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. 

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.

What to Consider About Life Insurance By Matt Dressel

The decision to purchase life insurance is very important.  It is a key part of your financial plan.  It pays your final expenses, provides funds to replace your lost income as well as to settle debts such as a mortgage, medical expenses, credit cards, or student loans. However, many individuals buy life insurance based solely on the cost of the premium without considering the features and benefits of the policy as well as how it meets their overall life situation. So what things should you consider when looking to obtain a life insurance policy?

Let’s start with the base policy.  The death benefit is the major feature of any life insurance policy. Ask yourself is the benefit payment going to be enough?  Will it keep pace with inflation?  These two questions are crucial if you have debts such as a mortgage or future plans for sending a child to college. Another thing to consider is what else is offered as part of the base policy at no charge.  For example, many insurers offer an Accelerated Death Benefit.  This rider allows the insured to access a certain percent of the death benefit in the event of a terminal illness.  If you have a family history of terminal illness this benefit could cover a large portion of the medical bills. Some insurers offer this benefit as a rider for an additional cost but why pay an added charge if you don’t have to?  Finally, if you are looking at a Whole Life or Universal Life Policy, the Cash Value will need to be considered. Will the interest rates build the cash value you need to help meet any goals or challenges, especially during your retirement or if you are in a high-income tax bracket?  Also, does the insurer have a past history of paying yearly dividends?  When looking at the base policy make sure it is aligned with your individual needs and financial goals in a cost effective manner.

The next thing to consider in obtaining a life insurance policy is the choice of riders that can be added to it.  Riders allow you to further design a policy to meet your needs and goals. Most riders come with an added charge, but some policies have free riders such as the Accelerated Death Benefit Rider described earlier. The following is a summary of the most common riders.

• The Waiver of Premium waives the premium payment if you become disabled as defined in the life insurance policy. If you work with machinery, chemicals, or any area that requires heavy exertion or heat exposure, this rider would be appropriate.

• The Accidental Death Benefit pays an additional benefit if your death is accidental. If you drive long distances regularly to work or school, work as a professional driver or delivery person, or work in construction or a construction related field, you should consider this rider.  

• The Option to Purchase Additional Insurance allows you to purchase additional coverage at specified dates in the future regardless of health or occupation. This rider is a great planning tool to protect your growing assets, your family, and your income as well as protects against inflation. If you are anticipating a salary increase, having children/more children, or assuming the care of an aging parent/relative, this rider would be valuable.

• A Term Rider allows you to buy temporary additional coverage on yourself without the expense of getting another policy.  This is a great way to help protect your assets from temporary or short-term debts associated with accessing a line of credit or a home equity line.

• The Child/Family Rider allows you to buy temporary additional coverage on a child or other family member without the expense of getting another policy. This is useful for final expense coverage or as starter coverage for a child.

• A Long-Term Care Rider allows you to pay for qualified long-term care expenses. This rider is ideal for individuals with a family history of long life spans and/or who want to avoid tapping into their other assets to pay for long-term care expenses.

Life Insurance is a major component of your financial plan.  Choosing a policy based only on the premium could be harmful in the long run. In short, you "get what you pay for".  It is important that you evaluate and design a policy to meet your financial needs and goals.  A financial advisor and/or a life insurance agent will work with you to make sure you have the right coverage.

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.  

(Life Insurance Benefits could be subject to the claims paying ability of the Life Insurance Company.)

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

Football and Your Investing Game Plan

Football Season has begun and training camp is in session.  All over the nation, our favorite high school, college, and pro teams are preparing for the season. Soon we will be cheering on the offense to score lots of touchdowns and exhorting the defense to protect the lead with the ultimate goal of winning a championship.  When you think about it, winning your investing game is similar.  You need “offense” investments that will generate money; “defense” products are also needed to protect your gains.  So, what is the financial offense and defense you need to win the investing game?

The goal of the offense in football is to score touchdowns. The goal of your financial offense is to increase your wealth by growing your portfolio and generating income. Investments such as individual stocks, stock mutual funds, and stock ETFs are used to grow the value of your account.  Their job is to provide big gains in value much like a football team’s quarterback  and receivers gain big yards by passing the ball. However, every effective offense has a running game to go with its passing attack. The running backs on the football team gain the yardage on the ground.  For your investing game plan, Dividend Paying Stocks, Dividend Paying ETFs, Growth and Income Mutual Funds, Balanced Mutual Funds are your running backs.  These investments pay quarterly income which adds value to your portfolio while providing consistent growth over time .  In addition, investments such as individual bonds, bond mutual funds, and bond ETFs are great short yardage performers.  They are usually solid performers that show little gains in value but provide a steady income. Taken together, these investments can provide the offense you need to score financial touchdowns and win your investing game.

The purpose of the defense in football is to protect your end zone. The goal of your financial defense is to protect your wealth by keeping you from using your investments. This is where insurance comes in.  Life, Disability, Health, and Long-Term Care Insurances are your defense.

Life Insurance pays funeral costs, pays off any debts, replaces income, provides a nest egg for your heirs, and pays estate taxes. Disability Insurance protects you by providing income if you should become incapacitated and cannot work. Health Insurance will offset the cost of medical care especially in the event of a serious illness. Long-Term Care Insurance will offset the cost of nursing home and home health care. Often overlooked and not considered glorious, a football team’s defense provides the backbone of championship teams.

As we cheer on our favorite high school, college, and pro teams, take some time to look at your investing football team. Make sure you have the right offense to win games and the best defense needed to win championships.  An advisor can help put together your roster to bring home the title.

Feel free to contact me at 252-515-0242, matthewdressel.ifsg@gmail.com , or http://www.independentfinancialsolutionsgroup.com/index.html

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.

Green Thumb vs. Brown Thumb Investors

Have you ever noticed how some people make a lot of money from investing while others do not? There are some individuals who are like "master gardeners" when it comes to their portfolios.  They have a "green thumb" for picking stocks, bonds, mutual funds etc.  Where they put their money it grows.  On the other hand, there are individuals who are the opposite. These people have a "brown thumb" for picking stocks, bonds, mutual funds etc.  In my line of work, I hear from individuals who fall into each category but especially the latter.  So what is the difference between "green thumb" and "brown thumb" investors?  Here is what I have noticed.

Green Thumb individuals are long-term investors, who are not looking for a quick profit.  They buy quality investments and hold them.  During market downturns, they stay calm, look for opportunities, and in many cases put more money into their current investments while the price is low.  Green Thumb individuals diversify their investments.  They do not put their "eggs in one basket". Finally, Green Thumb investors stay on top of their holdings, reviews their statements, educate themselves and seek professional guidance if needed.

Brown Thumb individuals are not long-term investors. They are constantly buying and selling hoping to make a quick profit. They buy speculative or "hot" stocks that "can't miss".   During market downturns, they panic, sell everything, and sit in cash refusing to take advantage of low price buying opportunities.  A Brown Thumb investor's portfolio is rarely diversified and often sector heavy. Finally, a Brown Thumb investor rarely checks their holdings, reviews their statements, and insists they know everything about investing.

Investing money takes time, patience, understanding, and discipline.  If you want to be a Green Thumb investor, you will have to develop the character of this type of individual.  There are plenty of resources including plenty of financial professional who are willing to help you develop that Green Thumb.