Although we consider ourselves (and by ourselves, I mean mostly B) to be relatively proficient in financial matters, we don't have the time or inclination to research mutual fund families or individual funds, so we decided to open our IRAs with a financial advisor who could help with the decisions. We also liked the idea of starting a relationship with a financial advisor to whom we could turn when we're ready to make bigger financial decisions.
IRAs, or more specifically, mutual funds, provide a minefield of new terminology. When you invest in a mutual fund through an advisor, you can buy A shares, B shares, or C shares. The type of share dictates how the advisor gets paid. With A shares, he's paid up front, and you can move your money at any time with no fee. The more you invest in a mutual fund, the lower fee percentage you pay. With B shares, he's paid over (usually) 8 years, and if you remove your money from the fund family before the 8 years are up, there is a fee (to make up what he would have been paid over the 8 years). I forget the deal with C shares, but they only make sense for a short-term investor, which we are not.
The fees, unfortunately, do not end there. The mutual fund itself also has fees. Luckily, the fees for our fund family--which "regular" people can't invest in; you have to work with a financial advisor--are pretty low.
Our advisor asked us a few questions to determine our risk tolerance, such as:
- The fund that you're in loses 20 percent. What do you do?
- a. Sell!
- b. Hold steady.
- c. Invest more.
- d. Avoid funds that lose money.
I think we both chose either B or C--excellent. The next question was harder to answer:
- The fund that dropped 20% had just dropped another 15 percent. What do you do?
- a. Sell!
- b. Hold steady.
- c. Invest more.
- d. Avoid funds that lose money.
A lengthy philosophical discussion about the stock market and the role of financial advisors ensued, but in the end, we both chose either B or C again. The brief questionaire said that we fit the profile of moderate-to-aggressive investors, a label that we were both comfortable with--after all, we're looking at a 30-year minimum investment period, and the time to be (moderately) agressive is now.
Our investment profile suggested an allocation of assets among large-cap, mid-/small-cap, international, and bond funds, and our advisor helped us choose 4 funds and allocations for each. As soon as he gets them set up, we can track their performance online and start planning our retirement vacations. (Just kidding--I think...)
We also planned to buy life insurance that day, but we had run out of time. However, before we left, our advisor helped run some education-cost models to help us determine the amounts that we might want for life insurance. He detailed the current average costs of education (high) and the percentage at which education costs were rising (astronomical), and ran a profile on our unborn children to figure out how much we'd need to save to pay 75% of 2 kids' private college education. The monthly sum that we would have to start saving now (now! before the kids are even born!) was astronomical--over $800 per month.
Ever since then, we've been trying to find niche sports at which our kids can excel and work to their advantage for sports scholarships. Right now, fencing and squash are at the top of the list, but curling is a candidate as well. B suggested that they might be musically inclined and can finance their education with pop-star careers, but I reminded him that usually talents like that are hereditary, and our children will be starting with an extreme disadvantage when you consider their parents' musical abilities. For now, we're pinning our hopes on athletic abilities or raw intelligence.
