Index Funds, Diversification & Market Volatility

Welcome to Episode Two of Cut Through the Noise, where Anthony Saffer, CFP® and Alex Okugawa, CFP®, CEPA®, CKA® tackle the hottest topics in financial markets, financial planning, and life, including:

– What are the advantages of an index fund?
– Should I diversify by having an IRA and a 401(k)?
– Should I refinance my mortgage or wait for rates to drop lower?
– How do I generate retirement income during volatile markets?

 

Full Transcript:

Alex: Hi there, and welcome to our segment Cut Through The Noise. So today we are going to answer common questions that we have been hearing throughout the month along with what is going on around the world. And as always if you have a question that you would like us to answer please drop a comment below or you can send us an email at admin@onedegreeadvisors.com.

What are the advantages of an index fund? (00:23-1:23)

Alex: So let’s get right into it Anthony. The first question we have here is What are the advantages of an index fund?

 

Anthony: Advantages of an index fund. Number one low-cost. That’s the main thing. So buying a fund that doesn’t put a lot towards the expenses more towards your bottom line, you know beyond that I mean, you’re really looking at the behavioral aspect of it. If I’m following a certain index. I’m more likely to stay involved because that’s what I’m comparing it to and then really for those broad-based indexes its ensuring that you do own the winners. I mean, if you go back and look ten, twenty years ago, what were the top performing companies? A lot of them are not the same today? And we don’t know exactly what’s going to happen in the next 10 to 20 years. So by broadly investing we’re more likely to capture those winners.

 

Alex: Yeah, can agree.I mean again, we’re big proponents of index funds you can use them within a certain portion of a portfolio to take advantage ofit.You know, it’s “pro” characteristics and then you know, you have to be aware of some of its “cons” characteristics.

Should I diversify by having an IRA and a 401k? (01:23-2:05)

Anthony: Alright next question for you Alex.Should I diversify by having an IRA and a 401k?

 

Alex: Yeah.That’s a good question.I hear this quite a bit.And again, it goes back to a basic understanding that an IRA and a 401k is just an account “type”. When we’re talking about diversification really what you’re focused on there is the Investments inside of each account type.So, you know, you can have Investments inside an IRA and Investments inside a 401k if they look identical, you’re not diversified sodiversification happens within the “account type”.

Anthony: Right and there can be matches that a company provides within a 401k and those things need to be considered as well.

Should I refinance my mortgage or wait for rates to drop lower? (02:09-3:05)

Alex:  Absolutely. All right, the third question we have here we’re hearing this a lot, especially with the current environment. It is Should I refinance my mortgage or wait for rates to drop lower?

 

Anthony: I say go for it. At least that is how I usually answer that question. I mean unless you have unique circumstances, and everyone must consider those factors is go for it. And one of the strategies that’s worked really well in this downward trending rate environment is to refinance with either low or no closing costs. Now you might pay at a tick higher on the interest rate, but it’s worked really well because then you know, you don’t pour a bunch of money into closing costs you lower your rate, lower your payments, and then if rates go down lower you’re not really feeling that remorse of paying a bunch of closing costs.

Alex: Especially and this becomes even easier too if you work with either like a more modern bank or a really good mortgage broker who can do a lot of things electronically. DocuSign just quickly, just click, click, click go through the process that takes a lot of the headache away too if you have to do multiple re-finances.

 

How do I generate retirement income during volatile markets? (03:06-04:32)

Anthony: Yeah. Absolutely. All right final question for you Alex. How do I generate retirement income during volatile markets?

 

Alex: Yeah. That is a great question. Of course, getting it a lot with what’s going on right now. The best way to you know, really create retirement systematic retirement income is to first of all understand your goals and priorities, but make sure you’re well diversified. I’ll give you an example, you know, if we look back to March of this year when the markets kind of dropped off on a cliff. If you’re taking systematic income. The last thing you want to do in March is sell from your stocks, right they just dropped 30, you know, plus percentage points. We don’t want to sell those. Let’s instead look at our bonds and our cash. High-quality bonds and cash to generate our systematic income. We give our stocks time to recover and when they do recover, then we can take some of the growth off of the stocks and replenish our bonds in cash but it’s all about having a plan ahead of time. It’s a systematic process to make sure you know what I’m going to help insulate myself from short-term Market risk to make sure I don’t have all these fluctuations and I’m worried about it.

Anthony: Yeah important for the sustainability over the long term. Those are the types of things that we help retirees with as well.

 

Alex: Exactly. All right. Well again, this was our segment cut through the noise. We hope it was helpful. If you have any questions that you would like us to answer again, please drop a comment below or you can send an email to admin@onedegreeadvisors.com. We look forward to talking with you.

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