 10%.

Other real estate platforms require you to lock up your money for at least 3 years – 5 years or pay a fee to withdraw early. So in the context of real estate investing, it’s a relatively short investing horizon.

Plus…

Groundfloor has been around since 2013, repaid over 1,100 investments, and distributed nearly $12.7 million in interest payments.

7. Pay-Off High-Interest Debt

This isn’t investing in the traditional sense. But if you’re an investing and finance nerd like me, the concept of a risk-free return comes into play.

In general, the risk-free rate is the theoretical lowest interest rate you would pay, assuming no default risk. In 2022, the 10-year treasury hovers in the 3% range, so if you can borrow money at 3%, you are, in theory, borrowing at the cheapest interest rate possible.

In the world of finance, this benchmark is the 10-year Treasury Note, the rate the U.S Government pays to service its debt maturing in 10 years.

Over the past 50 years, the S&P 500 returned 10% on average, so it may make sense to pay off your debt before investing, depending on your interest rate.

Debt with an interest rate below 4% is generally considered a good rate. Comparatively, credit cards have rates as high as 30%, so there’s a big range.

The below chart shows the interest rate, whether you should pay off your debt or debt, and the types of debt at that interest rate.

8. Investing in Yourself

Another viable option could be investing in oneself through education or starting a business. This could provide long-term benefits and help increase earning potential in the future.

9. High Dividend Yield Stocks

For investors seeking income and looking to make their investments grow, high-dividend stocks can be a good choice. Companies that pay dividends often do so on a regular schedule, and this can provide a steady stream of income.

That said, high dividend-yielding stocks can be one of the best compound interest investments.

10. Alternative Assets

Investing $20,000 in alternative assets can offer robust portfolio diversification and potentially high returns.

Such assets, including art, wine, commodities, music royalties, and hedge funds, often move independently of traditional stocks and bonds, providing a buffer against market volatility.

Alternative assets also offer an inflation hedge, especially relevant for assets like real estate and gold. High risk-adjusted return potential in private equity or venture capital can dramatically enhance portfolio performance. Moreover, some alternatives, like real estate, can generate regular income.

Ultimately, alternative investments can open new growth avenues while reducing exposure to traditional market swings.

The Bottom Line

Taking the initiative to invest $20K is a wise decision. There is no right or wrong answer on how to invest $20k. The most crucial point to consider is to decide what makes sense for your unique circumstances.

Everyone’s financial situation is different, but it’s essential to consider your current situation, goals, risk tolerance and needs before investing.

How to invest $20K wisely:

• Max out your traditional retirement accounts
• Open a backdoor IRA
• Open an online brokerage account
• Fund a 529 savings account
• Consider investing with a Robo advisor
• Invest in real estate
• Pay-off high-interest debt
• Invest in yourself
• High-Dividend Yielding Stocks
• Alternative Assets

Weigh the pros and cons of the above options against your objectives to help make the most educated decision possible.

Frequently Asked Questions

Below are some common questions when it comes to investing $20k.

What’s the best way to invest $20K short term?

If you don’t want to risk losing your capital, one of the best ways to invest $20K short term is a high-yield savings account or short-term certificate of deposit (CD).

Before you drop your life savings on the hottest stock your friend told you about, follow these 5 easy steps to become an investor.

All successful investors became wealthy through diligence and meaningful investing. It sure can be easy to make money when every asset class is increasing in value, but throwing your money at random investments without careful planning could end up poorly.

1. Define Your Investing Objectives & Strategy

Defining your investment objectives and strategy is the first step to becoming a successful investor. If you’re unsure where to start or overwhelmed by the process, it may be worth considering the wealth advisory services at Personal Capital. In return for a small fee, you can receive professional advice. For some people, that trade-off is worth it.

Ask yourself what your objectives as a soon-to-be investor are.

Common investing goals may include:

• Saving for retirement
• Life events (e.g., college, education, home)
• General Investing
• Lifestyle goals (buying a luxury watch, car)

Saving for retirement is usually the number one investing goal for most people, followed by investing for their children’s future, and lastly, if you’re wealthy enough, investing for lifestyle purchases.

WHAT NOT TO DO: If you are serious about becoming an investor, do not just open a brokerage account and put your cash into a random stock your friend told you about. More often than not, it won’t work out in your favor, especially in this market.

Types of Investors

There are 4 main types of investors. Each type of investor plays a specific role in the market:

2. Pick The Right Type Of Investment Account

The second step to becoming an investor is opening the correct investment account based on your investment objectives. Your investment goals should determine what type of account is right for your needs.

I’m a DIY investor, but if you are overwhelmed and don’t know where to start, using a robo-advisor or financial advisor could be helpful.

Below are a few of the most common investment accounts. When most people think about investing, a taxable brokerage comes to mind. This type of account allows for buying and selling most asset classes, including options trading.

The most common investing accounts are retirement accounts opened through an employer and a taxable brokerage.

Depending on your goals,

In the long run, maxing out your tax-deferred retirement accounts, such as a 401K and 403B, will be the most advantageous for most people.

However, many soon-to-be investors become enthralled by the idea of quick profits and opening a taxable brokerage in search of easy money.

3. Choose Your Asset Allocation

Your objectives should define your investment strategy. According to Vanguard, 88% of your investing experience (the volatility you experience and your returns can be traced back to your asset allocation.

Most investors have a well-diversified portfolio of equities, bonds, alternatives, and cash; some even have crypto in a retirement account.

Depending on your investing timeline and goals, the general rule is to hold riskier assets like stocks & ETFs when younger and reduce your exposure to riskier assets near retirement age.

If your investment objective is income generation, you may want to focus on fixed-income investments.

Fixed-income securities fluctuate less in value but tend to have higher interest payments.

Alternatively, equities are a better option if you are looking for capital appreciation as they increase in value more than fixed-income investments.

There’s no correct answer. That’s why they call it personal finance.

Asset allocation is tricky if you don’t want to pay for expert advice. However, some people may want a hybrid approach. A lower-cost option is M1 Finance. The M1 platform offers a semi-guided approach to investing, including expertly selected portfolios. M1 also provides taxable brokerage accounts, IRA, and 401k accounts.

4. Educate Yourself About Investing

Continuous education is the key to becoming an investing pro.

You need to learn how to research stocks. For example, reading the Wall Street Journal is a great place to start if you want to learn about the stock market and investing. Understand the differences like REITs vs. Bonds, and how to incoproate them into your investing portfolio.

You won’t become an expert overnight, but your investing insight and understanding of investment jargon will develop over time. If there are any investing concepts you are not familiar with, your investment account will likely offer free training and research.

Excellent sources for learning about investing include:

• The Wall Street Journal
• The Intelligent Investor by Benjamin Graham (Warren Buffet’s mentor)
• The Bogleheads’ Guide to the Three-Fund Portfolio by Taylor Larimore

5. Be Patient

Becoming a successful investor is a long-term game. There will be periods of prosperity, volatility, market downturns, and the urge to panic and sell when the market is down. It’s critical to stick to your investment objectives and remember your goals.

Investing Habits To Avoid

Getting caught up in investing habits that can be detrimental to your portfolio and long-term investing goals is easy in search of quick riches. It’s easier to develop bad investing habits than good ones, especially when the stock market does not move in your favor.

Trying To Time The Market

Timing the market means buying low and selling high.

Sounds easy enough?

Wrong.

According to a study by Bank of America, if an investor missed the ten best market days since 1930 every decade, their total return would stand at 28%. If, on the other hand, the investor held steady through the ups and downs, the return would have been 17,715%.

Panic Selling

Panic selling, also known as loss aversion, is the tendency to sell during a market downturn to avoid further losses. In 2020, at the onset of COVID, the S&P 500 dropped almost 25%, only to reach record highs months later.

And here we are in 2022. Due to accommodative federal reserve policies, the stock market is now in a bear market.

Business cycles come and go.

They always will.

In the long run, the patient investor usually comes out ahead.

Day Trading

Buying and selling securities on the same day to generate a small profit is a terrible idea if you are learning to become an invest r.

Not only is day trading incredibly risky, it usually doesn’t end well. The most significant number of millionaires are every day 401K investors. If you are starting to invest, day trading is not something you get involved in.

Trading Options As A Beginner

Options trading can get incredibly complex. While they can multiply gains, they can also multiply loss s. As a beginner, you should stay far, far away from options.

As you become a more advanced investor, options can play an essential role in your portfolio, from hedging to taking advantage of specific market conditions. But you must first understand how they work and their associated risks.

Investing Habits of Successful Investors

There are undoubtedly endless ways to get rich. However, most successful investors who have achieved financial independence all followed some essential investing tips on their way to financial freedom.

Regularly Contribute To Your Investment Account

When you start investing, making regular contributions to your investment account is critical, primarily when investing in a tax-advantaged account such as an IRA, 401K, or 403B. You start to feel the effects of compounding when you have $100,000 in an investment portfolio.

According to Vanguard’s 2022 How America Saves Report, individuals who contributed 6% vs. 3% to their investment account had a 70% larger balance after 10 years.

Diversify Your Portfolio

A critical part of investing is maintaining a diversified portfolio. A mix of stocks, bonds, alternatives, and cash works well for most people. However, it would be best if you were more inclined to invest in riskier assets such as equities the younger you are. A more balanced allocation of stocks and bonds makes sense as you near retirement age.

The easiest way to diversify is by buying an index ETF like VOO or SPY. These ETFs track the performance of the 500 largest companies by market cap. Also, index funds tend to have a much lower expense ratio – .03% and .09%, respectively. Compared to the average ETF fund, which has an average 0.53% fee, and mutual funds have a 1.42% fee.

There is no one size fits all approach. That’s why I like M1 Finance. They offer over 80 professionally picked portfolios comprised of stocks and ETFs that align with all types of investing objectives – from retirement portfolios to ESG portfolios.

Stick To Your Investment Objectives

Sure, your friend may tell you about the next high-flying stock that will be the next Apple or Google, but that doesn’t mean you s ould go all-in. No matter what, stick to your investment objectives even if the market is in a downturn. Market downturns happen quickly and can be painful, leading to panic selling.

Frequently Asked Questions

When Is The Best Time To Invest?

Now! If you think you can time the market, you are sorely mistaken.

After the pandemic started in March 2022, the S&P tanked and lost almost a quarter of its value. Two years later, the S&P 500 is up nearly 78%. Many people would have likely told you were crazy if you were going to start investing in March 2020.

However, the reality is that if you ignore the market volatility and maintain regular investment contributions, you will be ahead in the long term, and compounding is your friend when it comes to investing.

Can I Invest Without A lot Of Money?

Yes! M1 Finance is an investing app that allows you to invest in fractional shares of popular stocks like Tesla, and Google, among others.

Can I Invest Outside of The Stock Market?

Absolutely. Investing outside the stock market can be done through alternative investments like real estate, music royalties, and even investing in wine.

Alternative investments are becoming incredibly popular and more accessible for everyday investors. Having up to 10% of your portfolio in these asset classes can be helpful because of their uncorrelated returns to the stock market.

Financial Advisors were historically the go-to method for professional investing. However, due to shifting demographics and underperformance, individuals have started to shift to Robo advisors.

What Is A Robo Advisor?

Robo Advisory services can vary from company to company. Still, generally speaking, it’s an online service that selects low-cost exchange-traded funds (ETFs) to invest in based on a survey you complete.

Most robo-advisors do not select individual stocks but a portfolio of low-cost ETFs.

A relatively unknown service 10 years ago, there are now nearly 100 companies that offer Robo-advisory services.

According to Charles Schwab, assets managed by Robo-advisors are expected to rise to $460 billion, up from $47 billion in 2015, with the average assets under management hovering around $100,000.

Robo-advisory services weigh your personal preferences against unpredictable market forces to create your customized portfolio.

Personal Preferences

• Time Horizon
• Financial Goals
• Risk Tolerance

Market Forces

• Asset Class Performance
• Market Conditions
• Market Volatility

How Do Robo Advisors Work?

Robo advisors vary from company to company but most operate in a similar format.

Step 1. Complete a questionnaire that assesses your risk tolerance and investing goals.

Step 2. Based on the responses in your questionnaire, the Robo-advisor builds a portfolio of low-cost funds.

Step 3. Experts regularly monitor market activity and underlying investments to ensure your portfolio is rebalanced appropriately by a sophisticated algorithm—all so you don’t have to.

What are Financial Advisors, and What Do They Do?

A financial advisor is a licensed investment professional providing investment, tax, and estate planning advice.

Before the proliferation of the internet and the availability of trading data for everyday investors, individuals often relied upon financial advisors to manage their investment portfolios.

** Do you think you could execute a trade on the phone or find up-to-date market research quickly and easily in 2005?

Many financial advisors work for a larger company, like the advisors at Personal Capital, but some may also work independently. Traditional advisors usually charge clients a flat fee based on assets under management (AUM).

There are approximately 330,000 financial advisors in the United States.

Robo-Advisors vs. Financial Advisors: Head-to-Head Comparison

Below, we look at some of the key features of Robo advisors and Financial advisors and see how they stack up against each other.

Fees
Winner: Robo Advisor

Robo advisors charge very low fees, between 0.05% and 0.25% of AUM, which is one of the main reasons individuals turn to them to provide investment advice.

Meanwhile, financial advisors usually charge 1% – 2% of assets under management (AUM), making them considerably more expensive than robo-advisors.

It’s also important to note that some financial advisors are commission-based, meaning they charge clients when they purchase an investment product recommended by a financial advisor.

Robo-advisors are cheaper than financial advisors because robo-advisors are an algorithm, while financial advisors are licensed investment professionals seeking to earn a livable income.

If your investment advisor manages $100,000 and charges you a 1% investment management fee, they would charge you $1,000 yearly.

The low cost of robo-advisors is one of the main reasons investors choose them as their primary investing service.

Technology
Winner: Robo Advisors

Another reason robo-advisors are so popular is their technology and automated services. Most robo-advisors operate with a “digital first” mantra.

Robo advisors can flawlessly execute stock purchases and sales without error. The algorithm can also seamlessly perform portfolio rebalancing and tax loss harvesting.

In addition to portfolio management, robo-advisors can make administrative work such as opening accounts, account transfers and rollover, paperwork, and withdrawals much less burdensome for individual investors.

A human financial advisor is undoubtedly an “old school” way to receive investment advice. It requires manual intervention throughout the entire investment process and is entirely subject to human error.

Holistic Financial Advice
Winner: Financial Advisors

Financial advisors offer a full spectrum of financial services, from investment and tax advice to estate planning. Meanwhile, robo advisors only give you advice based on a questionnaire you completed.

Robo advisors cannot consider nuanced and evolving financial considerations, making a dedicated financial advisor better for holistic financial advice.

Robo Advisor vs. Financial Advisor: PROs and CONs

PROs of Robo-Advisors

Automation

Low costs aside, robo-advisors offer many valuable benefits. The stress of finding and meeting with a financial advisor is one reason many people avoid seeking professional financial advice.

You tell yourself that you will do it this weekend, but in reality, you push it off for months at a time.

Robo Advisors simplify the financial planning process by turning the process into an easy-to-manage experience that can take less than an hour to set up.

For example, many robo-advisors automate tax-loss harvesting. Tax loss harvesting is a technique that lets you immediately buy or re-purchase a stock or asset to maintain the structure of a portfolio as long as the value decreases.

Robots Don’t Cry

As mentioned above, robots aren’t afraid of mistakes and do not have feelings. Emotional realism is often the most significant reason we don’t make the best investment decisions.

The people who trust their guts are not interested in facts and are more likely to make risky investing decisions.

Investors who followed the crowd regret it. According to BlackRock, periods that followed investors cashing out of the market have provided above-average returns. In contrast, periods that followed investors adding to the market have provided above-average returns.

Low-Fee Funds Only, Please

Robo-advisors have low fees, which is very appealing. Fees for robo advisors are usually less than 0.50%, compared to fees between 1 – 2% of AUM for traditional advisors.

Flawless Execution

Robots are capable of optimizing thousands of portfolios, flawlessly. They don’t feel a mental crash at 1:00 pm and won’t even dream about catching the next episode of Billions.

They do what they need to do.

Algorithms rebalance portfolios in response to market changes.

Robo advisors will Always have your best interests in mind

Because algorithms are not sentient(yet), they will continuously operate with your best interests in mind.

Through a robo-advisor, you don’t have to worry about an algorithm pushing you towards a particular product to earn a higher commission or investing in a fund based on speculation.

And while there are laws like Regulation BI to prevent traditional advisors from behaving unscrupulously, it’s not guaranteed.

A few years ago, TIAA-Cref agreed to pay $97 million to settle claims from 20,000 customers that they used misleading sales tactics.

This isn’t to say that all traditional investment advisory services have nefarious intentions but to serve as a cautionary investing tale.

PROS of Financial Advisors

Holistic Financial Planning

Algorithmic systems can’t provide holistic financial advice as humans can. A Robo advisor assesses your needs by analyzing a short survey you completed.

Many people have nuanced and complex investment needs.

Robo advisors can’t discuss your estate plans or show you your budget mistakes like a human financial advisor can.

Also, robo advisors can’t talk to you in-depth about how to prioritize a long-term investing goal.

Human Interaction and Emotional Management

Sometimes humans need a little reassurance or, more importantly, need a personal relationship with a financial adviser.

You can always call your advisor if you are unsure about an investing strategy or stock. You can feel assured a qualified financial expert can answer your questions.

When stocks fall and send their portfolios plunging, panic can quickly ensue. If you call your broker and tell them you want to get our of a certain investment, they will give you the advice you need to calm down.

Complete Personalization and Flexibility

When you hire a human advisor, they advise you but ultimately do what you want. Your financial advisor can assist if you want to invest $25,000 in a Zimbabwe-based diamond-producing company.

Plus, they will examine your property, assets, or any other assets you make available to them.

CONS of Financial Advisors

Human Fallibility

Like humans, financial advisors are subject to emotions. If you threaten to move your money or are unhappy with your returns, your advisor may execute transactions in hopes of beating the market and making you a happy client.

However…

Recent research found that only 23% of the actively managed funds had better performance than passively managed.

It’s tough to pick winning stocks. Other intelligent people often try to beat the market to make themselves appear bright.

High Costs

Financial advisors are often more expensive than robo-advisors.

Human financial advisors generally charge a flat fee between 1% – 2% of assets under management, while robo advisors usually charge less than 0.50% in annual fees.

So if a traditional financial advisor manages $100,000 of your assets, you can expect to pay between $1,000 and $2,000 in management fees.

Availability for the Average Person

It requires time and effort to manage an individual investment portfolio.

Because human advisors usually charge a percentage of assets under management, their time and effort are limited to managing the most important high-net-worth clients.

Many traditional financial advisors require a minimum portfolio of $50,000, and some advisors require a portfolio of at least $1,000,000 before taking on a new client.

Meanwhile, a robo advisor like M1 Finance has a minimum investment of just $500.

Who Should Use Robo Advisors?

• Novice investors who do not have in-depth market knowledge
• Individuals who do not have a large amount of cash to invest
• Experienced investors who want to automate complex activities like portfolio rebalancing and tax loss harvesting
• Investors who do not have complicated personal finances

Who Should Use Financial Advisors?

• Investors who want a personalized investment experience
• Investors who want the comfort of talking to a human instead of an algorithm
• Investors who have nuanced personal circumstances that a computer cannot address.

The Bottom Line

Both robo-advisors and financial advisors have their place in the investing world.

As Millennials and Gen Z become the majority of the workforce, their preferences are shifting towards a more mobile and digital-friendly investing service with lower costs.

However, as you become older and your finances are more complicated, there is still a need for financial advice that cannot be handled by a computer.

That said, Robo advisors are a better option for younger investors who do not have complicated finances and could benefit from lower fees and the power of compounding.

Meanwhile, using a financial advisor is better suited for individuals who have families or generally are more advanced in their investing experience.

Bullish and Bearish are standard terms used in the investing lexicon. If you want to become an investor, you must understand basic investment terms. You may have heard these terms used while listening to CNBC or reading the Wall Street Journal.

But what exactly does being “bullish” and “bearish” mean, and where did those terms come from?

Let’s look at the definition of bullish vs. bearish and the history of the two terms.

What Does It Mean To Be Bullish?

When someone says they are Bullish, they believe an individual stock, industry sector, or the overall market will go up in value.

When one refers to the stock market, they most likely refer to the S&P 500, a weighted average of the 500 largest publicly traded companies by market capitalization.

You can be Bullish on a stock or the overall market for several reasons including, but not limited to:

• Strong earnings of the individual company, industry, sector, or overall stock market
• An excellent business strategy that will put the company in a competitive advantage
• Advantageous economic data (low unemployment, inflation, increased Gross Domestic Product, increased retail sales, increased durable goods orders)
• Introduction of new technology
• Increased production capacity
• Decreased production costs

Someone might say “I am Bullish about Tesla because they are releasing a new car this year.”

What Does It Mean To Be Bearish?

When someone says they are Bearish, they believe an individual stock, industry sector, or the stock market, in general, will go down in value. A bear market occurs when the stock market drops 20% or more.

The reasons for being bearish can include, but are not limited to:

• Weak earnings of the individual company or overall market
• A poor business strategy that will put the company in a competitive advantage
• Unfavorable economic data (high unemployment, inflation, decreased Gross Domestic Product, decreased retail sales, reduced durable goods orders)
• Decreased production capacity
• Increased production costs

A person might say “I Bearish on the market because unmployment and inflation are abnormally high.”

Where Did The Term Bullish Come From?

The etymology of the term bullish is unclear. However, most people lend meaning to the way a bull attacks.

• The term Bullish comes from a bull’s method of attack. When a bull attacks, it moves its horns upward, analogous to the stock market going up in value.

Analysts often consider it a bull market if there is a 20% or more rise from the stock market’s most recent low.

Did you know?

The longest bull market in history lasted 11 years, began in March 2009, and ended in March 2020, when the S&P 500 rose nearly 460%.

Where Did The Term Bearish Come From?

There are two theories regarding the genesis of the usage of the term Bearish.

• Like a bull, the term bearish is derived from a bear’s method of attack. When a bear attacks, it paws down, analogous to the stock market moving downward or losing value.
• The second theory is that the term comes from a proverbial expression “selling the bear’s skin before one has caught the bear.” Meaning if everyone is selling, the prices will go down in value.

Conversely, analysts consider it a bear market if there is a 20% or more decrease from the most recent stock market high.

The longest bear market in history lasted about 5 years and ended in March 1942, when the S&P 500 lost about 50% of its value.

In 2008, many investors were bearish on the housing market as the economy teetered on the brink of financial disaster.

Is It Better To Be Bullish or Bearish?

Most investors are bullish over the long term, meaning they want the stock market to increase value.

There are sophisticated investors such as hedge funds and institutional investors that made fortunes by taking advantage of bear markets through short selling.

For example, hedge-funder John Paulson bet against the housing market during the 2008 financial crisis by shorting mortgage-backed securities.

Paulson’s strategy netted $15 billion and made him a hedge fund superstar.

There are numerous strategies to take advantage of bull and bear markets. However, trying to time the market is often incredibly difficult for individual investors and is best left to professional investors.

How To Make Money In Each Type of Market

It is certainly possible to make money in both bullish and bearish markets. While no strategy guarantees success, below are some common strategies deployed for each kind of market.

Strategies deployed in a Bear Market

• Shorting Stocks or Market Indexes

• Selling Covered Call Options to generate income

• Buying Put Options to hedge downside risk

• Buying stocks that are on sale

Strategies deployed in a Bull Market

• Selling Put Options for income generation

• Buying Call Options to take advantage of increasing stock prices

If you are unfamiliar with the financial markets, it may be best to stick to a long-term investing strategy and ignore the ups and downs.

The Bottom Line

Gaining a better understanding of the difference between bullish vs. bearish and familiarizing yourself with investing lexicon, in general, will allow you to digest financial news more quickly.

There have been bull markets and bear markets caused by different economic, social, and medical-related factors throughout history.

The most recent Bear Market occurred in March 2020 when the S&P 500 dropped about 35% as the COVID outbreak took hold and sent fear rippling through the stock market and world.

Those fears quickly resided, and stock markets are now reaching record levels.

That said, as an individual investor, it’s best not to panic buy or sell. Individual investors should maintain a well-diversified portfolio to be prepared to weather all market conditions.