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- [00:00]
Darina
Hi, I'm Darina, co founder of OpenPhone. My dad is a business owner and growing up I'll never forget his old ringtone. He made it as loud as it could go because he could not afford to miss a single customer call. That stuck with me when we started OpenPhone. Our mission was to help businesses not just stay in touch, but make every customer feel valued, no matter when they might call. OpenPhone gives your team business phone numbers to call and text code customers all through an app on your phone or computer. Your calls, messages and contacts live in one workspace so your team can stay fully aligned and reply faster. And with our AI agent answering 24. 7, you'll really never miss a customer. Over 60,000 businesses use OpenPhone. Try it now and get 20% off your first six months@openphone.com tech and we can port your existing numbers over for free. Open Phone no missed calls, no missed.
- [00:59]
Grainger Representative
Customers if you're a custodial supervisor at a local high school, you know that cleanliness is key and that the best place to get cleaning supplies is from Grainger. Grainger helps you stay fully stocked on the products you trust, from paper towels and disinfectants to floor scrubbers. Plus, you can rely on Grainger for easy reordering so you never run out.
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Tess Wearsmith
Of what you need.
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Grainger Representative
Call 1-800-GRAINGER, click grainger.com or just stop by Grainger for the ones who get it done.
- [01:30]
AT&T Business Representative
And now a next level moment from AT&T business. Say you've sent out a gigantic shipment of pillows and they need to be there in time for International Sleep day. You've got AT and T5G so you're fully confident, but the vendor isn't responding and International Sleep Day is tomorrow. Luckily, AT&T 5G lets you deal with any issues with ease so the pillows will get delivered and everyone can sleep soundly, especially you. AT&T5G requires a compatible plan and device coverage not available everywhere. Learn more@att.com 5G Network.
- [02:02]
Farnoosh Tarabi
So Money Episode.
- [02:03]
Farnoosh Tarabi (Co-host or Secondary Voice)
1876 Crypto in youn 401 what you need to know before the end of the year.
- [02:10]
Farnoosh Tarabi (Podcast Introduction)
You're listening to so Money with award winning money guru Farnoosh Kharabi. Each day get a 30 minute dose of financial inspiration from the world's top business minds, authors, influencers and from Farnoosh yourself. Looking for ways to save on gas or double your double coupons. Sorry, you're in the wrong place. Seeking profound ways to live a richer, happier life. Welcome to SO money.
- [02:37]
Tess Wearsmith
It's important to remember when you're investing in something like a 401k, if you're in your 30s, 40s, 50s, that money's going to be in there for at least another 10, 20, 30 years. It's going to be in there for a while. The whole point of investing in a broad diversified portfolio like a target date fund or a combination of stocks and bonds is that you don't have to go in. That's the whole point of the portfolio is creating something that you can buy and hold that's diversified and is going to get you the average return of the stock market while also reducing your risk and smoothing out some of the volatility of the market.
- [03:14]
Farnoosh Tarabi
Welcome to so Money everybody. I'm Farnoosh Tarabi.
- [03:16]
Farnoosh Tarabi (Co-host or Secondary Voice)
Well, it's not technically the fall, but we've all got our pumpkin spice lattes out. Some of us already have our Halloween.
- [03:23]
Farnoosh Tarabi
Decorations and I'm looking at Christmas, to.
- [03:25]
Farnoosh Tarabi (Co-host or Secondary Voice)
Be honest, because these tariff tariffs are.
- [03:28]
Farnoosh Tarabi
Making me a little concerned about the price of Legos. So we are stocking up on gifts when we can.
- [03:34]
Farnoosh Tarabi (Co-host or Secondary Voice)
Now this is also a great time.
- [03:37]
Farnoosh Tarabi
Of year to check in on your money.
- [03:40]
Farnoosh Tarabi (Co-host or Secondary Voice)
A lot of us wait until January to make financial resolutions, but the fall is one of my favorite times to review our money, especially our retirement accounts. And today we're focusing specifically on the 401k. There are deadlines we have to keep in mind. There's also some interesting new legislation on the horizon and for many of us, this is when our employers begin open enrollment and nudge us to reevaluate our benefits. So this is again a really great, healthy time to be looking under the hood of your 401k. Or if you haven't started investing yet, look at your workplace benefits. But before we dive in, a really quick note that on Tuesday, September 30th this month I'll be teaching my one and only investing workshop. It is a virtual live class where I'm going to pull back the curtain on any how I invest. All the rules that I've been following for decades to build a seven figure portfolio. You'll get to see my process in action. You will get clear strategies that you can implement. You'll be able to ask me questions live and if you'd like to join, spots are filling up. Go to SewMoney Workshop.com and get your spot reserved. This always sells out. I only teach this once a year live and I hope to see you there. Now back to today's show. Our guest is Tess Waresmith. She's an Accredited financial counselor, investing educator, and founder of wealth with Tess. She has a gift, I think, for breaking down this intimidating world of investing into simple, actionable steps that help everyday people build long term wealth. And she's here to talk about the recent headlines that you may have been hearing about crypto private equity and these alternative assets slated to appear in our 401ks. What does it mean? What are the risks? How to make sure that our accounts are protected and they're working for us. And also the strategies that Tess believes are the most important as we finish the year. Let's get into it.
- [05:43]
Farnoosh Tarabi
Tess Wearsmith, welcome back to SEW money. How have you been? How was your summer?
- [05:48]
Tess Wearsmith
It was wonderful. I'm so excited to be back. I just bought an inflatable paddleboard which was my win of the summer. So yeah, it's been really lovely.
- [06:00]
Farnoosh Tarabi
We're not going to talk about inflatable paddleboards.
- [06:02]
Tess Wearsmith
Bummer.
- [06:04]
Farnoosh Tarabi
Sorry. Although maybe offline we can change water sports stories. Let's talk about money and investing. This is obviously your wheelhouse. You're extremely dedicated to helping people simplify their investing and make smarter choices. And today I thought we could come back on it's the fall, and I think fall is a great time to to review your money. Often we do this in January, if we do it at all. Everyone does everything again in January. But I think fall is a great time to get ahead of the new year and also make sure that you do finish the year strong and focusing on retirement right now, as we know that there are deadlines to hit. Right. The end of the year is the last day to contribute to your 401k for that tax year and get that tax break. But we also want to talk about some news that's been coming down the 401k pipeline. Maybe some of us are unaware because it's been happening relatively quietly with everything.
- [07:02]
Farnoosh Tarabi (Co-host or Secondary Voice)
Else going on in the world.
- [07:03]
Farnoosh Tarabi
But these are important changes. But let's start with the headlines and the big picture. There's news that crypto and other alternative assets like private equity are starting to appear in some 401k conversations. Can you tell us what the average saver should know about this?
- [07:21]
Tess Wearsmith
Sure. One of the big things that happened in the summer that I think you're right, slid past a lot of people just because there's so much happening in the world and so much policy being talked about. One of the things that was passed was legislation, an executive order that basically said we want to make sure that alternative assets are available for regular investors for regular Americans with 401ks. And this was something that was definitely controversial. Depending on who you ask about it. It's important to understand what this is because this could show up in your 401k. So just to break down a little bit of what this means, specifically the order talked about alternative assets and some examples of alternative assets are private equity, which is basically an opportunity to buy into companies that aren't publicly traded. Just a super simple explanation. And then other alternative assets that were listed as possibilities to show up in your 401k cryptocurrency as well. One really important thing to understand is this is not going to happen tomorrow. But it is something that we need to pay attention to because it could impact the choices you have in your 401k, the fees in your 401k. It's not necessarily a bad or good thing. And we can talk about the pros and cons. There are benefits and drawbacks of this, but it is something that we all need to know. And I think what concerns me about this legislation is that already most Americans, over half of Americans, have no idea what they're paying in fees in their 401k in the first place and don't really know what they're invested in already. So because this legislation was passed but hasn't really been implemented, this is a perfect time to understand the basics of your 401k. Start to use this as an opportunity to learn from what you're invested in, find out some of those fees and then if these changes occur and there's still a big if of whether you will actually see these alternative assets show up in your portfolio, you'll have a better understanding of what that actually means for your money in the future.
- [09:26]
Farnoosh Tarabi
There are potential gains and big gains in alternative assets, but also big losses. What's your advice for how much to be invested in alternatives in your portfolio and what are the questions we should be asking, let's say our 401k manager or if we're working with a financial planner. If you're working with a certified financial planner, they are your fiduciary. They're not supposed to sell you any products that would earn them a commission without disclosing that to you. You are their number one financial priority, at least on paper. And I think, I think most do practice that law. But we still have to be vigilant. So what do we need to know about the limits of these and what do we need to show about the risks?
- [10:10]
Tess Wearsmith
Yeah, so you nailed it with the pros, right? People that are really for adding alternative assets, it's a way to diversify your investment. So right now, in your 401k, if you don't know what you're invested in, you're probably invested in stocks and bonds. So ownership of companies and bonds, right. Those are the two main ways that you are diversified. And so the argument is that adding alternative assets like cryptocurrency or private equity can further diversify and put your eggs in different baskets. To your point, however, there is the potential for higher returns but also higher risk. And so what's really important to understand about alternative assets is that historically they've been available to wealthier Americans, what's called accredited investors. So people that have a specific net worth or are making a certain amount of money and they're deemed what's called sophisticated investors. And private equity has also been available to large government pension funds. And the reason for that is because these are people in institutions that have a huge amount of money, so they can afford to take a portion of that and put it into riskier assets. As a person that is trying to make sure you have enough money for retirement and your future and your family and whatever your financial goals are, it's really important to understand that wealthier people that have some leeway in terms of their finances and big pensions and funds are able to take those risks because it's not going to impact them as much. And so when we're thinking about alternative assets in our portfolio, you have to be really certain that you understand the risk and evaluate that against how much money you want to put into these assets. And so personally, I think most people, the average, I can't say exactly, it really depends on the person. But I think on average, most people shouldn't be putting more than 5ish percent. Rough guideline, that's not financial advice. 5% of your net worth or your assets into alternative assets because they are what's called super speculative. The same goes with cryptocurrency. Right now people ask me all the time, do you invest in it? And I do, but it's a very small portion of my money and I look at it like Vegas odds gambling.
- [12:28]
Farnoosh Tarabi
100%. Yeah, I very much agree with the 5% rule of thumb. I want to get into some more tried and true 401k strategies. With you in a moment. But just to give listeners some more context on this executive order which is titled Democratizing Access to alternative assets for 401k investors. Siri on the nose, I will link that in our show Notes. But I want to mention a couple things, right? One is that our president has a huge stake in crypto proliferation. And so while CFPs have a fiduciary obligation to their clients, President Trump does not have a fiduciary obligation to you per se, at least to your 401k. We'd like to think that he does. I would like to think that presidents do. But he is very pro crypto. And so this is personally very advantageous for him. As crypto gets into our 401ks and quote, unquote, becomes more democratized, the reality is that the market grows and so does his exposure to that market, which, again, he has a huge stake in. So that's context number one. Context number two, I'm going to include in our show Notes an interview that I did with Barry Ritholtz, who is a very longtime investor. He foresaw the 2008 subprime mortgage debacle, among other weaknesses in the market over the decades. And we talked about this, this was earlier this year, and where he very much cautions us against any investment strategy pitch that is branded as democratizing Your sort of 401k or your investments. He thinks that is, I don't know, what do you call that? Not propaganda. But it's like this deregulation, really, as opposed to democratization. And this isn't me being political. This is just facts.
- [14:22]
Tess Wearsmith
Totally. And I think some of the other facts to shift more into really helping people understand the risks here, if this does show up in your portfolio, is that first of all, there's an immediate conflict of interest. There's $9 trillion roughly of 401k money that private equity advocates would love access to. There's a reason why they access your money. So that's the first thing, right? There's a little bit of conflict of interest there. In addition, 401k fees are already an issue where people are spending an incredible amount of money on fees. Not always, but a lot of times, and they don't realize it. One of the things about private equity that keeps getting pushed as a marketing tactic is, yes, this is higher returns, but what aren't talking about in the same breath that they should be is much higher fees and another thing called liquidity risk, where you might not necessarily be able to access your money once they're in these investments. So there's a lack of transparency. These are not publicly traded companies. Right. So there's a lot of risk when it comes to private equity. The way it shows up in our 401ks if it does, remains to be seen. It will be up to the plan administrators. And additionally, it could show up in something like a target date fund. So you might not even be totally aware that you're investing in those things. But there are an incredible amount of risks here. And so again, I think I know we're going to shift into the 401k best practices, and I think that's super important. But I really want everyone to be aware of this because there is a possibility that things become more expensive because of the inclusion of alternative assets like these.
- [15:56]
Farnoosh Tarabi
And the simple advice really to boil this all down is to be proactive. Ask about the inclusion of alternative assets in your portfolio. What's the breakdown? What are the fees? We should all do this anyway. But to your point, this executive order has provided another sort of opportunity, I guess, to like, care and get under the hood of things. So the fall, as I mentioned, is a great time to review your finances and with that, your 401k. As we approach the end of the year, and we want to make sure that if our goal was to invest a 10% of our income in our 401k or to meet that match, that we can. And if you're behind or really further ahead, like now, you can realign and reposition for the next four months. Open enrollment season is the one time that employers push us to look at our benefits. And so why is this also a good time to review your 401k?
- [16:55]
Tess Wearsmith
Yeah, so it doesn't necessarily mean that open enrollment is the only time to look at your 401k, but exactly like you said, because it's an opportunity for us to evaluate some of our other benefits and what we might be choosing for health insurance or life insurance. It's also a good time to actually look at your 401k and really understand how much you're contributing. Are you taking full advantage of of whatever company benefit you might have if you have a match, are you taking advantage of that first and foremost? And if you're in a position to do, Are you maxing out your 401k to save on taxes and better prepare for retirement? I think one of the most overlooked benefits of a 401k is the tax savings. Because I get questions all the time where people will say, I want to save on taxes, how do I do that? And the reality is, if you're a W2 employee, but there's honestly no cool silver bullets to save a bunch of money on taxes, but your 401k is actually one of those things that can really help. And so, because right now we have a few months to the end of the year, this is your opportunity to potentially contribute more, to max out your 401k before we get to December so that you can benefit from those tax savings, that you can get as much money into this account as possible before it resets in the new year. And also to really take a look at how your money's invested. So the two biggest things you really want to make sure is there a way that you can shift your finances to make sure you're contributing and maxing this out as much as possible again to save on taxes? And then what is that money doing for you while it's inside your 401k? And that's the second step to really maximizing this account for you.
- [18:34]
Farnoosh Tarabi
So let's say I'm in my 401k portal, I'm looking at my balance, I'm seeing a bunch of ticker symbols. I want to understand how I'm actually investing. What is the allocation? Is this the right allocation for me? What's your advice for us listening to? Guide us to the right mix. And I know a lot of times with wherever we're hosting our 401k, whether it's fidelity or Vanguard or Schwab, that they will do it for us based on maybe a series of questions they asked us at the beginning. But it's not always perfect. So how do we know that we're in the right mix?
- [19:16]
Tess Wearsmith
Sure. So it depends on where you are from a financial knowledge perspective right now. So I'll start from the very beginning. What I would do if you had really no idea how your money is invested. If you're not sure, you're very likely invested in something called a target date fund. And a target date fund is an all in one investment that includes stocks and bonds. And it adjusts for you in risk over time so that by the time you reach retirement age, it's less risky and less volatile. And so target date funds can be a really great option for a lot of people because it's the all in one investment. It's like going to Ikea and you have to furnish your bedroom. And instead of getting like a bed and a lamp and a dresser, you get the Ikea like rooms to go. You get like the full bedroom set. That's what the target date fund is for your 401k. Or you can invest in target date funds outside of your 401k as well. But there's a couple Important things that you need to know about a fund like this one is that the amount of stocks and bonds matter. And that ratio is going to change as you approach retirement. And so most of the time with the Target Date Fund, you're going to see a date. It's going to say target date fund 2040 or 2060. And that date is the date that fund thinks that you want to retire. And so what's going to happen is that as you approach that date, the amount of bonds is going to increase and the amount of stocks is going to decrease. And that's okay, because that's sound financial advice in terms of reducing your risk. The problem is that if you pick a date because you want to retire earlier, that might leave you in a situation where a big portion of your money is in bonds and less in stocks. And what happens then is because bonds are less risky, they also have a lower return. And so if you're feeling like your 401k isn't growing like it should be, one of the first things you really want to understand is how much of my money is in stocks and how much of my money is in bonds. This is probably the number one thing when I work with students and they learn the basics of personal finance and investing. This is the most common thing that people figure out is once they look at their account and either look into their Target Date Fund or whatever else they're invested in, they realize that they're holding a whole bunch of bonds and a lot less stocks. And so, generally speaking, there's no perfect percentage here. And I can't give you specific financial advice of what this ratio looks like for you, but guidelines are when you're in your 30s, 40s, even early 50s, you should be vastly majority stocks. 70, 80, 90%, depending on how comfortable you are with risk. And what I find is that once most people learn the basics of the stock market and how powerful it is, they want to be closer to 80 or 90%, because they realize they have decades until retirement. And so what I see a lot is people signing into their accounts, learning the basics, and realizing they're investing in a huge chunk of bonds, and that's why their money isn't growing as fast as they would like it to be. So I think that's the first step. If you're not sure what you're invested, you're probably in a Target Date Fund and figuring out that mix of stocks and bonds.
- [22:34]
Farnoosh Tarabi
Oh, my gosh. What you just said just triggered something in me. Can I share a story?
- [22:40]
Tess Wearsmith
Yeah, absolutely.
- [22:42]
Farnoosh Tarabi
I don't know if you'll appreciate it, but it's not the worst you've heard. I transferred a 401k into an IRA after leaving a job, which is good thing. Step one, transfer the 401. And it was at the same financial institution. So I didn't even change websites to do this. It was literally just two clicks on the financial institutions website. And I didn't realize that all the investments were now in cash in the ira. For a year I just went about my life and then I finally was checking the statements and I go, why has money grown at all in a year when I know that it should have at least grown a little bit? And it was a pretty banging year for the s and P500. I think it was up like 24%. And it's because of that transfer. I just assumed. And by the way, the Wall Street Journal did a whole story on this subsequent to this. Not because this happened to me, just coincidentally. I think for whatever reason, billions of dollars sitting in cash, you're talking about too much in bonds. How about just you're in cash and you have no idea because you opened the Roth IRA, you opened the 401k, you trans maybe the money into different accounts, and now you're at ground zero and you haven't picked any investments. And you think you're invested because you opened the account. But there's another step.
- [24:10]
Tess Wearsmith
Yeah.
- [24:10]
Farnoosh Tarabi
Anyway.
- [24:11]
Tess Wearsmith
Yeah. And that's a really common problem in the work that I do as an accredited financial counselor. One of the things is I work with people all the time that are at the beginning of this journey. So they are maybe resetting their password for the first time in a while on these accounts. And it is very common for people to log in and either realize that their money hasn't been growing because it's sitting in cash, similar to your situation, or that it's not growing like it should be because it's invested in things that don't make sense for them and their age. All this to say, you don't need to be a stock market expert to start to look at some of these things in your account, but it can make a dramatic difference in how much money you have in retirement. Tens of thousands of dollars, hundreds of thousands of dollars, if your money isn't set up right. And I will say the amount of times that people think they're invested in something and they realize they're not is more common than I think we really realize. And so, again, because we're talking about the fall, it's open enrollment. This is a perfect time to log into your accounts. And first of all, your money should be growing. The S&P 500, which is the benchmark for the stock market. It's how we measure the overall performance of the stock market at the time of this recording, is up 9%. So your money should be up if you're invested in a majority stock portfolio with some bonds. If it's not, that's a red flag that something needs to change in order to make sure that your money's growing for retirement.
- [25:36]
Farnoosh Tarabi (Co-host or Secondary Voice)
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- [28:01]
Workday Go Representative
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- [28:31]
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- [29:11]
Farnoosh Tarabi
All right, let's talk about fees because I have another personal story, hopefully a helpful story here that years ago I worked with a financial planner and at the same time I was launching this podcast and I spoke with a guest who was very big on check the fees. So I had never done this and I checked the fees and I was mostly pleased with the fees, all less than 1%. And then there were some that were like two and a half percent. And I brought those up to my financial planner. I said why are we investing in these funds that are very expensive compared to the others in the portfolio? And you know, well this is an emerging market fund. It's a little bit more or a lot more managed. So that's why the fee is higher. It's more, it's. We consider this an alternative, but I said it's not important to me because I did the math and this one fund is going to cost us like X thousands of dollars whether it makes money or not for me. So I think I'm willing to give that up in exchange for maybe more of the S and P 500. And they did. They were fine with it. But I felt so empowered with that knowledge of just check the fees and ask about the fees, because you could, you could save yourself tens, maybe more thousands of dollars over the life of that portfolio. Tell us your philosophy on fees.
- [30:35]
Tess Wearsmith
This is like my hill to die on because I have a similar story of working with a financial advisor and realizing what I was paying in fees. And when I did the math, I realized if I continued working with them for another 10, 20 years, which was my plan, I would end up paying multiple six figures in fees, which is so hard for us to comprehend because we hear 1% or 2% and it sounds relatively innocuous. But what we don't understand is that fees compound just like our money does. And so if you're paying 1%, I personally think that's very expensive. There's wonderful financial advisors that charge flat fees and there's other ways to invest your money. What I will say is that when it comes to your 401k, there's two different types of fees that you should know about. One is the administrative fee, which is the fee that the plan administrator is going to charge. And there's not much you can do about it, but you should know what it is because when you leave that company, if it's hot on the higher side, you're going to want to be a little bit more urgent with moving that money over. For example, my last corporate employer, the administrative fee was 0.86%, which is, is pretty high. And most people don't know. And by the way, the employer didn't know what the fee was. So you might have to. If you work for a smaller company, I would make sure that you ask the plan administrator directly or find some disclosure docs because there's not a lot of transparency around these fees. But anyway, that's the first one. There's not much we can do about the administrative fee, but the other fees are the investments themselves. And so every time you invest in a target date fund or any kind of mutual fund or index fund, every single fund has a fee and the fee is called an expense ratio. It's just an annual fee expressed as a percentage. And so different funds are going to have different fees. And so your example, Farnouche, is perfect. Some funds that are actively managed, where there's a manager, a wealth manager trying to pick the right stocks, those are going to have a higher fee. Whereas passively managed funds, things like index funds and indexed ETFs are going to have lower fees. The problem is that a lot of times we are conditioned to associate something costs more, it's better. And in this case that's not necessarily true. And most index funds and index ETFs tend to outperform professionals that are trying to pick the right stocks to beat whatever average they're trying to surpass. And so in your 401k, you're going to have different options. You're going to have some options that are higher fee and you're going to have options that are lower fee. And so one of the things you can do as you're starting to look at your 401k now, let's say you figured out you're contributing more. That's the first step, right? Make sure you're contributing, make sure that you're at least getting the match. The second step is, okay, now that I'm contributing this money, what's my money doing? And so you want to look at the target date funds. Some of those funds can have really high fees. And when I say high, really anything above 0.2% these days is pretty high. Most 401ks are going to have at least a couple funds that are index funds, like S&P 500 index funds or total US stock market index funds that are simple passively managed funds that get you the average return of the stock market and cost you almost nothing under 0.2%. And so that's really the second thing I would do is really understand what your options are. Because a lot of times people feel like they don't have many options. But when you look into it, you might have a couple index funds and you only need a couple to create a really nice diversified portfolio for yourself. So I would say the order is a target date fund might be a fine option if the fees are reasonable. But if not, you might want to take it a step further and look into index funds. And I would recommend anyone do that anyway, because this is the kind of knowledge that can help you build wealth. If you really want to be maximizing and optimizing all of your accounts, your IRA, and start really understanding the power of compound interest and really growing your money, you want to understand the basics of index funds. I think that is like a truly life changing piece of knowledge. And the 401k is a great place for you to start because you already have it. You're already an investor, you're already investing in the stock market. You might as well make sure your money is growing as fast as possible.
- [34:58]
Farnoosh Tarabi
If you're starting today and you create a portfolio, let's say through any of these automated platforms or through your workplace, 401k and you decide I want 80% stocks, 20% bonds. And so your index fund mix represents that there are bond index funds, S&P 500 index funds, ET cetera. Can I assume that as I age and I become less risk tolerant, that allocation will adjust for me or do I need to go in every so often and adjust it to okay, now I'm going to do 70% equities and 30% bonds. I'm under the impression that the automated platforms have asked you when you want to retire and will do it for you. But I've noticed that is in personally like not the case sometimes, it just depends. So any advice on that?
- [35:48]
Tess Wearsmith
Yeah, it does depend. I will say there are some 401ks that have really great features that are making it really easy for you these days, which is great, but some of them don't. So if you're not in a target date fund that is is automatically doing this for you, you want to figure out a percentage of roughly where you want to be at. And as a reminder like you can always change that as you learn more. So a 401k is a tax advantaged account. And I think a lot of people agonize over which investments they're choosing or their stock and bond allocation. You can change it. It's not like a huge deal. So I would pick your allocation. Let's say for the sake of this example, a very common allocation is going to be 80% stocks and 20% bonds, something like that. If you're invested that way, the general recommendation from financial institutions that I trust like Vanguard and Fidelity, one to two times a year, maybe you adjust it. But quite frankly, like you're investing for the long term, 10, 20 years, you don't need to be reallocating all the time. If the market goes down a percent or up a percentage, you don't need to go in there, there. I've had a target allocation and I've left it for years. So I don't think agonizing over the allocation is a good use of your time. I do think what's more important is setting the right one for you in the beginning. And then yeah, I would go check it like once or twice a year. But it's not something that you have to constantly manage all the time.
- [37:14]
Farnoosh Tarabi
There's also this auto rebalance feature, which is separate from what I was asking about. But I do think that is something we should all opt into. And basically what auto rebalance is is that let's say you have designated your allocation to be 80, 20, 80 stocks, 20 bonds, and then stocks go on a rally for six months and suddenly your allocation is 90 stocks, 10 bonds, because the value of stocks has gone up, and so your pie has increased on the stock side. So every once in a while, maybe every six months or quarterly, these automated platforms can do what's called auto rebalance, which is to realign the portfolio back to the 80, 20 that you had requested. And I guess what I'm also hearing is that as you get older or as your life circumstances change, your risk tolerance change, irrespective of what's happening in the market. You're like, okay, from here on out, I want to be a little bit more conservative. I'm going to go in and you can actually change the proportion of stocks to bonds in your portfolio. And I have done that. I did that during the pandemic when I realized, oh, I'm in my 40s now and life is really uncertain, and we just bought a new house and my kids are getting older and I just didn't want to have more. I didn't have as much appetite for risk. That isn't to say that I withdrew from the market. I just shifted my exposure to equities in my biggest retirement portfolio slightly. But I knew that could potentially reduce also my gains over the next 30 years. So what I did instead to offset that was contribute more to the portfolio, something that I could personally adjust myself. And so I just felt more in control of, like, my risk exposure. And I felt happy about it. I've written about it. I can share that as well in the show notes. But to your point, don't be doing this, this twice a year. I don't know what institution is asking you to do this twice a year. That. That feels aggressive to me.
- [39:21]
Tess Wearsmith
Yeah, I've seen the recommendations between like quarterly and twice a year. And again, it's important to remember when you're investing in something like a 401k, if you're in your 30s, 40s, 50s, that money's going to be in there for at least another 10, 20, 30 years. It's going to be in there for a while. The whole point of investing in a broad, diversified portfolio Like a target date fund or a combination of stocks and bonds is that you don't have to go in. That's the whole point of the portfolio is creating something that you can buy and hold that's diversified and is going to get you the average return of the stock market while also reducing your risk and smoothing out some of the volatility of the market. I'm with you. I barely change mine at all. One thing I'll say, over the last few years, the market's been on a pretty significant rally. So if you did do this a few years ago, you probably have more of a stock allocation at this point. Might want to change something, but I don't think it's something that most people should be going in on any kind of regular basis and feeling like you have to keep up every time there's a piece of news. That would be exhausting.
- [40:27]
Farnoosh Tarabi
Oh my gosh. I think that's a forever piece of advice and always good to sit with you and feel. I feel more in really like in the last 40 minutes my nervous system has calmed a bit and we are talking about investing, which is like a really anxiety driving like potentially. But you do a beautiful job of just giving us what we need in the right doses. Always good advice. Tess Wearsmith. Tell us where we can learn more. I know you have so much going on and so many cool offerings.
- [40:57]
Tess Wearsmith
Yeah. So for your 401k specifically, I actually have a super short mini course that will walk you through some of the steps we talked about figuring out how much you want to invest, some guidelines for how to invest and that that's a free resource. So if you go to wealthwithtess.com 401k you can access that resource. And honestly right now is a perfect time to do that. There's a few reminders of other tax advantage things that are good to know, but it's really short. It'll take you like 40 minutes max to look at your account. So probably the hardest part will be resetting your password. So that's@wealthwithtest.com 401k and then I also share tons of information and updates on Instagram at Wealth with Tess as well. And yeah, thank you, thank you always for having me. I think 401k is like my favorite account out there because we already have it, it's automated and it's such a great gateway to learning about how to build wealth outside. So if you're somebody that's overwhelmed with they should be doing this or that and you have a 401k. That is a perfect place for you to start. Like you're already doing it it. So you can take your time and learn the basics of it and really make sure it's working for you. And that's going to empower you to make better financial decisions outside of it as well. So if you're looking for a place to start this fall, start with that and make sure you're making the most of that and then you can move on to other investing strategies.
- [42:24]
Farnoosh Tarabi
I love the 401k too. Part of me feels bad for saying that, but I do. I should be anti establishment a little bit here, but I don't love the reason.
- [42:37]
Tess Wearsmith
Like the history is tough.
- [42:39]
Farnoosh Tarabi
The history is tough. Like people really relied on that pension. But the world changes. Who wants to stay at the same company for 50 years? Nobody.
- [42:46]
Tess Wearsmith
Yeah. And for a lot of people, it is a way to have exposure to the market without having to set up your own account. That's not. I agree. Like, what we're talking about is that there used to be pensions. Right. And because of legislation, companies pulled back on pensions and started with more 401ks. And I really believe that you shouldn't have to be an active participant in the market to have a comfortable retirement. But that's where we're at. And so if we have these tools and we can make the most of them and make sure that we're building enough wealth to have security in our family, then I want to help people do that. Even though, yeah, I love it as an investing vehicle. But I agree, like, I, I wish we still had pensions. I think that would be more fair and easier for a lot of people.
- [43:32]
Farnoosh Tarabi
Oh my gosh. Can you imagine?
- [43:34]
Tess Wearsmith
Is that too negative to end on?
- [43:36]
Farnoosh Tarabi
No, no, no, I think.
- [43:38]
Tess Wearsmith
But your 401k is a great tool.
- [43:42]
Farnoosh Tarabi
It's portable. You've got the match. Yeah. There's lots to love, lots to love with the 401k. And if you don't have a 401k, there's IRAs, a whole world of IRAs. Maybe we'll have you back on and talk about that similar. But you can have both. You can have a 401k and an IRA.
- [43:58]
Quit with Jones Representative
Yeah.
- [43:58]
Farnoosh Tarabi
Tess Wearsmith, thank you so much.
- [44:01]
Tess Wearsmith
Thank you so much for having me.
- [44:05]
Farnoosh Tarabi (Co-host or Secondary Voice)
Thanks again to Tess Wearsmith for joining us again. If you'd like to join me for my virtual live workshop on Investing, go to somoneyworkshop.com and grab your spot. I'll see you back here on Wednesday. And I hope your day is so money.
- [44:33]
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- [45:56]
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