Conway Wealth Group at Summit Financial Resources Inc.
Michael Conway is founder and CEO of Conway Wealth Group LLC at Summit Financial Resources Inc., a premier, independent financial planning and advisory group. He is a Principal of Summit Financial Resources and serves on the company’s Board of Directors.
As a successful and well-respected financial advisor, Michael has spent more than 30 years building his own practice and providing clients with specialized solutions that blend financial and estate planning strategies with open architecture investment management.
Michael’s clients include successful entrepreneurs, corner office executives, CEOs, CFOs, Wall Street professionals, professional athletes, and others—all with significant wealth tied to their businesses or employers. Michael is creator of The Conway Integrated Wealth Solution™, a unique financial planning process that aligns families' wealth with aspirations and financial goals.
Michael is a member of the Financial Planning Association, and has earned Certified Financial Planner® and Chartered Financial Consultant® credentials. In addition, 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, and two dogs. He enjoys church, backpacking, scuba diving, and horseback riding.
The American College (ChFC)
The College for Financial Planning (CFP)
CONWAY WEALTH GROUP, LLC is owned by Michael W. Conway who offers securities and investment advisory services through Summit Equities, Inc., Member FINRA/SIPC, and financial planning services through Summit Equities Inc.’s affiliate Summit Financial Resources, Inc. 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax 973-285-3666 Direct Office Tel. 973-285-3640
Wealth Protection & Financial Planning for High Net Worth Families | Michael Conway Story
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’ve made a smart decision to at least begin thinking about investing, particularly because your money will not grow at current, near-zero interest rates if it’s parked in a bank savings account. Right now, the cost of inflation exceeds what you’re earning in the savings account, which essentially means you are losing money over time on a net basis. Meanwhile, without knowing all the facts, it’s possible you should use the savings to pay off any substantial, high interest debts. In addition, it’s very important that you set aside money in a checking or savings account for any emergencies. The general rule is that you should hold three to six months of expenses. Since you’re earning next to nothing in the bank, we might suggest keeping three months’ worth. So, for example, if your expenses total $8k per month, you should keep around $24k in your account. To consider your investment options, let’s assume you have paid down your high interest debts and have already set aside your emergency funds.
First, you mentioned you’re considering a CD. As a result of the Federal Reserve-induced low interest rates, your real return (factoring in inflation) on a CD would be minimal. You also mentioned your concern about the economy. People tend to hyper-focus on current economic or markets conditions rather than their own needs and goals. Try to refocus on yourself and your long-term objectives, rather than the “noise” in the market. In other words, a CD is a very low risk investment, but it might not reflect what you are trying to accomplish with your money in the long term. For example, people often invest in CDs with short time horizons, meaning you earn interest on the money for several years until you receive the principal back. Your investments must reflect your needs, risk tolerance, time horizon, etc.
In knowing all the important factors, an advisor can help you align your money with your life. We believe in creating long-term, balanced, diversified portfolios. In other words, we believe a portfolio should have a mix of equity (stocks) and fixed income (bonds), among other asset classes, and the mix should reflect all of the factors about you we discussed above. In addition, these positions should create diversified exposure, meaning the companies are from all over the world and in various industries. To build diversification, mutual funds and ETFs (exchange-traded funds), for example, have various holdings within one investment. In other words, these products tend to provide generally less inherent risk than individual stock or bond positions and more of the diversification needed for a long-term mindset.
Before making any decisions, we strongly suggest you speak with a financial advisor.
We always appreciate when young people seek financial education. To start, we think the choice to open the Roth might make sense, particularly if you expect to fall into a higher tax bracket by the time you retire. However, your contribution limits begin to decrease if your income begins to grow into a certain range. For single filers in 2016, contributions are limited starting at an income of $117,000 and reaches zero at an income of $133,000. In other words, if you expect to make more than this going forward, you should consider opening a traditional IRA.
Before any investment choice, make sure your personal finances are squared away. It might be worth it to at least partially pay down any significant debts with high interest rates. It’s also wise to first contribute the maximum amount to a 401(k) plan (if available), especially if your company matches contributions. When determining an investment choice, you should consider your risk tolerance and the balance of risk and reward for each product and asset class. Stocks, for example, are generally riskier than bonds. This becomes increasingly important as you get closer to your retirement. 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.
You mentioned VFINX. Vanguard is a strong company with a great track record. However, you need to understand the composition of any mutual funds you consider. VFINX is almost entirely composed of large U.S. company stocks (over 500), including Apple Inc. While mutual funds or ETFs tend to provide generally less inherent risk and more diversification than individual stock positions, purchasing just this one fund would mean your portfolio would consist of just one asset class. Although your age suggests you can handle this degree of risk, we believe any portfolio should have a mix of equity (stocks) and fixed income (bonds), among other asset classes. In addition, these positions should create diversified exposure, meaning the companies are of different sizes, are from all over the world, and are in various industries. To create some degree of diversification, consider investing in other mutual funds. A small investment in VBMFX (a Vanguard bond fund), for example, can begin to provide some balance.
Although the VFINX fund provides exposure to Apple Inc., selecting individual stocks can get you in the habit of paying attention to company fundamentals. However, as mentioned above, you should consider spreading the money to a few other funds instead.
You mentioned Lending Club. We don’t know enough about this particular product, but various financial regulators have recently looked into the company’s investment process. Becoming a creditor in a brand new business model that could face regulatory changes may not be the most effective long-term strategy.
As your assets grow, you get older, and you begin a family, consider speaking with a financial advisor. 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.