David Wattenbarger is the President at Drw Financial in Chattanooga, TN and has over 18 years of experience in the finance industry. He started DRW Financial as a fee-only financial advising and planning firm after working for twelve years “behind the scenes” in financial services, where he learned a great deal about how best to serve the needs of his clients.
David has found it valuable to continue learning, and earned his CFP® designation, as well as the Chartered Advisor in Philanthropy® designation, which aligns well with his desire to help clients align their financial lives with their own unique values. David's prior professional experience includes serving as a general principal, options principal, and municipal bond principal for an independent broker dealer, as well as extensive work with other financial professionals on a consultative basis.
David's personal values revolve around carving out quality time with his family and making the work he does worthwhile and valuable to his clients.
BA, College Scholars, University of Tennessee, Knoxville
Assets Under Management:
INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES PRODUCT, SERVICE, OR INVESTMENT STRATEGY. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER, TAX PROFESSIONAL, OR ATTORNEY BEFORE IMPLEMENTING ANY STRATEGY OR RECOMMENDATION DISCUSSED HEREIN
A ROTH IRA is one type of retirement investment account, and the ways is may grow are similar to many other types of investment accounts. There are three common ways for account balances to grow:
- Contributions: this is cash added to the account from other sources. ROTH and traditional IRAs have annual contribution limits that depend on age, income, and tax filing status, and up to the those limits the account holder can add funds they choose to commit specifically to their retirement goal
- Investment price gains: ROTH and traditional IRAs that are held with custodians that allow brokerage and market based investments may be exposed to the rising and falling market prices of the chosen investments. If a given investment rises in value, that portion of the IRA rises in value as well. Gains like these are considered "unrealized" until the investment is sold, at which time they are "realized" gains. In general terms, capital gains taxes on realized gains are deferred while the money is held in the IRA.
- Investment income distributions: some investments pay dividends, which are typically cash distributions from stocks held individually or within mutual funds in the portfolio; some investments, like bonds, pay interest. The distributions of cash may either accumulate in the IRA or be reinvested into purchases of existing or new positions in the IRA. As with the capital gains, the income tax on these distributions are generally deferred while the money is held in the IRA.
Some things that can slow the rate of growth in the account or even lower the balance would include: market losses, custodial fees related to holding the account at a particular custodian, internal expenses to a particular investment product (like with mutual funds, annuities, etc), transactional expenses to buy or sell investments (like commissions or ticket charges), and fees paid to an investment adviser.
Investing in common stock offers two primary ways to make money: realized capital gains and dividend payments.
- Capital gains come from buying a stock at one price and selling it at a higher price. In taxable investment accounts, these types of gains will typically result in a tax liability at potentially different state and federal rates depending on how long the stock was held before selling.
Choosing to buy and sell, or trade in and out of common stocks to realize capital gains may depend on a belief that the stock is "undervalued" at the time of the purchase and "fairly valued" or "over valued" at the time of the sale. This belief may require a thorough understanding of the company's place in the market and their management's execution on their business plan, among other factors.
- Dividends are payment made at the discretion of the company's management, and are generally paid out quarterly in the United States. Companies that consistently earn a profit have a choice between sharing some of that profit out with shareholders or "reinvesting" the profit back into the company's operations or plans for growth; many companies do a little of both.
When evaluating a stock investment based on the dividend, it may prove useful to research the following:
- How does the dividend yield compare to the overall market? If the dividend yield for a given company is much higher than that for other companies in the same line of business, or much higher than the dividend yield for a relevant index (like the S&P 500, for example), then the market may be treating the dividend of the one company as being at risk.
- Does the company routinely produce enough cash and net income for the dividend payment to look sustainable? Using the recent example of General Electric, who in November 2017 cut their dividend payment in half, one can see that dividends and dividend yields are subject to change.
There is a world of information out there, and much of it is helpful in making prudent decisions. At a minimum, if your plan is to make your own investment choices, you should become very familiar with these concepts:
- Diversification. In general terms, this describes how concentrated or "spread out" your exposures are to specific companies, sectors of the economy, or particular risks (like interest rate sensitivity, for example)
- Asset allocation. This relates in some ways to diversification, and is about how the different types of assets available in the investment markets (stocks, bonds, funds holding real estate or commodities, etc) interact with each other. Much research points to the value for investors using an asset allocation model to tailor their investment approach.
- Risk tolerance. Each investor has a particular tolerance for financial risk, informed by a combination of financial capacity, time horizon (see below), and psychology. Defining your own tolerance for risk, and allowing that understanding to influence your investment choices can help you choose an investment strategy you are more likely to stick with over time.
- Time horizon. This is a core component of goal planning and risk tolerance, and essentially addresses how long you have between now and when you hope to meet your investing goal. For example, if you are 30 years old now and plan to retire at 60, the time horizon for your retirement goal would be 30 years. The time horizon may make it clear that certain investments do or do not make sense for a particular goal.
- Active and passive investing. Active investors tend to make ongoing decisions about what to buy and sell based on evolving valuation beliefs, while passive investors tend to set up a portfolio based on an asset allocation model (or similar approach) and let it ride, perhaps with periodic "rebalancing". Both types of investors can use "index funds", although sometimes "passive" and "indexed" are conflated terms.
SIMPLE IRAs have a peculiar rule requiring a two year wait between the initial contribution and rolling money out or transferring to another or different type of IRA. After that, there are two main steps: the SIMPLE IRA funds need to convert to ROTH funds by paying income tax on the amount originally deferred (and reporting that conversion on your tax return), and opening the ROTH IRA at your chosen custodian to take the net proceeds from the SIMPLE.
These are great questions, and it is not uncommon at all for people just getting started with an employer sponsored retirement plan like your 401(k) to feel some confusion at first.
While the details of each plan can differ, it sounds like your employer is incentivizing you to save in the plan by offering a matching contribution subject to a cap. Let's use some example numbers to help clear up what this means in reality. Say your salary is $50,000, and you feel like you have room in your budget to contribute 10% (or $5000) to the 401(k) plan in the first year. Your employer has said they will match 25% of your contributions (yay!), so that works out to another $1250 (this is $5000 / 4). Then, the next year you want to step up your savings a good bit and decide to contribute $10,000 via your own contributions; 25% of that number would be $2500 from your employer, but this is where the 4% cap comes in -- 4% of your $50,000 is $2000, so your employer's match would "cap out" for that year at $2000.
The choice between investment options is a more complicated conversation, and the "best" choice for you will likely be influenced by your age, your likely career progression, your personal appetite for risk, your potential needs for liquidity, and a number of other variables. At the most generic level, you may wish to sort the available investment options by embedded cost (some mutual funds and Exchange Traded Funds cost more than others) and attempt to create a blend of stock and bond investments that suit your risk tolerance. Again, in very generic terms, "growth" funds tend to hold mostly stocks and are designed to target a larger increase in value over time, albeit with more risk and volatility along the way. "Income" funds or strategies tend to select more bonds or dividend paying stocks; these are generally considered less risky, and with less perceived upside potential.
In any case, you may find it very valuable to speak with a trained financial planner who can help you assess the actual investment options available in your plan and work out a strategy to optimize your use of that plan within the larger framework of your financial life.