Conway Wealth Group
Michael Conway, CFP®, ChFC® is founder and CEO of Conway Wealth Group LLC, a premier, independent financial planning and advisory group.
As a successful and well-respected financial advisor, Michael has spent more than 30 years providing specialized solutions that blend financial and estate planning strategies with open architecture investment management. Michael has been recognized by Investopedia as one of the 2017 top 100 most influential advisors in the country.
Michael’s clients include entrepreneurs, CEOs, Wall Street professionals, professional athletes, and others. In tandem with family-office style planning and investment management, we steer clients toward Aligning Life & Wealth®. Through our Alignment Index™, we quantify not just investment gains, but gains in the categories of life that actually create lasting happiness and a Life Beyond the Numbers™.
Michael is frequently looked to as an expert in financial news media, and has been featured in various publications, including Barron’s, the Wall Street Journal, Investment News, and Investor’s Business Daily, among others.
Michael has three children and lives in New Jersey with his wife, Leslie. He enjoys church, backpacking, scuba diving, and horseback riding.
The American College (ChFC)
The College for Financial Planning (CFP)
Investment advisory and financial planning services offered through Summit Financial, LLC, an SEC Registered Investment Adviser, doing business as Conway Wealth Group, LLC. 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax 973-285-3666 Direct Office Tel. 973-285-3640
You’re suggesting that equity prices should not fluctuate based on free markets, but based on the fundamental performance of a company. Our entire economy, along with stock valuation, operates within the core concept of free markets and a society based on capitalism. This means that the forces of supply and demand determine price. Butter at the grocery store is not priced directly because of the quality of the butter. It’s priced based on the amount of people (demand) wanting to buy the butter. The quality of the butter influences that demand, but it does not directly determine price. The same is true in equity markets. A company’s financial quality (based on a fundamental analysis of the balance sheet and cash flow) will influence demand, but it’s the actual demand (or lack thereof) of shares that will directly affect daily prices.
It’s also important to understand how the concept of speculation plays a role in equity market prices. Buyers of stock certainly care about the financial fundamentals of a firm, but they might care even more about whether or not they anticipate the price of the stock to increase in the future. This expectation could be based on many factors, including firm innovation, anticipated sales growth, acquisitions, etc. As buyers enter the market because of these expectations, demand has increased, driving up the price of the shares. There are many, many other factors that could influence the decision making of buyers and sellers in all markets within the structure of our economy, each ultimately playing a role in prices. Our economy is simply not a system in which prices are solely fixed based on fundamental/mathematical factors. It’s also important to understand that the system isn’t without its flaws. Various forms of price manipulation—either illegal or legal—can affect the “freeness” of the market. However, creating a new system of prices based on a strict mathematical equation, whether via the generally accepted accounting principles or otherwise, would be nearly impossible to regulate and might not serve the needs of investors. The complexity of equity market prices is a key reason why investing is extremely difficult for any “do-it-yourself” investors, particularly investors unable to construct diversified portfolios that properly fit their needs.
It’s always great to hear when young people are looking to begin the process of financial education and securing finances for the future. We often discuss this issue with our older clients, as the financial literacy of their children often lacks what might be required when they receive an inheritance. In fact, a 2014 FINRA study showed only 18 percent of young millennials (ages 18 – 26) were able to correctly answer just four or five questions of a financial literacy quiz. We’re glad to hear you're well on your way to boosting those numbers.
In regards to your question, a few key points jump out. First, you’re young. Second, you want to “park your money” and “earn money over time.” Finally, you are looking for low risk. These considerations are great starting points to begin to create an appropriate portfolio. Long-term investing can be a great approach to achieving long-term financial goals, and the sooner you can begin to both save and invest, the better. When you say you want to “park your money,” that typically relates to wanting to put money in a money market, which essentially means you want to put your money in cash because you expect to need it in the short term. I suspect that you really mean you are looking to invest for the long term with more of a “hands off” approach. Money managers consider this passive investing, or the process of applying sound research to an initial investment design, followed by limited buying and selling for the sake of appreciation over the long term. This is different from an active investor, who might try to time the market, buying and selling more rapidly to capture gains (or losses) from short-term price changes. A passive approach would require a longer time horizon (which you have since you’re young) and a well-diversified portfolio that could withstand shorter-term market downturns.
The discussion of the risk and reward balance is more complex, as it (and various other factors) very much defines what type of investment products are most appropriate for you. You mentioned you have a low risk tolerance, which could mean you couldn’t tolerate a dramatic dip in the value of your investment. However, if your risk tolerance is too low, more conservative investment strategies may not provide enough growth in your portfolio to achieve your long-term needs. In general, the younger you are, the more risk you can assume, since your portfolio will have time to make up any short-term losses.
With all that said, you’re still too young to be too worried about your long-term financial needs. Now is a good time to start to experience the process so you are better prepared in the future. You mentioned stocks, ETFs, and mutual funds. In general, investing in a few individual stocks is more risky than investing in a mutual fund or ETF. Mutual funds and ETFs are products with various holdings within the one investment. In other words, these products tend to provide generally less inherent risk and more of the diversification needed for your long-term mindset. Meanwhile, selecting individual stocks with higher risk can get you in the habit of paying attention to company fundamentals. There are essentially unlimited options, especially because of your age. There are several online “robo” platforms that would suit your needs, but as your assets grow, you should definitely consider speaking with a financial advisor. As you get older and begin a family, it will become more important for your portfolio to properly reflect your current investments, financial situation and needs, tax status, investment objectives, investment experience, time horizon, liquidity needs, and risk tolerance.
To be clear: The selections you’ve provided are not stocks, but are indices—or baskets of stocks—that attempt to benchmark certain parts of the overall stock market. The S&P 500 Index contains the stocks of 500 U.S. large-cap companies across various industries. The Nasdaq 100 Index contains 100 of the largest, most actively traded nonfinancial U.S companies listed on Nasdaq. A few major factors set the Nasdaq 100 apart from the S&P 500: The Nasdaq 100 doesn’t include financial companies, is more heavily weighted in technology companies, and has fewer stocks (and therefore less diversification). This generally means there is greater risk investing in the Nasdaq 100 versus the S&P 500.
It’s not totally clear how your company offers these two options. It’s possible that you’re referring to your company’s 401k program, in which you can select a particular allocation for your portfolio to which you and the company contribute. It’s also not clear what exactly the company is offering, since again, the Nasdaq 100 and S&P 500 indices are not actually investment options, but are benchmarks. Certain mutual and exchange-traded funds exist that attempt to mirror the performance of these indices. Let’s assume that your firm is offering two such funds.
It’s impossible to know what choice is best for you without knowing various factors, including, but not limited to, your age, other current investments, financial situation and needs, tax status, investment objectives, investment experience, time horizon, liquidity needs, and risk tolerance. In general, the Nasdaq 100 is riskier than the S&P 500. Determining how much of that risk to take on would reflect all of the factors I just listed. The broader issue is that neither of these options offers diversification beyond equity markets. Though it may make sense to have a blend of these two indices, you don’t have any exposure to other safer assets, particularly debt (bonds), which might mean you should maintain a substantial cash position in your portfolio (particularly if you are older). I recommend speaking with an advisor who can determine your needs, goals, time horizon, etc. to best determine proper allocation.
You’re wise to question markets in the context of supposed historical norms, since we have not experienced market dynamics like this in the history of money. It’s clear we’re in unprecedented territory when the Dow drops more than 300 points because of a possible Federal Reserve member speech. Investors can no longer rely on economic trends or company fundamentals to better understand market movements as stocks instead now move at the beat of central banking policy. You’d think weak economic data might make equity investors pause. Instead, we’ve entered some sort of parallel universe where bad news is good news. When the August jobs report came in well below expectations, stocks rose, since the data meant the Fed might maintain its accommodative low interest rates.
Here’s the real problem: To truly avoid the market uncertainty you’ve addressed, an investor would historically put his or her money in cash. Today, that money would earn next to nothing, essentially banking a loss if you consider that inflation is running near 1%. Central banks accomplished their goal: To steer investors into equity markets and ensure they never left. Despite economic stagnancy, equity benchmarks are near record highs. Trying to determine whether or not markets will break from very long-term trends is a fool’s errand. Making that bet might only result in missing out on a long-term (albeit moderate) growth trend across your time horizon. For all we know, central bank policy will keep the current bull market afloat for years.
We don’t recommend day trading as an alternative. Fear compels investors to sell out of positions, locking in significant losses and missing positive day-to-day reversals. When the market heads higher, greed forces those same investors to buy back into markets too late. They miss the upward correction, only to lock a loss at the bottom and pay a premium at the top. Even investment manager “gurus” that attempt to time the market have continuously proven the failures of such practices. Frankly, unless you have serious trading experience, you might as well bring your money to Vegas and put it on red (Read: Normalization: How A Rational Market Downturn Yields Irrational Fear.)
You mentioned savings. As we said above, your money in the bank can’t currently keep up with inflation. However, we believe maintaining cash reserves is essential, particularly to lower your overall exposure to risk assets and to ensure you have the liquidity necessary to endure any market downturns. Considering the myriad issues you acknowledge in your question, we think saving in tandem with a well-designed, well-diversified, long-term portfolio still best sets up investors for financial success. Ultimately, you should shift your focus to your life rather than these financial stresses. The percentage of growth in your portfolio should not define your happiness. You should consider finding an experienced financial advisor that can help guide you toward aligning your life and wealth.
The most important part of the answer is probably the most obvious, but warrants particular attention: Slow down your credit card spending. One of the most efficient ways to cut into your debt balance is to avoiding increasing it in the first place. The best strategy to cut spending is to first understand and then manage your spending by creating very specific monthly budgets. You’ll quickly begin to notice some totally unnecessary or frivolous outflows, particularly costs set up through autopay, that you can cut out of your budget entirely. By limiting and closely monitoring your spending, you’ll be well on your way to cutting the debt.
Another thing to consider before actually paying the debt is the way in which you use your cards. It’s important to be very smart about where and how frequently you spend on each card. For example, you may choose to spend more on a particular card because it offers the best in rewards points, but chances are that card also has the highest interest rate or yearly fees. You might also consider pausing credit card spending altogether by choosing to pay in cash for a certain period, if possible.
In actually paying down the debt, you more than likely will need to pay significantly more than the minimum payment to quickly cut the debt. The first key is to focus on the card that costs the most in interest per month. While this would typically be the card with the highest rate, it may instead be the card with a lower rate but higher debt balance. Check your monthly statement to see which card is hitting you the hardest, then go after that card first. This doesn’t necessarily mean you should focus on this card until it’s completely paid down. If you pay down a card to the point that another card begins to cost more a month, consider switching your payment focus.
When it comes to deciding what amount to pay down on a monthly basis, that process again comes down to budgeting. Once you have that monthly budget in place, you’ll know exactly what’s left to apply to the debt. In general, the more you can pay down, the better. If you can pay down multiple cards at once, even better. It’s important to try to use incoming funds to pay down the cards, rather than dipping into any savings that you may need in an emergency.
There are other options to consider, including contacting your card institution to at least ask about lower rate options. It may also be possible to transfer balances from a card to another card (at the same institution) with a lower rate. It’s best to speak with a card rep to understand the fine print of what a transfer may cost. There is also the option of a personal loan, which certainly comes with its own risks you’ll need to consider. Before even considering a personal loan, make sure the loan has a significantly lower interest rate than your current credit card debt. Keep in mind that you should only consider a consolidation method if you believe you’re unable to pay off the debt at your current rates and that you actually plan to tackle the debt burden.