Financial Plan, Inc.
James (Jamie) Twining is the founder of Financial Plan, Inc., and a CERTIFIED FINANCIAL PLANNER™ practitioner who works with an exclusive high net worth client base. Jamie has a niche advising BP Cherry Point refinery employees.
A graduate of the University of Southern California and a devoted husband and father, Jamie enjoys spending time with his family, leading the choir at Sacred Heart Church and outdoor sports including mountain biking, scuba diving, and an annual surfing trip to Mexico.
His favorite pastime on a rainy winter’s night is to sit down with his son Gabriel, open a bottle of fine Pinot Noir and play a game of chess.
To be consistently profitable, my advice is to be an investor, not a day-trader.
Day traders make money by trading securities based upon their forecasts of future price movement. The trouble is that no one can predict future price movements. Day trading is quite akin to gambling, including the "house odds", which for the day trader are the costs of trading. Most day traders lose money over time, just as most gamblers do.
An investor does not make money by trading, but rather by owning profitable companies. A widely diversified portfolio of equity securities held over long time periods is almost certain to increase in value.
If you decide to day trade, I would do it as entertainment. For me, it is not so entertaining to throw money away on day trading schemes or slot machines.
First, determine whether your advisor is a securities salesperson or a fee-only advisor. Here are some clues that can help you: If your advisor has the title "registered representative", or if you see the phrase "securities offerred through..." then your advisor is really a salesman. A salesman is not qualified or paid to give advice. It will be difficult to determine what you are paying, because the brokerage industry is quite experienced at hiding compensation numbers. Regardless of what you are paying to a salesman, the value is questionable, because the true cost of buying and selling investments is near $0, and the "advice" is typically given as a tool to steer you into the investments being sold.
If instead, you see the words "fee only", or NAPFA member, then you have a fee-only advisor. This advisor is a fiduciary, and is qualified and paid to give advice. A fee only advisor is typically transparent with fees, and it should be easy to figure out how much you are paying. There are a few different ways that advisors charge, but far and away the most common is as a percentage of fees under the management of the advisor. Typically, a fee-only advisor charges in the range of 1% for the first million dollars, and lesser percentages for amounts over that. This fee should buy you more than investment management. It should include advice on your entire financial life. The advisor should oraanize your finances through financial statements, projections, and written action plans. The advisor should also coordinate a team of professionals that advise you in the areas of lending, insurance, income taxes, and estate planning.
You should see the fees being deducted from the money market portion of your accounts on a monthly or quarterly basis. To find a fee-only advisor's fee schedule , evaluate the firm's ADV form, which can be found at https://www.adviserinfo.sec.gov.
I would caution you not to make predictions as to the future price of anything. Rental real estate may be priced highly in your local market relative to the past, but that is not what matters. What matters is the unanswerable question; are the prices high relative to where they will be in years to come? No one knows. Don't ever let any market surprise you, it is altogether possible that the prices will continue to rise.
The same applies to mortgage interest rates. No one knows if they will rise or fall from current levels. Don't be surprised if they fall. It is true that the fixed rate mortgage carries less risk for you if the objective is positive cash flow for the long term.
I find it extremely unlikely that lenders will discontinue fixed rate mortgages. My advice is to actively seek attractively priced properties without regard for opinions as to whether real estate prices or mortgage interest rates will rise or fall.
I agree with your advisor that a lump sum is advisable.
If the objective is to reduce risk, dollar cost averaging is a temporary solution: once the periodic purchases are made, you will be fully invested anyway. A better way to reduce risk is simply to revise the equity exposure downward to perhaps 40% or even 30% equities. However, the 50% equity exposure is already more conservative than I would like to see for someone who is just now retiring.
Don't let the all time highs scare you: the market is often at all time highs, and when it is, statistically, it is higher after one year's time. (About 73% of the time, historically).
Disclaimer: obviously, if the market falls during the period of time over which you are averaging, you would be better off than if you had invested the lump sum at once; but no one can predict the future direction of the market. Because of the upward bias in the market, your odds are better simply investing all at once.
Great Question! It illustrates the mental anguish that so many go through when attempting to forecast future market prices. I encourage you to study the Efficient Market Hypothesis and the work of Eugene Fama and Kenneth French.
For now, I will give you the Executive Summary: The prices of publicly traded securities reflect all publicly known information and all expectations for the future. The market prices of securities, and by extension entire markets, is the best indication of fair value.
In other words, GDP growth, earnings, QE, interest rates, and hundreds of other factors are already baked into current prices. The current price is a consensus price, arrived at an auction with millions of participants. What moves prices are future, unknown events. By definition, they are unknowable and unpredictable. At every moment, 50% of market participants believe a security is undervalued, and 50% believe it is overvalued. The moment that a future positive event causes more than 50% of market participants to believe that a security is undervalued, it will appreciate to the point that the opinion is split 50/50 once more. This happens in the blink of an eye, and cannot be effectively exploited by investors. The moment a negative event causes more than 50% to believe that a security is overvalued, it will depreciate.
An entire industry has been built around the notion that future prices can be predicted. A newsletter author is not going to sell copies if he agrees with me. Pundits and commentators who don't make forecasts are boring and will not command an audience. Mutual fund managers who admit that they can't beat a monkey with a dartboard are out of a job in a hurry. Yet the reality is that prices of securities and markets cannot be predicted, period. The clear over-performance of index funds is solid evidence of this.
There are facts that we can prove and rely upon regarding securities and markets that are helpful to us as investors. For example, markets have an upward bias. Certain types of securities tend to appreciate more than others. But unfortunately, predicting future prices is a fool's game, and in my opinion should be avoided.