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.
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.
There are various ways to gain exposure to different corners of the market. Determining an investment type (i.e. stocks, bonds, ETFs, mutual funds, etc.) and segment of the market greatly depends on what you are trying to accomplish and when. For example, traders or “stock pickers” look for trends in the market to exploit. Such a trader might look to invest in energy stocks, which have recently taken a hit as a result of low energy prices. However, there can be significant risks to market timing and stock-picking, especially for “do-it-yourself” investors that don’t have enough access to important information, the expertise to make timed investment decisions, or the restraint to avoid reactionary, emotional trades.
Instead, we generally suggest investors create balanced, diversified, and long-term portfolios. You’ve listed several sectors for stocks. Creating a portfolio that includes some of each will help you build diversification, but consider adding other sectors like financial services, real estate, technology, health care, and utilities. Instead of trying to select individual stocks, you can more easily create diversification using mutual funds or ETFs, which have various holdings within one investment and tend to present generally less inherent risk than individual stock or bond positions. Keep in mind, the first layer of diversification is asset type. You asked about stocks, but building diversification requires exposure to fixed income (bonds) and other assets. The exact blend needs to reflect your needs, time horizon, risk tolerance, and other factors. You then need to think about gaining exposure to different regions. If you want exposure to energy equity, for example, understand that there are energy companies all over the world.
You asked when you should take profit from the portfolio. The short answer: not until you need to. In other words, we suggest reinvesting any gains in your portfolio so that the value of the portfolio continues to grow over time. If you pull funds from the portfolio, you can cut into the principal, which erodes your total growth potential. The portfolio may experience shorter-term highs and lows, and certain parts of the portfolio will outperform others. But a long-term “buy and hold” strategy has historically proven a very effective strategy to build wealth. This doesn’t mean you should never touch an allocation. Broader trends in the market will make it necessary to tweak your exposure.
Before making any decisions, we strongly suggest you speak with a financial advisor.
While this is conceptually possible, it’s impossible to determine whether this is feasible for you without knowing factors like your portfolio allocation, your savings rate, your spending rates, future needs, future goals, etc. More important, the premise of your question highlights a common misconception of how to build portfolios for long-term capital needs. Building portfolios solely to generate “interest” or income can be a tremendously dangerous approach, particularly in a market with severely depressed interest rates. Aside from extremely wealthy individuals, income from a portfolio often cannot meet spending needs.
Some investors tend to prefer spending only income rather than both income and growth because of a behavioral finance flaw referred to as “mental accounting.” People tend to want to use “new” money gained without ever touching the original asset. Think of a gambler that wins in a casino. The gambler, like the investor earning income, did not have that money before, so he’s more inclined to play with “house money” and not with the money he originally brought to the casino. It’s the same reason we’re more likely to pay for our vacation using our tax refund rather than our savings. In reality, money is fungible, meaning its inherent value doesn’t reflect how or where the value originated. Therefore, we shouldn’t compartmentalize the way in which we spend assets. Whether we spend our tax refund or prior savings on that vacation is irrelevant—we still end up paying the same amount of money.
In portfolios that grow over time, an investor can strategically harvest assets from the portfolio. For example, in periods of strong stock market performance, the investor might raise money from the appreciating asset. Unfortunately, investors that succumb to the mental accounting bias can’t fathom ever selling a position. However, portfolios solely designed for interest pose both overt and covert risks. First, reaching for income creates exposure to unique and specific pockets of risk in various segments of the economy. Second, these portfolios needlessly depress their allocations to growth assets, hampering the ability of a portfolio to grow over time.
Let’s use your example. You are young. Let’s say you currently need your portfolio to generate income of $5,000 a month to pay the bills. To successfully do so, your portfolio likely needs to assume significant risks, since interest rates are very low. More important, remember that income-based portfolios are less likely to appreciate in value. So let’s assume that 30 years from now when you decide to retire, your portfolio is worth exactly what it’s worth today. However, after 30 years of inflation, you now need $10,000 per month to pay for the same bills. Down the line, you’ll end up needing to cash out principal. Wouldn’t you rather have put a portfolio in place that both generated some income and grew in value over those 30 years?
An advisor can help investors avoid common biases and define reasonable strategies to take cash from a portfolio that reflect the financial goals and needs, as well as the portfolio size and structure. (Learn more here.) We suggest you discuss goals with an advisor who can properly structure assets and generate required cash flow needs to meet those goals, all while maintaining proper diversification.
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.