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Finance 101: June 2023 Thumbnail

Finance 101: June 2023

In June the financial advisors at Ruedi Wealth Management wrote five more “Finance 101” columns for The News-Gazette’s Business Extra section. Make sure to look for them every Sunday, but in case you missed the columns from June all five are below.

Financial Advice for Small Accounts

Daniel Ruedi, CFP®, RICP®

In the past people who wanted to invest a small amount of money faced a catch-22: it was very difficult to receive quality financial advice if you weren’t already wealthy! The cost for advisors to serve each individual client was high enough that to talk to a financial advisor you had to have at least $500,000 or even $1 million. This left everyday investors with little-to-no options for quality advice.

Fortunately, that has changed over the years. Technological advances have made it so much more efficient for advisors to serve clients that the amount of money a client must have to get quality financial advice has dropped tremendously. In fact, a whole industry of high-tech “robo-advisors” has popped up to provide financial planning and investment management to smaller accounts that typically would not get any attention from a traditional advisor.

This technology was later picked up by large brokerage firms and even independent RIAs like Ruedi Wealth Management in order to serve smaller accounts. Where there used to be few options for small investors to receive advice, there are now several high-quality options.

“Robo-advisors,’’ or online-only financial advice platforms really drove this change. By automating many of the processes around account management, they were able to specifically target small or beginner investors. Robo-advisors typically set up an account for you and invest the money in a diversified portfolio. Several even do some very basic financial planning to make sure your portfolio is aligned with your goals. Many of these robo-advisors have no account minimum and generally charge low management fees around 0.25-0.5%.

Large brokerage companies also adapted the technology to create their own robo-advice platforms or hybrid advice models, where they pair a robo-advice platform with the guidance of a financial advisor. They have low account minimums and comparable fees to robo-advisors. Vanguard Personal Advisor Services, for example, has a $50,000 account minimum and charges 0.35% of the assets they manage.

Last but not least, independent RIA firms like Ruedi Wealth Management have adopted robo-advice platforms that enable them to serve smaller clients than they could previously serve before. Firms like this will generally charge traditional financial advisor fees (around 1% of the money they manage) and will treat it as a way to provide comprehensive financial advice to people they couldn’t have served in the past. At Ruedi Wealth Management, for example, we were able to lower our account minimum to practically 0 by adopting a hybrid online-only service model for smaller accounts. We are thrilled to be able to help smaller investors.

Daniel Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.


International Investing

Paul Ruedi

Research shows that most investors around the globe tend to show a strong home bias—overweighting stocks that they own from their home country. Some investors even take this to an extreme and only invest in companies in their home country. But there is a mountain of support for the benefits of diversification across borders, and U.S. investors should consider holding at least some amount of international stocks in their portfolios.  

The stock market in the U.S. accounts for over 58% of the world's stocks (statista.com). That means an investment portfolio that invests only in U.S. companies ignores around 42% of the available investment possibilities. My son Daniel often explains the benefits of global investing to other fishing enthusiasts by asking them, "If you were going fishing, would you limit yourself to half the lake, or would you want to seek opportunities wherever they were available?" Investing shouldn't be any different.

 I tend to receive more questions about the inclusion of international stocks for a U.S. investor after reasonably long stretches of under or over-performance of international stocks relative to the returns of the U.S. stock market. But these performance differences are cyclical and should not influence your portfolio decisions because you would likely make changes at just the wrong time.

For example, during the 1970s and 1980s, international stocks provided significantly higher returns than the broad U.S. stock market. During the 1990s, that reversed in a big way. During the "lost decade” (2000-09), where the broad U.S. stock market had a total return of -10% over those ten years, many areas of the global stock market posted solid performances. During the past ten years, it has been the broad U.S. stock market that has provided much more robust returns. These periods are impossible to predict in advance. Investors who shifted their portfolios based on performance had plenty of opportunities to get it wrong.

A globally-diversified investment portfolio provides the opportunity to participate in whichever regional market is outperforming. While the United States has led over some periods, another country or region will inevitably lead at other points. The challenge for investors is overcoming our human nature that always wants to be in the best performing country or asset class. But that simply is not possible to do consistently. Thankfully, it’s irrelevant to becoming a successful investor.

The key purpose of international diversification is to reduce the overall level of fluctuation of your portfolio. The way international stocks behave differently than U.S. stocks, often performing well when U.S. stocks perform poorly, can provide a huge diversification benefit to U.S. investors.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.


Should I Invest in Gold?

Paul Ruedi

Humans have been enticed with gold for thousands of years. It existed as a store of value and display of wealth long before organized exchanges, stock markets, and individual ownership of companies.  With a long history providing an allure on top of its shiny, tangible nature, gold can seem like an interesting investment. But is it a good one? Does it have a place in the typical investor’s portfolio?

This question can be approached on a couple different levels, and I think it is best to start philosophically. Gold, though an interesting metal that can increase in value, doesn’t actually produce anything. Warren Buffett famously described how gold has “no utility;” we dig it up, we melt it down, we then pay to store and guard it. No part of this process is really productive.

Over the years, Buffett has in various ways explained how he thinks people are better off investing in businesses that actually produce things. A dollar invested in a business or a handful of businesses may be used to buy inputs and create a product that is worth more than those inputs. This process is productive, and compared to buying a chunk of metal that just sits there, sure seems to have a better chance at producing returns for investors.

From a return standpoint, gold has historically produced long-term returns similar to inflation. It does so with tremendous volatility, making it a very bumpy ride for very little payoff. Proponents of gold often suggest gold is a good inflation hedge. However, the tremendous volatility makes gold a poor solution to that problem relative to other options to hedge inflation, like Treasury Inflation Protected Securities (TIPS).

That volatility might be acceptable if gold was a reliable inflation hedge, but this isn’t always the case. If investors had purchased gold for this purpose in 1980, they would have been very disappointed to see its value reduced to a fraction of their purchase price over the next two decades, while the creep of inflation caused their cost of living to more than double.

Gold is also a somewhat costly investment. The transaction costs and storage costs reduce the returns investors receive. For this reason, and all the reasons I mentioned above, I generally do not recommend people invest in gold. If investors want an investment that outpaces inflation over time and rewards them for the variability they take on, they need look no further than a low-cost, diversified stock index fund portfolio.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.


Lessons from Retirees

David Ruedi, CFP®, RICP®

In my years working as a retirement planner, I have seen people take many different paths in pursuit of a happy retirement. Since I plan to retire someday, I couldn’t help but think of all these observations of different retirements as a case study that I could learn from and use to plan my own retirement. Though there is no one-size-fits-all set of circumstances that will make people happier in retirement, I have noticed a few things that tend to make retirees live happier, more meaningful retirements.

I first noticed that people who stay busy during retirement tend to be happier than those who do not. It is a great idea to be purposeful about how you spend your time and that you plan to do things you enjoy. Hobbies and activities can keep you physically healthy, provide a sense of mastery and accomplishment, and be a great way to socialize. Though I am not 100% certain how I will fill my retirement days just yet, I plan to stay busy and physically active.

I also noticed that people who simplify their life as much as possible tend to be happier in retirement. Though vacation properties and lots of adult toys are fun on the occasions you use them, there is a cost to owning them in money, time, and mental energy. The same goes for having multiple investment accounts or debts to pay. Complication requires more management, which can ultimately detract from a happy retirement.

Perhaps the biggest lesson from my years in retirement planning is that people who spend conservatively seem to be the happiest regardless of their income level or assets. People who take conservative portfolio withdrawal rates worry less about their investment portfolio and their finances in general. I will likely over-save and take a very conservative portfolio withdrawal rate. Though it may not be the most financially optimal thing, as I will end up spending less than I could have, the greater peace of mind will be worth it.

These are just a few of the lessons that I will implement in my own retirement, but there are many others retirees could consider. Thinking of these best practices in advance and building them into your retirement plan is a great idea. If you aren’t sure how to do that yourself, you may want to talk to a retirement planner.

David Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois


Delaying Social Security

Paul Ruedi

Most retirees have heard about the monetary benefits of delaying Social Security. But that didn’t stop 31% of women and 27% of men from signing up for Social Security at the earliest possible age (62) in 2018 per Social Security Administration data. However, it appears people are becoming more educated on the subject, as those numbers are down considerably from 2005 when around half of women and men signed up at the earliest possible age.

You will take quite a haircut if you claim benefits before full retirement age (FRA), which is between 66 and 67, depending on your date of birth. Suppose your full retirement age is age 67 (you were born in 1960 or later). At 67, you get 100% of the projected benefit at your FRA. But if you claim at age 62, the earliest date possible, you will take a 30% haircut.

So, if your FRA benefit is $1,000, for example, your benefit at age 62 would be $700. Claim at age 63 and your benefit is reduced by about 25%, at 64 your benefit is reduced by about 20%, at 65 it is reduced about 13.3%, and at 66 it would be reduced about 6.7%.  

But what if you wait past full retirement age? Again, for someone born in 1960 or later, for every year you wait to claim past your FRA, your benefit will increase by 8% per year. A person with a FRA benefit of $1000 who waits until 70 would see their benefit increase to $1,240.   

You’d think the gap between the $700 per month for the person who claims at 62, versus the $1,240 per month benefit at age 70 would motivate everyone to delay. But people often worry they may not live long enough to break even or get ahead of taking a lesser benefit at age 62. That very well may be the case, and by delaying Social Security you do accept this risk. But if you look at a non-smoking, relatively healthy married couple at age 70, and you will find that the odds are, there is a 50% chance one of them will answer the doorbell at age 93.

Like all financial questions, the answer for when to claim Social Security is, “it depends.” There is no one-size-fits-all solution. If you aren’t sure when to claim Social Security in order to optimize how much you can spend throughout retirement, you may want to talk to a retirement planner.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.



Disclaimer: Past performance is no indication of future results. You should not make any investment decisions without first performing your own due diligence and consulting your financial advisor.