When you think of a financial advisor, you probably picture someone who helps others manage their money and navigate complex markets. But do they follow the same advice they give to their clients?
We spoke with Ally Invest Senior Financial Advisor Brandon Shephard to understand the principles that shape his personal investing decisions, as well as his fellow advisors'.
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Start with your “why”
Before making any investment, Brandon asks himself, “What do I want my future to look like?” For Brandon, he’s determined to build generational wealth and provide opportunities for his children.
To identify your financial goals, Brandon recommends asking yourself the same question. Once you’ve defined your “why” for investing, you can move forward with purpose and motivation, whether it’s for family, financial freedom, retirement or security.
Learn more: Set up a complimentary consultation with an Ally Invest dedicated advisor.
Five advisor-approved investing practices
Our financial advisors follow these five practical approaches.
1. Matching strategy to timeline
Whether buying a house, funding a child’s education, preparing for retirement or all of the above, your goals can help determine your time horizon. Brandon likes to think of his and his clients' goals in five-year increments to help break down the timelines:
Short-term: For goals they want to accomplish in five years or less, safety is usually a big factor. Brandon considers keeping funds in cash or conservative investments that suit his risk tolerance.
Intermediate: When their goals are a little further down the road (think five to 10 years), Brandon considers taking on some calculated risk, while keeping a balanced portfolio of securities with lower expected volatility.
Long-term (10 years or more): This is where Brandon might be comfortable being a little more aggressive, since markets have more time for potential recovery. He might consider, say, a stock-heavy portfolio to capture compounding over decades for goals that are 10 years or more away.
All these strategies incur some risk, since there’s never a guarantee of return with investing, but understanding his own capacity for risk helps Brandon plan out what kinds of investments he's comfortable with for different timelines.
Take note: Brandon stresses the importance of building an emergency fund. Depending on what’s best for individual circumstances, a person could focus on this before or while they tackle investing toward short-term, intermediate or long-term goals. Having at least three to six months’ worth of expenses easily accessible can help with recovery from unexpected life events, such as a medical emergency or layoff, without having to dip into investments.
Understanding his own capacity for risk helps Brandon plan out what kinds of investments he's comfortable with for different timelines.
2. Building a strong portfolio
When it comes to mitigating risk and increasing long-term growth potential, Brandon values diversifying his investments across various asset classes. He also discusses how he might lean into exchange-traded funds (ETFs) and mutual funds to spread out risk, rather than going all in on a single stock. (Keep in mind, ETFs generally have lower fees and are more tax-efficient than mutual funds.)
Of course, our advisors occasionally buy individual stocks, usually with a small amount of “play money.” However, they typically focus their portfolios on broad-based funds that have a better chance of providing long-term growth and stability with lower risk.
3. Investing tax-smart
Understanding how investments affect overall tax liability is an important part of building a portfolio. Here are a few tax-advantaged accounts Brandon noted:
401(k): Many employers offer a matching contribution to a 401(k), which is essentially free money. Employee-elective deferral contributions to traditional 401(k)s are also pre-tax, meaning they lower taxable income and could result in a lower tax bill.
Health Savings Accounts (HSAs): Putting money in an HSA can offer certain tax benefits, such as tax-deductible contributions, tax-free growth on earnings and tax-free withdrawals when used for qualified medical expenses.
Roth Individual Retirement Account (IRA): Contributions to a Roth IRA have already been taxed, so withdrawals in retirement are completely tax-free (provided certain conditions are met).
Tax-loss harvesting — selling investments at a loss to offset capital gains — is another investment strategy Brandon might use to reduce his tax bill. With regard to taxes, he stresses the value of consulting with a tax professional or a financial advisor that offers tax planning services.
4. Automating investments
Wherever possible, Brandon sets up recurring contributions to his retirement or automated accounts to keep his investing consistent. This can be particularly helpful in avoiding the temptation of trying to time the market during market swings and can reduce the likelihood of choosing investments based on emotions.
If someone isn't quite ready for a dedicated financial advisor, an Ally Invest Robo Portfolio is an alternative that might help them automatically manage a diversified portfolio based on their financial goals and risk tolerance, and rebalance their investments as needed.
5. Get an outside perspective
Even financial advisors have financial advisors. Working with a professional helps them remain disciplined and avoid rash decisions, as well as integrate an impartial third-party perspective into their money discussions. Especially when financial planning with a spouse or partner, having that outside resource can keep both parties on equal footing.
Connect with an advisor through Ally Invest Personal Advice to build a plan that meets you where you are and where you’d like to be.
