A believer in continuing professional development, Eric Dostal obtained the CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) designation, and graduated with a JD from St. John’s University School of Law. Eric recognizes the challenges investors face when planning their retirement and therefore he helps clients retire when and how they would like. Eric focuses primarily on providing affluent and high net worth individuals with expert, comprehensive and impartial financial planning advice to help those individuals achieve their unique life goals.
After joining Sontag Advisory in 2013, Eric has worked extensively with clients over the past 4+ years to create and implement their unique financial plans. Eric has demonstrated a high degree of skill developing and overseeing the investment, insurance, retirement, tax and estate planning strategies of his clients.
Eric currently lives in Merrick, New York with his wife Jamie and daughter Madeline. When not in the office, you can often find him spending time with family and friends. He also recharges by sitting down with a good book and honing his culinary skills.
JD, St. John's University School of Law
B.A. - History, SUNY Geneseo
I will give you three pieces of advice. First, pay yourself first. Before you spend any money on food, clothing, housing, entertainment, vacations, whatever you can think of, be sure you have put aside something for yourself. It is best if you set up an automatic transfer that corresponds to your paycheck deposit. Even if the amount is small, get into the habit of saving regularly and consistently at the beginning of your career. This habit will reap huge dividends for you in the future.
Second, invest your savings prudently. As your savings balance grows, many individuals will come to you with ideas of how to invest your money for the future. Be sure to take a critical eye to all of these proposals. Ask as many questions as you can. Decipher how the person you are speaking with is paid. Ask them to explain their underlying assumptions, go beyond the materials presented to you and dig into the details. Ask if they invest their own money in this way, and if the answer is no, ask why. Many individuals are highly experienced in personal finance and have the tools and the knowledge to guide you on the right path. It is your responsibility make sure that the person you are working with is one of these individuals.
Third, appreciate your greatest asset, time. Right now, the most powerful force you have going for you is time. The dollars you invest today will work and grow for you for the rest of your life. Those dollars will earn more dollars, which will, in turn, earn more and more. This phenomenon, known as compound growth, is extremely powerful, but it takes time. Know that this is a lengthy process, do not get discouraged, and enjoy the ride.
It is easy to get caught up in the daily media coverage about rising interest rates and bond returns and forget why you own bonds to begin with. Fixed income serves two equally important roles in a portfolio: 1) to provide return, and 2) to manage portfolio risk. With rates as low as they are, the expectations for short term future total-returns from fixed income are quite low. However, this is not a good reason to shift assets away from bonds and into riskier assets because it ignores the risk management and diversification benefits of bonds.
A portfolio holding a mix of high quality and diversified bonds plays a critical role in managing portfolio risk, regardless of the prospects of future returns. Predictions of interest rate movements are no better than stock market predictions. Investor's should implement a consistent, diversified, long-term allocation that can weather different types of interest rate environments and conforms to your ability and willingness to take on investment risk. If interest rates rise quickly, the value of a high quality bond portfolio will decline. However, monies are continually reinvested at the new, higher rates as coupons are paid and short-dated bonds mature. As a result of this, history has had very few multi-year holding periods of high quality bonds with negative total returns. Even during a historical period of skyrocketing rates, high quality bonds have still been far less risky than stocks.
The allocation of your portfolio will depend on your investment time horizon, financial goals, ability to take on risk, and willingness to take on risk. There is no one size fits all portfolio allocation. However, all but the most aggressively allocated portfolios have a place for a bond allocation.
First, congratulations on graduating! I’m going to take your questions one by one:
-Where do I find a financial adviser?
If you choose to work with a financial advisor I would recommend using a CFP® Professional. As outlined on the website: “Certified Financial Planner™ professionals have completed extensive training and are held to the highest ethical and educational standards. CFP® professionals understand the complexities of the changing financial climate and will make financial planning recommendations in your best interest.”
-How in the world do I pick the right one if I go this route?
You need to find someone you are comfortable with and who has the knowledge to help you. You should choose someone who has a fiduciary responsibility to you, meaning they must put your interests ahead of their own. I would look for someone who is a fee only Advisor, does not get paid on commissions, and who is employed by or registered as a Registered Investment Advisor (RIA). These factors are not the only thing that matters, but it is a good starting point for interviewing advisors to see who would be a good fit for you.
-Does a financial adviser help with investments or is that left to wealth managers?
A comprehensive financial advisor will help you will all aspect of your financial life, from setting up the investments in your portfolio, to creating a financial goal plan to meet your needs, to providing insurance and tax advice.
-Taxes- (I know next to nothing about taxes) would a financial adviser help with taxes?
Yes, a financial advisor should help you with tax planning. The level of planning necessary will vary depending on the client’s particular situation. Some financial advisors prepare tax returns for their clients, others work closely with the accountant to provide the information necessary to prepare your return. Generally, it is the financial advisor’s responsibility to understand their clients’ individual tax situation and to recommend actions that will benefit them.
-I always seem to hear about more and more investment tools beyond the simple 401(k) or IRA/Roth IRA, what are the ones I need to know about and utilize?
You have mentioned several types of “retirement” accounts. These accounts are tax-advantaged plans that derive their existence from the Internal Revenue Code. There are other types of retirement plans, (Simplified Employee Pension Plan (SEPP), Cash Balance Pension Plans, 403(b), 457(b), 457(f), Keogh, etc.), which you might have access to. Generally, these types of plans are only available through an employer or if you own your own business.
-I own a decent car. Should I sell it, put the proceeds to work in the markets and take on a monthly payment?
What you would essentially be doing is leveraging your portfolio, which can be a risky move. You would be borrowing money to make an investment, at historically low interest rates, which could lose value. I would not recommend selling your car to invest in your portfolio. Now, if you decided to trade in your car for a cheaper model, I would suggest you put the excess you received in an emergency fund until you have about 6 months of living expenses saved.
-If I did something like that, should I buy or lease?
I always recommend buying a car rather than leasing, but that’s generally because I try to keep cars until the transmissions falls out of them. If you like to change your vehicle often, don’t drive very much and don’t want the responsibility of ownership, than leasing can be a good idea. Very often though it works out to be more expensive to lease a vehicle than to own one.
-I want to diversify my investments outside of the stock market, but it seems like that's the only readily accessible vehicle to do so. How and what else should I look into?
There are many asset classes outside of the US stock market that you can invest your dollars in. A well-diversified portfolio should be constructed out of an asset mix that uses both US and International Equity, Fixed Income (Bonds) and Alternatives. However, the asset allocation of an investment portfolio (the percentage invested in stocks, bonds and alternatives), is far more important in driving your returns and volatility than any individual security or fund selection is. When selecting a proper risk profile we look at two primary components; risk ability and risk willingness. Risk ability is focused on your ability to achieve your financial goals based upon a certain allocation. Risk willingness is focused on your emotional level of comfort with volatility throughout different market cycles.
-Is there an entry level way to take advantage of the incredibly low interest rates currently available?
We talked about leverage already, any amount that you would borrow to invest would be using leverage. I would recommend looking at possibly refinancing any student loan debt you may have. There are many companies out there that are offering competitive refinance opportunities.
-What % of my take-home pay should I save, invest on my own, put into a 401(k), etc.
First, you need to establish an Emergency Fund in cash to cover 3-6 months of non-discretionary spending. Once you have this established, you should contribute to your 401(k) an amount equal to your company match. If after that you are still able to save more, I would generally recommend increasing your contribution to your 401(k) until you reach the maximum. This can change depending on your individual goals. For example if you wanted to start saving for a down payment for a home or to start a business those funds should be saved outside of retirement accounts.
-What should I do to earn and improve my credit?
You need to open credit lines (credit cards), use them to make purchases and pay your statement balance in full when it is due. By establishing lines of credit, using that credit wisely and paying on time you will improve your credit score.
-How many credit cards should I have?
Generally I would recommend having between 1-3 credit cards to build up your credit score.
-What % of my available credit line should I spend?
You should aim to keep your outstanding credit between 1-9% of your total amount available. Again, you should pay off the full statement balance each month.
I hope that I have been able to answer some of your questions. I understand that taking on these items is a large undertaking, especially when you don’t have a background in the subject matter. Keep asking questions, it’s the best way to make sure you are getting the right answers.
Your question illustrates the difference between two forms of investing, dollar-cost averaging (DCA) and lump-sum investing (LSI). As outlined in a Vanguard white paper, “On average a LSI approach has outperformed a DCA approach approximately two-thirds of the time, even if results are adjusted for higher volatility of a stock/bond portfolio versus cash investments.” The reason for this is that the longer dollars are invested in the market, the longer they have to compound.
If you are confident in your portfolio allocation, understand your investment time horizon and are seeking the potential for maximum returns then you should put your dollars to work as soon as possible. If you are more concerned with loss avoidance and avoiding feelings of regret, then a DCA approach may be more appropriate. If you choose DCA however, be aware that you are likely reducing your potential future returns for short term piece of mind, which actually is likely not that big a deal.
Also, it is impossible to consistently and perfectly time the market and trying to do so can have severe consequences. The annualized total return of the S&P 500 Index from January 1996 to December 2015 was 8.2%. If you exclude the 10 best performing days, during the entire 20-year period, the annualized return drops to 4.5%. And if you missed the top 40 days, again during a 20-year period, the annualized total return drops to -2.0%! The moral of the story is to determine your risk profile, allocate your investments, and get started.
A target date fund is really a proxy for your risk tolerance. Target date funds are designed to become gradually more conservatively allocated, less equity more fixed income, as you near and then surpass a set date – your expected retirement. The thought being that each year you are reducing your expected time-horizon which in turn reduces your ability to take on investment risk.
- The Vanguard Target Retirement 2010 Fund has a portfolio allocation of 33% equity and 67% fixed income.
- The Vanguard Target Retirement 2015 Fund has a portfolio allocation of 47% equity and 53% fixed income.
- The Vanguard Target Retirement 2020 Fund has a portfolio allocation of 58% equity and 42% fixed income.
Generally, a higher allocation to equity will increase the expected return of a fund, along with its expected volatility or risk, over the long term.
It is important to remember that your portfolio’s asset allocation should not simply be dictated based off a single data point, i.e. your retirement date. When selecting a proper risk profile we look at two primary components; risk ability and risk willingness. Risk ability is focused on your ability to achieve your financial goals based upon a certain allocation. Risk willingness is focused on your emotional level of comfort with volatility throughout different market cycles. To the extent that you feel comfortable taking on additional risk (by pushing out your target retirement fund date and thereby increasing your equity allocation) for the possibility of higher returns, I see no reason not to switch funds.
One caveat to this recommendation is if there would be a large tax burden to changing your investment. This may occur if you hold your investment outside of a tax advantaged account like an IRA or 401(k). If this is the case, you would need to consider the impact of those taxes on your overall financial plan before making a decision to switch investments.