This is part four in a series of articles for beginner investors. The first three parts covered why you should invest, types of investments, and the importance of diversification. This article covers finding and hiring a financial advisor.

When it comes to money management, it can feel as if there are two camps: the top hat and monocle-wearing uber-rich types who pay other people to worry about their money, and the rest of us who have to slog through money decisions on our own. Thankfully, nothing could be further from the truth. Every investor, no matter how modest the budget, can benefit from the help of a financial professional. And if you would rather clean your driveway with a toothbrush than make big money and investment decisions, help is available for you!

Types of Financial Advisors

Depending on your needs, there are several different professionals out there who can help you to reach your goals.

Financial Planners

For general money advice—including anything from investments and retirement to life insurance to savings to taxes to estate planning—a Certified Financial Planner (CFP) is your best bet. These financial jack-of-all-trades are a great resource for the average investor, as they can help you to get a good overall look at your entire financial picture.

Financial Planners will generally offer you a free first meeting, during which time you can ask questions about how they can help you reach your goals. From there, advice from the planner can either be charged hourly (a good idea if you have just a couple of specific questions), by the project (great for those who need help in only one area), or on retainer (for those who are looking for a long term relationship).

Although anyone can call himself a financial planner, a Certified Financial Planner is a title regulated by the CFP Board and those professionals must abide by standards of practice and a code of ethics.

Stockbroker

This is the sort of money manager that most individuals think of when you mention getting investment help. Stockbrokers (also known as investment managers or wealth advisors) work to maintain the best possible returns for your investments.

In most cases, using a stockbroker is for relatively high rollers—those who have a portfolio of anywhere from $50,000 to $100,000 or higher. That’s partially because you will be paying around $100 to $200 per stock trade, which is too rich for many casual investors’ blood.

If you are willing to do your own research, you can use the services of a discount broker—that is, someone who will do the trading for you at a lower fee than that of a full service broker. Discount brokers generally charge less than $10 for an individual online trade.

Specialist

Sometimes, you need help in a very specific area. Want to figure out how to leave all your money to the whales? Want to know which 529 plan will be best for your kids? Want to figure out how to minimize your small business’s tax bill? In each of these cases, a generalist might be able to help you, but for the absolute best advice, find someone who specializes in the area where you need help.

However, it could be financially dangerous to simply hire anyone who has put out a shingle for services. This is where getting a reference from your CFP could be invaluable.

Research Before Hiring

It is always a good idea to do a background check or otherwise research an individual or company before hiring them to help you manage your money. The best place to start is by doing an online background check on the financial advisor, which you should be able to do for free with just a few minutes time. If you are satisfied with what you find online, then it’s a good idea to interview the financial planner to understand how they get paid, their investment philosophy, how they can help you, and whether or not you are comfortable with the individual or company. If something just doesn’t feel right, then don’t be afraid to look elsewhere.

When to Call in for Help

It can be tough to know if you’re ready for a financial advisor. Many people wait until they have a major life change to call in the big dogs. There’s nothing like getting married, having a baby or changing a career to make you realize it’s time to get your finances in order. And there’s absolutely nothing wrong with that kind of timing.

However, if you ever feel like you don’t know what more you need to do in order to maximize your financial goals, then schedule a meeting with a pro then and there. It will help you to find a direction or give you the peace of mind to know that you really are on the right track.

To be honest, I think I will always be a little phobic about investing. As a very risk-averse individual, I’m always worried about making the wrong decision. But I know that my financial health depends on my ability to take that plunge. So I’ll test the waters and learn to overcome those fears.

This is part three in a series of articles for beginner investors. The first two parts covered why you should invest, and types of investments. This article covers the importance of diversification in your investments.

My high school Biology class taught me that the health of a particular eco-system could be measured by the bio-diversity found there—meaning, if there were a lot of different species living in one place, you could bet that was an ecologically healthy environment.

Your financial health is similarly reflected by the diversity of your investments. It’s easy to see that putting all of your eggs in one basket is a recipe for disaster—just look at any recent financial scandal from Enron to Bernie Madoff and you’ll find someone who has lost everything because it was all placed in the same poorly managed (to say the least) basket. However, other than knowing better than to give your life savings to a Ponzi scheme or place it all in your mattress, how do you know how to diversify?

Why You Should Diversify your Investments

Here are some basics to keep in mind when trying to maintain your financial health:

Portfolio: It’s Not Just Another Word for Briefcase

You’ll often hear people refer to their investment portfolio. Basically, this is the breakdown of the different ways you invest your money in order to reach your goals. Your portfolio will change throughout your investing career as your goals change. When you first start investing, your portfolio will reflect the fact that you are able to take a long view and will include investments that may be more volatile. You have the time to wait out the market and allow your stocks to recover. If you are closer to retirement, you want to make sure your money stays put and possibly shows some modest growth. In that case, your portfolio will likely focus more on less risky (and lower returning) bonds.

In short, your risk tolerance and time frame help determine the diversity of your portfolio.

Risk Assessment

Determining your risk tolerance is an important part of drawing up your investment portfolio. For those investors who are willing to watch their money go up and down with the instability of the market, a more aggressive portfolio (but still one that incorporates diversity!) will give the possibility of higher returns, while still maintaining some stability. Those who don’t have the stomach for rapid declines can go the more conservative route but still incorporate a few riskier investments that could pay out higher returns. No matter what your risk tolerance is, however, it is imperative that you diversify your portfolio so that no one investment dominates. That allows both aggressive and risk-averse investors to enjoy stability and the potential for growth.

Beware of Sure Things

When it comes to investments, people will sometimes get dollar signs in their eyes and forget the most basic tenet of investing: diversify! If you ever come across a “can’t-fail” investment strategy, back away slowly. There is no such thing a sure thing. Accepting some risk means that you know everything is above-board. The only real way to mitigate the inherent risk of investing is to diversify. Any other scheme is just that—a scheme.

Next week, we’ll discuss how to find a financial advisor to put this all together.

My wife and I moved a few months ago and I finally realized I forgot to change our address for our Thrift Savings Plan accounts. It’s important to use the most up to date address you have so the TSP can contact you with updates or any issues that arise. This is especially important if you are already receiving your Thrift Savings Plan benefits (you need access to IRS Form 1099-R when you file your taxes). Thankfully, updating your address is as simple as updating your account online or filling out a form and mailing it in (the form is available online or by calling the the ThriftLine).

Changing Your Thrift Savings Plan Account Address

Have you moved recently?

The TSP doesn’t send out much mail – but the mail it does send is usually very important for your retirement planning needs, or filing your taxes. In most cases, the mail you receive will be limited to quarterly or annual statements if you opt to receive them in physical form (you can also receive them electronically), and your IRS Form 1099-R if you are making qualified withdrawals from your funds. Other than those situations, TSP mailings are usually limited to important plan updates.

As you can see – it’s a great idea to give the TSP the most up to date information you can. Not only will it help you have the most recent information about your account and what’s going on with the TSP, but it will also keep your private information out of the hands of others. Identity theft is a real danger, so it’s best not to give people a reason or means to target you!

Changing your address: There are two categories of TSP members: actively employed, or separated from government service. Actively employed covers anyone who is still eligible to contribute to his or her Thrift Savings Plan, and separated from Federal service covers everyone (military and civilian) who is no longer eligible to contribute to their TSP.

Are you still employed by the Federal government? Then you will need to contact your agency or service to update your address. You won’t be able to change your information via the TSP website or via the Thrift Line if you are actively employed because your service is responsible for maintaining your information and relaying it to the TSP.

Separated from Federal service? Then you are responsible for notifying the TSP about any changes to your account or personal information. To do this, you can complete Form TSP-9, Change in Address for a Separated Participant. You can get a copy of the form from the link provided, or by calling the ThriftLine. It is a one page form and should only take about 5 minutes to complete. The other way to change your address is via the Thrift Savings Plan website. Log into your account, visit the My Account: Profile Settings section and change your address.

Mail or fax your Form TSP-9: Once you complete your form send it to the following address or fax number:

Thrift Savings Plan
P.O. Box 385021
Birmingham, AL 35238

Fax: 1-866-817-5023

What if you have two accounts? Great question! My wife separated from active duty and then worked a civil service job, so she has two TSP accounts; one military, and one from Federal service. The instructions are basically the same. If you are still active in the uniformed services or Federal service, you can still only change your address through your agency or service. Then just check the appropriate box on your Form TSP-9 for the agency or service in which you are no longer active. If you are no longer active in either the uniformed services or Federal service, then you can use one form to change your address on both accounts – just check both boxes when you send in your form, or update it online.

Don’t forget about your ability to transfer your TSP. If you have since left Federal or military service, you may wish to consolidate your financial accounts to make it easier to plan for retirement or otherwise manage your money. If this is something you wish to consider, the be sure to review your options for rolling over a TSP account. Some options include rolling it into a 401k or other employer sponsored retirement plan, opening an IRA, or rolling it into a current IRA.

Investing for the first time can be intimidating, which is why we are writing this series for beginning investors. The first article in the series covered why we should invest. In it we discussed the importance of investing and how it’s not as difficult as many people believe. In this article, we discuss ways to invest and different types of investments.

Are you familiar with different types of investments? If you think that bonds are British secret agents and stocks are what thieves were shackled into in Colonial America, you’re not alone. Just like any subject, investing has its own vocabulary and it can feel a little intimidating to ask basic questions of an expert. So here is a breakdown of different ways to invest your money, and what they all will mean for your bottom line:

Investment Basics – Types of Investments

Certificates of Deposit

A Certificate of Deposit (CD) is a short-term, debt-based investment offered by a bank. In short, you give your money to the bank who lends it out to someone in the form of a loan. You receive your money back plus interest anywhere from three months to six years later. CDs are very low risk investments, but they also offer a relatively low return on investment. Because these deposits are based on a set time limit, there may also a penalty if you need to withdraw your money prior to the maturity date. Read more about using CDs as short term investments in our article about how to build a CD ladder.

Treasury Bills

A treasury bill (T-bill) is a short-term investment offered by the government. The term is usually less than one year and typically three months. T-bills generally don’t pay interest, but you can buy them at a discount, meaning you yield the difference between the purchase price and the redemption value. This means you actually buy the bond at less than face value and redeem it for face value upon the maturity date. T-bills are backed by the government and offer the closest thing to a risk-free investment available to any investor. However, their very low yield is a major drawback. US Savings bonds can be similar low risk, low return investments.

Bonds

A bond is similar to a CD in that it is debt-based. Essentially, a bond is an IOU issued by a company. When you purchase a bond, you loan a specified amount of money for a specified number of years in return for interest on the investment. Bonds generally offer much higher interest rates than CDs or T-bills and offer relatively low risk. However, they are long-term investments, which means that your money is tied up for anywhere from 10 to 30 years. If you need to sell your bond before it reaches maturity, the sale may result in a loss. Also, though bonds are relatively low risk, it is always possible that the bond issuer may declare bankruptcy or otherwise default, meaning it is possible to lose money.

Stocks

A stock is different from the debt-based investments. When you purchase stock, you have in effect become a partial owner of a company—and you get a piece of any profits (known as dividends) that the company allots to share holders. Dividend investing is a popular and proven way to invest in stocks, but if your stocks do not pay dividends (not all do), then you only make money if your stock increases in value. Unlike a bond, your return on investment is not guaranteed with a stock. Stock values fluctuate from day to day, which means that your risk is greater—as are your potential returns.

Mutual Funds

Mutual funds were created in order to allow investors to pool their money in order to buy a variety of investments—and let a professional money manager determine the best use of the investors’ money. Mutual funds are an easy way to diversify your investments (more on that next week). However, many mutual funds charge management fees of around 2% (the professional money manager needs to take a cut) and their performance depends on how good your fund manager is.

Index Funds

Index funds are similar to mutual funds—they allow investors to pool their money to purchase stocks in a large number of companies, giving them the opportunity to invest in a variety of companies without buying hundreds of individual stocks. The main difference between index funds and mutual funds is active management vs. passive management. Mutual funds are managed actively, meaning the portfolio manager actively chooses which stocks to purchase based on the mutual fund goal, and index funds are passively managed, meaning the stocks in the index fund are based on a preset list of stocks. Most index funds track a market index such as the S&P 500, NASDAQ, Wilshire 5000, indexes which track foreign markets, and similar stock market indexes. The goal of an index fund is to simply match the market as closely as possible, while not charging investors as much money in fees as some actively managed funds charge. Learn more about why index funds are attractive investments.

Gold, Silver, Precious Metals, and Commodities

Many people feel the stock market is too risky and prefer to invest in a physical asset such as gold, silver, precious metals, or even commodities. These investments can be a good way to diversify your investments. However, like most investments, it may not be a good idea to maintain a portfolio which 100% invested in precious metals. Learn more about investing in precious metals.

Which type of investment is best?

Each of these investments has its own set of pros and cons, and they can all be appropriate for investors based on their individual investment needs. In most cases it is a good idea to use a variety of different investment types in one portfolio. Next week, we’ll take a look at why diversity is important in your investments.