Helping your clients with investments and retirement planning

Over the last several months, we’ve seen the impact of the coronavirus to global markets. And although it’s still early to know the resulting impact, financial advisors recommend that investors should take a step back and focus on the long term; if history is an indication of the future, the markets may recover and proceed to reach new highs.

In addition to planning, preparation and advisory services, tax professionals can help their clients invest their money and save for retirement. However, many people stay away from investing their money because it seems complicated, they’re afraid of losing money or don’t have money to invest.

Here are some investment tips to help guide you when you’re meeting with your clients; feel free to share the below tips with your clients.

How much to invest

One rule of thumb is to try to save about 10 percent (or more) of your income, split between retirement vehicles and investing. It’s wise to start as soon as you can, even if it’s a small amount (maybe your tax refund), because of the compounded growth you realize over time.

Try to maximize your retirement savings because of the incentives, such as tax deferrals and a company match. However, retirement accounts are for long-term investing and can come with restrictions, such as paying a penalty if you withdraw before age 59½.

Some people establish an emergency fund in a savings account – maybe a couple of months of expenses. Otherwise, you may incur debt or have to raid your investment account, where you could encounter a penalty or a downward market fluctuation.

If you’re having a difficult time meeting your financial obligations such as rent or car payments, it might not be the best time to start investing until you’re more financially stable. Also, think about paying off high-interest debt before making an investment; the interest rate may be higher than what you can earn in the market.

Types of investments

• Cash and cash equivalents: Includes savings accounts, certificate of deposit and money-market funds. Cash investments are lower in risk and carry a lower rate of return. A benefit to a bank savings account is that the money is insured by the federal government up to a certain amount.
• Bonds: Fixed income investments provide a steady stream of income, and bond values are subject to interest rate fluctuations. Generally, bonds are more stable than stocks but return a lower rate.
• Stocks: Equity investments allow you to own a partial interest in a company. Stocks have the potential to earn high growth over time through principal appreciation and dividend income, but stock values can be more volatile than other investments.
• Mutual funds: These are composed of a portfolio of stocks, bonds and/or other securities based on certain investment goals. Mutual funds allow you to invest in a diversified portfolio as an alternative to picking individual stocks and other securities through a brokerage account.
• Exchange-traded funds (ETFs): These are similar to mutual funds, but are based on a specific index such as the S&P 500. ETFs can be purchased and sold on a daily basis.
• Real estate investment trusts (REITs): A REIT is an investment portfolio made up of a variety of real estate properties that generate income.

Asset allocation

Stocks can potentially deliver better returns, but can be volatile, so they’re better suited for the longer term. Bond values tend to be more stable and are better suited for a shorter timeframe. Determining the proper asset allocation between stocks, bonds and cash is an important step, and is based on your age, goals and risk tolerance.

Six mistakes to avoid

1. Not starting soon enough. It’s more about the amount of time in the market versus market timing because of the benefits of compounding and tax deferrals. The longer you’re in the market, the better chance you have to meet your financial goals and you reduce the market risk. It’s wise to start small, start early and begin with a retirement plan such as a 401(k) or IRA because of the tax benefits.
2. Not having goals or a plan in mind. Make sure you know the purpose of each investment – for example, saving for retirement (long term) versus saving for a down payment on a house (shorter term). Once you know the purpose of each investment, you can figure out the investment vehicle and how much to save to meet your goals.
3. Not doing your research. Sometimes we get caught up in the hype of a stock or make a purchase after the run-up. It’s important to look at the fundamentals to reduce some of the risk, and gauge a company’s value and growth potential. Fundamentals include revenue, earnings, price-earnings ratio, cash flow, business development and overall market/economic conditions. It’s wise to rely on the expertise of an investment advisor.
4. Not looking at the fees. Be sure to look at how much you’re paying in fees, along with expected rate of return. The fees will ultimately eat into your earnings and growth rate. Fee arrangements can vary from an expense ratio that reduces investment income, advisory fees to manage an investment account, transaction commissions and a loaded mutual fund.
5. Going for a home run. It’s difficult to pick the next hot thing, and you can lose money doing so. It’s better to invest in a well-diversified portfolio that is in line with your overall investment objectives and risk tolerance.
6. Selling too quickly. The stock market can be volatile and cyclical, with bull and bear markets lasting multiple years. Keep in mind your investment goals, timeframe and risk tolerance.

Next steps

As discussed, the world of investments and retirement planning is vast, and tax professionals can use the opportunity to educate their clients, discuss the tax impact, and provide more value to the engagement. In lieu of giving out investment advice, you can encourage your clients to use the services of an investment advisor.

While all of us can lower our risk by meeting with a financial advisor, sticking with less volatile investments and planning for the long term, by investing money wisely, the savings will grow over time and help build wealth, increase financial security and leave more money for retirement.