Mutual Funds and ETFs

Today’s investors have many different types of investments from which to choose.  The most commonly used vehicles are ETFs (Exchange Traded Funds) and Mutual Funds. According to the independent research firm, ETFGI, $4.6 trillion worldwide is invested in ETFs. At the same time, mutual fund investments amount to $17.4 billion globally according to the research site, mutualfunds.com.  Combined, mutual funds and ETFs account for 70-75% of all investment holdings. They are found in Investment Accounts, Retirement Accounts, and Educational Savings Accounts. Still, in spite of their popularity and widespread use, most individuals know little about these investments beyond the advertisements they see. Providers such as iShares ETFs, Spiders ETFs, Oppenheimer Mutual Funds, Franklin Templeton Mutual Funds and others are widely advertised.


Mutual Funds are a professionally managed portfolio of stocks and/or bonds. Each fund has a specific strategy or focuses such as growth, growth, and income, etc. The goal of the fund is to outperform an index like the S&P 500 or Russell 2000. In order to achieve this goal, the fund manager is constantly buying and selling stocks and/or bonds to increase performance.  This is called active management. Mutual Funds are purchased through a mutual fund company by an investment company or brokerage house and a minimum investment amount is required. Fund prices are set by the fund managers at the end of each business day. Many investors purchase mutual fund shares as part of a periodic investment plan. Investors purchase mutual funds to gain access to stocks or bonds without having to purchase these securities individually. In addition, mutual funds are purchased to provide diversification, build wealth, plus generate income through dividends and capital gain distributions.


ETFs are a professionally managed portfolio of stocks and/or bonds. Each ETF has a specific strategy or focus such as growth, growth, and income, etc. However, the goal of an ETF is to replicate, not outperform, the performance of an index. Since the goal is to replicate an index, there is not as much buying and selling of stocks and/or bonds by the manager. This is called passive management.  ETFs are purchased on the stock exchange through an investment company or brokerage house and no minimum investment amount is required. Investors purchase to gain access to stocks or bonds without having to purchase these securities individually. ETFs are also purchased to provide diversification plus build wealth and generate income through dividends.

Mutual Funds and ETFs have much in common. Both are managed portfolios, offer diversification, and have some type of focus.  There are also key differences with regard to how each is purchased and the goal of each regarding an index. However, the biggest difference is the expenses and management plus capital gains taxes. Mutual Funds have higher internal expenses due to the active management required to “beat the index”; ETFs generally have low internal expenses fund due to the passive management required to “track the index”.  Mutual Funds generally declare capital gains each year which are passed on to the fund investors as taxable gains. ETFs rarely declare a capital gain which can be tax savings.

So, which investment should you use, Mutual Funds or ETFs?  There is no clear answer. Investing money in securities exposes investors to risks including loss of principal; past performance is NOT an indicator of future returns. You should carefully consider investment risks, objectives, charges, and expenses. An advisor and tax specialist can assist with the decision on whether a mutual fund or ETF would be better for your situation.

Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor.  He is an Investment Advisor, Life Insurance Agent and does Financial Planning.  If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com. 

SEP IRA: The Retirement Account Especially for the Self-Employed

Since the beginning of 2017, the number of self-employed individuals in the United States has expanded greatly. According to a study by MBO Partners of Herndon, VA from July 2017, the self-employed population increased to 40.8 million individuals and represented 31% of the working population. Here in Carteret County and nationally, this trend is expected to continue. As the self-employed continue to grow their business and income, many will also begin to think about ways to fund their future retirement. If you are self-employed, have freelance income or a small business owner, a SEP IRA (Simplified Employee Pension) could be appropriate for you. A SEP IRA is a Traditional IRA specifically designed for these individuals. Contributions are made by the business into an IRA held in the self-employed individuals' name or the employee’s name. For an employee to receive this benefit, he/she must be at least 21 years old and has been an employee for 3 of the last 5 years. Contributions are considered tax-deductible to the business.

When it comes to making contributions to a SEP IRA, there are several important points that employers and employees need to know. First, employer contributions are not discretionary and cannot discriminate against highly compensated employees.  An employer can exclude employees with earnings under $600 and non-resident aliens with no source of U.S. income.  Contribution limits for 2018 are 25% of a participants pay or $55,000, whichever is less. If you are a self-employed individual, contributions are based on your self-employment income minus 50% of any self-employment taxes that have been paid. The deadline for establishing and contributing to a SEP is the employer tax filing deadline including extensions. Since SEP is a Traditional IRA, an employee may elect to make a separate contribution in their own name as well.  The Individual Contribution Limit for 2018 is $5500 plus an additional $1000 catch-up contribution for individuals who are age 50 years and older.  All contributions are immediately vested at 100% and the employee directs how they are invested. Finally, the employer does not have to make ongoing contributions.  

A SEP IRA is a great way for the self-employed individual to save for retirement as well as the small business to reward/retain its employees.  The plan requires minimal paperwork and tax filing documentation. Before establishing a plan, it is important to discuss the IRS regulations governing a SEP with a tax professional.  After speaking with a tax professional, an advisor can establish the SEP and recommend the appropriate investments. 

Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor.  He is an Investment Advisor, Life Insurance Agent and does Financial Planning.  If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com.  

Role of Dividends

Dividends should be an important part of any investment plan.  Unfortunately, many investors don’t consider dividends and even overlook them.  Dividends are overlooked because their effect on an individual portfolio is not readily apparent unlike a change in the price of an investment. So, what role do dividends play in an investment plan?

The first is income. Many companies have a long history of paying their stockholders dividends. For many individuals, but especially retirees, they are a source of income. When creating a dividend income stream, it important to devise a portfolio consisting of stocks of profitable companies with a history of paying, as well as, increasing dividends. It is also essential to choose stocks that pay dividends during different months so there is monthly income. For example, you could build an income stream using Philip Morris (PM), General Dynamics (GD), and Exxon Mobil (XOM).  

Stock	Month Dividend is Paid
Philip Morris (PM)	January, April, July, October
General Dynamics (GD)	February, May, August, November
Exxon Mobil (XOM)	March, June, September, December

(This chart is for illustrative purposes and does not constitute a recommendation.)

Notice how the stocks work together to provide a steady stream of dividend income.  They pay in different months throughout the year and there are no gaps. Keep in mind a sufficient amount of money is required for individual stocks to create a desired income. A portfolio of mutual funds and exchange-traded funds invested in these companies can also provide dividends. Funds with terms like high-dividend, growth and income, and equity-income in their names are examples. Make sure you read the funds information sheet and prospectus for guidance.

Dividends are a useful tool to build wealth.  Just about every investment company allow clients to reinvest dividends back into the stocks, mutual funds, and exchange-traded funds inside their accounts. When these dividends are reinvested, more shares are purchased.  This is called a Dividend Reinvestment Plan (DRIP).  For example, a company, ABC Inc’s, stock is valued at $10 per share. ABC Inc declares a dividend of one dollar per share. A DRIP participant holding 100 shares will receive 10 shares of company stock (100 shares/$10 per share = 10 shares).  These reinvested shares have increased the value of this holding.  Before the dividend was paid out, ABC Inc’s holding was worth $1000 (100 shares x $10 per share).  After the dividend was reinvested, ABC, Inc’s holding is now worth $1100. (110 shares x $10 per share). By reinvesting the dividend, ABC, Inc’s value increased by $100.*    

* This example is for illustrative purposes only.  Results may vary. Reinvesting dividends do not guarantee an increase in value.

Finally, dividends can offset declines in the value of a portfolio during market declines. Whether a dividend is reinvested or taken as income, it first passes through an investor’s portfolio and counts towards the value of the account. In the example below, a hypothetical client statement for the month has this information on the first page.

Opening Value	$1000.00
Cash Deposited	$0.00
Investment Value Change	-$100.00
Dividends Paid	$200.00
Closing Value	$1100.00

(This example is for illustrative purposes only.  Results may vary.)

The dividends in this example proved to be significant. Notice the value of the combined investments declined $100.  Yet, the closing value was $1100.00.  The $200 worth of dividends offset the investment drop and created a gain in the value of the account for the month.  Unfortunately, this example is not always the case.  However, even if the investments had dropped $300, the $200 dividend payment would have resulted in a $900 closing value. Think what would have happened without the dividends?

Dividends serve many roles for an investor whether it be income, wealth building, or providing a cushion for a portfolio during market declines.  There is one detail to keep in mind about dividends.  They are taxed as income unless paid inside a retirement or other tax-exempt account.  It important to discuss the potential tax implications of any dividend strategy with an investment advisor and tax professional.

Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor. He is an Investment Advisor, Life Insurance Agent and does Financial Planning.  If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com.

Retirement Investing By Matt Dressel of the Independent Financial Solutions Group

Investing for retirement means allocating your money across the different types of investments to achieve the twin goals of accumulating enough money for retirement then making sure you don't run out of money once in retirement.

A retirement portfolio should be managed on the basis of your accumulation and distribution phases. The Accumulation Phase is the time period when you are saving and investing money to reach your goal.  The Distribution Phase is the time period when you are withdrawing money from your investments once the goal is achieved.

The following is an example of a retirement portfolio management based on someone with the following information:

Time Horizon: 30 Year Accumulation Phase

Risk Tolerance: High

Goal: Retirement

Assumption:  The Client is 35 Years Old and will have a 30 Year Distribution Phase.

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Accumulation Phase:

Years: 1-25                                Years: 26-30

Growth- 40%                             Growth- 35%

Growth & Income- 40%             Growth & Income- 45%

Income/Cash- 20%*                   Income/Cash- 20%*

                                               * 2%-3% Cash

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Distribution Phase:

Years: 1-5 Years:                      6-10 Years:                                 11-15 Years

Growth- 35%                            Growth- 25%                              Growth- 15%

Growth & Income- 45%            Growth & Income- 40%               Growth & Income- 30%

Income/Cash- 20*                     Balanced- 5%                             Balanced- 15%

* 2%-3% Cash                           Income- 25%                             Income- 35%

                                                Cash- 5%                                    Cash- 5%

Years: 16-20                              Years: 21-25                               Years: 26-30

Growth- 10%                             Growth- 5%                               Growth- 0%

Growth & Income- 20%             Growth & Income- 10%              Growth & Income- 0%

Balanced- 20%                          Balanced- 30%                          Balanced- 40%

Income- 45%                             Income- 50%                             Income- 50%

Cash- 5%                                   Cash- 5%                                  Cash- 10%

Note- These allocations can be adjusted during times of extreme and prolonged market declines

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As you notice in our example above, the accumulation phase portfolio changes very little. The purposes here is to focus your attention on growing your money.  This means a
portfolio that is heavy on growth and growth & income investments.  However, once the distribution phase is reached, there are frequent adjustments.  The focus has now become generating income to live on, preservation of money for unforeseen issues, and continue growing your funds so as not to run out of money. Therefore, an increased use in balanced and income investments over time is now in place.

Investing is key for a comfortable retirement.  An investment professional can help you put together and manage a portfolio to achieve your retirement goal. 

Disclaimers

1. I.F.S.G. is a fee-based registered independent advisory specializing in investments and life insurance solutions.
2. I.F.S.G. does not give tax advice. You should consult your tax professional before making any financial decisions.
3. Securities provided by Trade PMR. Fixed income products provided to Trade PMR by Advisor Asset Management, Crew & Associates, and JBB Financial.
4. Investing Money in securities exposes investors to risks including loss of principal and past performance is not an indicator of future returns. Investors should carefully consider investment risks, objectives, charges, and expenses.

Matt Dressel is the Owner of the Independent Financial Solutions Group. If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com

Basic Comparison Between a Traditional and a Roth IRA

		Traditional IRA		Roth IRA
Contributions		Pre-Tax Money		After-Tax Money
Investment Growth		Grows Tax-Exempt		Grows Tax-Exempt
Distributions in Retirement		Taxed		Not Taxed
Required Minimum Distributions		Yes, Beginning at Age 70		No

  

An IRA and/or a Roth IRA are a Great Way to Put Aside Money for Retirement.  The chart above is a basic comparison.  You should consult an advisor and/or tax professional to determine which account is in your best interest as well as to learn the tax implications of premature distributions. 

(Chart Produced by the Independent Financial Solutions Group)

Disclosures:

1. I.F.S.G. is a fee-based registered independent advisory specializing in investments and life insurance solutions.
2. I.F.S.G. does not give tax advice. You should consult your tax professional before making any financial decisions. 
3. Securities provided by Trade PMR. Fixed income products provided to Trade PMR by Advisor Asset Management, Crew & Associates, and JBB Financial.
4. Investing Money in securities exposes investors to risks including loss of principal and past performance is not an indicator of future returns. Investors should carefully consider investment risks, objectives, charges, and expenses.