How can my wife and I maximize our financial situation?
We are newly minted healthcare professionals with a combined gross income of $400,000. We are in the process of paying back a substantial student loan balance (~$260,000). We refinanced our loans to 1.95% over 5 years (~$4,000/month), so it's a relatively aggressive strategy to pay down our debt for the lowest interest rate we could find. We don't have any outstanding debt such as a mortgage, car, or credit card debt. However, we live in an expensive metropolitan city so our rent is high compared to the national average.
Her employer offers a 401(k) and a pension, while my employer offers a 403(b), a 457(b), and a pension. We've maxed out our retirement plans and are trying to save an additional $2,500/month. Also, our monthly savings will dramatically increase after we've paid down our student loans in 5 years. We could probably stand to be more aggressive with our after tax savings, but we like to travel.
We're not entirely sure we are ready to pull the trigger on buying a house in this market because housing prices are severely inflated. Plus, we're just not sold on the economics of purchasing a single family unit.
My question is, what investment strategies should we consider after maxing out our retirement contributions and the monthly savings we're currently doing? We've been using robo-advisors (e.g., Wealthfront) while we try to figure our next steps. Does anyone have any suggestions?
I would recommend avoiding the use of robo-advisors to create your long-term asset allocation. As a Chartered Financial Analyst (CFA) and a CPA, I have learned over the years that the metrics upon which traditional asset allocation methods and quant-based models used by robo's, which generally rely on backward-looking measures of 'correlation' are fatally flawed. As I'm sure you're well aware, rising geopolitical risk across the globe, the trend toward 'anti-globalization,' and unprecedented leverage across the international monetary system create a wide distribution of potential macroeconomic outcomes over the coming year (and beyond). Investors are only in the early, early stages of catching on. Volatility can be traded in the financial markets (as can just about anything), and currently sits at astonishing low levels as consumer confidence in the US has surged following Trump's election and subsequent announcement for pro-growth fiscal policy, defined by individual and corporate tax cuts and deregulation. This confidence has already begun to wane, and should only continue to do so in the coming months - in other words, the 'hope trade' is overdone.
So how would an individual investor take advantage of such an environment? Using history a guide, it's useful to note that insanity can continue for an extended period of time, continuing to drive rallying equity markets - but once confidence is lost, you don't get it back. You just don't. Markets tank, and not just the equity markets. You see, here's where the correlation measure gets investors in trouble: during episodes of financial panic, historical correlations break down entirely, and asset classes that historically exhibited low correlation (e.g. Stocks vs. bonds vs. commodities) suddenly move decisively in the same direction ... down, fast. For example, in 2008, you couldn't even find a buyer for investment grade corporate bonds for a sustained period of time. Even Treasuries were forced to be sold at fire-sale prices - any time debt overwhelms real economic growth for a sustained period of time, you may hear things like "it's just a liquidity problem." "Liquidity problems are virtually synonymous with insolvency.
Episodes of extreme financial panic happen roughly once a century, and curiously they're always driven by borrowings to fund over-consumption to the nth degree. This simply means we're overdue for the next financial 'breakout' - which could happen in 2017, 2018, only time will tell. But one thing is certain it WILL happen, it's simply a matter of WHEN.
You can capitalize on this by buying shares in the various long volatility ETFs. During the Crisis of 08/09, when equities fell 40%, the volatility index surged some 300%+. So you needn't own a TON of long volatility positions to reap large profits from a coming uptick in recognized volatility in the global financial markets -- if you do, you may reap handsome rewards. But if you're more risk-averse, you can buy, say, 10% of the portfolio in long volatility positions - while holding a significant positions in domestic SPDRs (I recommend the Biotech SPDR, Healthcare, and Technology, and strongly urge you to avoid Financial Services - the derivatives risk inside the world's 12 largest banks, or the 'weapons of mass destruction,' as coined by Warren Buffet, are inconceivable. Derivative exposures alone could drive a collapse in the entire monetary system.
Stay away from emerging markets, whose debt burdens denominated in a strengthening USD and weakening currencies are crippling the prospects for economic growth. Avoid China altogether - the country is going broke, and this is second grade math. At the end of 2015 it had $4 trillion in reserves. At the end of 2016, this fell to $3 trillion, by and large due to capital flight, legal and illegal. Of the $3 trillion the country currently has, $1 trillion is tied up in illiquid investments such as hedge funds by the banks. Another trillion is borrowed funds. Now, the country is burning through $80 billion yuan/month, meaning, as the math simply illustrates, the country will be broke by the end of 2017. Major restructuring, and bailout by global lenders (likely to drive contagion, particularly into Europe and Japan) will be required.
When investor sentiment reverses, the shift typically happens abruptly and can cause investors like yourselves to lose much of your savings, including those in your 401(K)s, 403(b)s and 457(b)s -and I wouldn't count on your pension - the US (and global) pension funds face a crisis that can only be fixed in one of two ways: (i) bailout by the government, through the creation of ever more new money (from thin air), handed to the pension funds to pay out retiree benefits, but by the time you'll be eligible to receive such benefits inflation will act as a hidden tax, making the same, dollar-denominated promised benefit payments worth far less from a purchasing power perspective; or (ii) the pension funds will simply go broke, and default on their promises. In any case, I'd be remiss if I didn't advise you to rely on non-pension sources of retirement income. In your other accounts, I recommend only holding exposure to domestic (U.S.) equities, and only through the NASDAQ (NOT the S&P 500, because the Nasdaq does not include Financials). This can be done by buying QQQ. You can hedge your risk of global catastrophe with long volatility positions in a selection of ETFs or ETNs, which can be found here: http://etfdb.com/etfdb-category/volatility/. I recommend VIIZ. Don't fall into the investor's trap, saying, well, that hasn't done so well lately. Well yes, that's precisely why it's cheap, and what makes it attractive. As Buffet once said, do you buy a more expensive house rather than a comparable house that's recently declined in value, simply because it's gone up in price? Of course not, this thinking is backwards, and should be kept in mind when investing in the stock markets.
Hope this helps. Please touch base if you would like further financial advise, my contact information (including email, phone) should be listed along with my profile page.
Congratulations on finishing up med school and embarking on your career.
I personally do not like owing money, so your approach to paying down your loans appeals to me, particularly since you have the ability to still save pretty aggressively.
Robo-advisors can be useful to an extent, but you and your wife may find it worthwhile to establish a relationship with a true financial professional. Given your profession and earnings, you likely have issues that extend far beyond "investing" that you may want to consider - tax strategies, asset/creditor protection, longer-term estate issues, etc. You certainly have time, but understanding the pieces and how they all fit together now will help you as you think about a strategy moving forward.
Before I get to your question about investment strategies, I'd like to address your housing comment. I do not know where you live, so it is entirely possible that housing is inflated; however, there are few places in the country where prices are "severely inflated." That being said, the decision to buy a home is a function of a number of factors - economics being just one. In most states, your home will provide you with some protection in the event you are sued (that "asset protection" thing). In some states, that protection is unlimited (i.e., your home cannot be taken regardless of value); while in others, there are limits. Given your profession, that may be a consideration. Home prices also tend to rise at about the rate of inflation. If we have a period of higher inflation coming (your guess is as good as anyone's), a home purchase today can provide a hedge against upcoming increases in rental payments (if things get more expensive, your landlord will certainly raise rent). So, before you completely rule out purchasing a home, it may make sense to have a deeper discussion about the pros and cons.
Now, about your question. First, let me preface this by saying that I cannot and am not making any specific recommendations since I do not know enough about you and your personal situation to do so. To that end, these comments are general in nature.
There are certainly people who will try to sell you a wonderful strategy - hedge funds, private equity, private REITs, market timing, etc. At this stage of the game, however, you may be well-served by sticking to the basics. I am assuming you are relatively young, so an approach where you have long-term investments in U.S., International and Emerging Market stocks would likely be appropriate since you may have more than enough time to weather the ups and downs. You can potentially reduce some of those ups and downs by adding in other things - strategic bond, commodity, and other exposure, for example.
As your portfolio builds, you can explore some of those other strategies, but be very careful. The costs are high, there is very little liquidity, and often the "sales pitch" is better than the real thing. Again, I would be very hesitant to go too far off the reservation without the guidance of a trusted financial advisor.
I will caution you, there are plenty of people who will try to sell you products that sound "too good to be true." Do your research and/or work with someone who is not getting a commission because you do not want to be stuck in a product that ends up being much less than what you expected.
If there are specific questions you'd like to explore, feel free to reach out.
Good luck and Happy New Year.
Honestly, you are doing so many things right! Here are a few things I would think about:
- Maximize your company benefits every year. Look into getting a health insurance plan that qualifies for a Health Savings Account so that you can max that out every year as well. This is another tax deduction.
- Make sure you're taking advantage of both the 403(b) and 457 Plan. You might be able to save more than you think for retirement.
- I love the aggressive plan to pay off your student loans and I would actually hold off on buying a home until you pay off your student loans. (It feels like you already have a mortgage because of the student loan debt so this will free up a ton of cash flow if you wait until the student loans are paid off).
- Make sure you have at least 3 months of net pay saved for emergencies before you start aggressively investing. Set up a separate savings account for a down payment on a home and start funneling some cash here each month.
- I would stick to the Robo-advisors. I think you'll save on fees and it's a good fit. I use Betterment with my clients, but Wealthfront works too. This will give you a ton of flexibility since you can't touch your retirement accounts.
- If I were to work with you, I would be most concerned about the following: setting up basic estate planning documents, making sure you have adequate life insurance (if your student loans are private), and long-term disability insurance since your income stream is your biggest asset.
You and your wife are doing great! I think the big thing is figuring out what you want your lives to look like and making sure you two are on the same page with your goals. Planning for a home purchase, a family, a big trip, an early retirement, etc. Those are the fun things to talk about and working with a financial planner in the future might be helpful as your life situation changes. Best of luck!
Your current plan seems like you are on the path to success! There are a couple things you might consider for your additional savings. You could make "non-deductible" IRA contributions and convert those dollars to Roths to get tax-free growth. It will help you in retirement years to have a pool of money to pull from tax free. Another tool that you could look at is LOW COST, flat fee annuities for more tax deferred growth and liability protection. There are a couple of good providers out there for these types of investments. It does sound like eventually, you will want a pool of money to purchase a home, so keeping some savings going to after tax dollars makes sense.
Newly Minted Healthcare Professionals,
Congrats on your new careers! I think you are off to a great start on the financial front.
From the information you provided, it sounds like you are looking for flexibility regarding your housing arrangement (young, enjoy traveling, etc.). If for no other reason, it may make sense to wait a little while to make any decision to see how your professions evolve. If you fall in love with them and your location, then the decision to purchase a single family home changes from more than just an economic one. If your only impediment to purchasing a home (versus renting) is what you consider to be "severely inflated" costs, then it may make sense to talk to an investment advisor who can give you some additional perspective. For example, it may very well be that we are at a historical bottom in mortgage rates and we are going to see nothing but higher and higher rates for years and possibly decades to come, so locking in a low mortgage rate now could make sense. Also, is the city you would be looking to buy in bankrupt (some are)? This could mean higher property taxes and/or declining property values.
There are different approaches to investing and not all investment advisors are the same. Some of us actually (believe it or not) analyze specific companies and industries, and build portfolios of stocks, bonds, etc., of strong businesses positioned well for secular trends. We also reduce risk when storm clouds are on the horizon. The idea is strong performance, regardless of market conditions, through analysis and an understanding of how markets trade. In this case, the advisor essentially provides the client with their own customized portfolio (your own mutual fund, if you will). Such an advisor may also be able to help you choose the funds in your retirement plans (401(k), 403(b), etc.) to achieve better performance. This is especially noteworthy in your situation, because you are investing a lot into these plans.
On the other hand, you have robo-advisors that are an evolution of the cookie-cutter, one-size-fits-all approach. The robo-advisor is the equivalent of prescribing the same medication to everyone who walks through the door with the same symptoms. They can do well in the right conditions, they can also destroy your wealth in the wrong conditions. Some advisors also take the same cookie-cutter approach, without the "robo" format, but just charge more.
You would be well suited to consult several different investment advisors to find which approach is best aligned with your worldview. In general, most advisors will fall into either the former or the latter category that I have described above.
Moreover, it would be helpful to have an advisor who can integrate your entire portfolio. In other words, it might not make sense to invest your non-retirement plan assets the same way as your retirement plan assets. This may very well be the case if you are using a robo-advisor. If you pursue a different approach outside of your retirement plans, you may be able to significantly diversify your overall portfolio.
Regardless of your investment strategy, at some point it may make sense for both of you to contribute to Traditional IRAs so you can take advantage of additional tax-deferred compounding. These funds cannot be withdrawn prior to age 59 1/2 without penalty though, so this should be a secondary strategy. It would be better to build up some cash reserves first.
Joshua Hall, ChFC