Many people would love to be in Jeremy McMullen’s shoes. At 30, he has little debt, and owns a home and a rental property. Yet, he’s in no mood for pats on the back. With an underperforming portfolio that lacks diversification, his holdings have produced a lackluster -0.1% five-year return. As a result, he’s desperately seeking better performance from his investments.
“For at least the last five years, my investments have lost money or been stagnant–even before the economic downturn,†says McMullen of his thrift savings plan, Roth IRA, and the mutual funds in his brokerage account.
He was so discouraged during the Great Recession of 2008—09 that for several months he stopped contributing to his brokerage account. “I watched it go as low as $14,000 at one point, when it had been worth $28,000,†he says. “I wanted to pull out all my money to protect it from a complete loss.â€
But McMullen, who spent several years in the Armed Forces, is not one for backing away from challenges. He knows discipline gets results, and socks away $400 a month into his Roth IRA and about 10% of his salary of approximately $75,000 into the retirement plan at work.
He’s counting on these investments to fund his dream of being able to retire by age 55. His other goals include having the financial wherewithal to travel abroad once a year, and save for the college education of his 1-year-old son.
McMullen, a lieutenant in the United States Navy, serves as a naval science instructor for the University of South Carolina’s Naval ROTC unit. Although he offers guidance to students, McMullen admits that he also needs direction, “so that I can improve the performance of my investments and get the kind of growth I’m looking for.â€
For the most part, his finances are on track. He has $37,000 in a money market account (which also represents his emergency funds), $5,300 in checking, additional savings of $3,000, and $92,000 invested in equities. He’s not drowning in debt–his only obligations are $2,300 for furniture, his car loan of $23,000, and $111,000 for his two mortgages.
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McMullen concedes, however, that his expenditures could be better organized: “I don’t track daily, small expenses very well. I put most everything on my American Express, so I can see where I spent my money. But with so many purchases, when I get my statement it’s overwhelming. I haven’t updated my budget in awhile.†Some of his larger bills are set up on automatic bill pay to eliminate guesswork.
Motivated by his son, McMullen is looking to fine-tune his approach to saving and investing. “I want to be able to start saving for his education, not just college, but maybe during his formative years. I want to be able to handle whatever life throws at me financially.â€
The Advice
Black Enterprise and Robert Rowell, financial adviser and vice president of investments for Wells Fargo Advisors L.L.C. in Charlotte, North Carolina, devised a plan to help McMullen get the most out of his investments and reach his financial goals.
– Diversify portfolio: McMullen’s track record calls for a closer look at his holdings. “He has all his Roth IRA contributions in large-cap stocks. He has all his eggs in one asset class and is missing out on other asset classes, such as [midcap], small-cap stocks, real estate securities, emerging markets, commodities, high-yield bonds, international stocks, investment grade bonds, etc. Rowell recommends putting 65% in equities or stocks; 32% in bonds or fixed income; 2% in commodities; and 1% in cash alternatives. “From one year to the next, one class can have a higher rate of return, and you don’t want to miss the growth
opportunities,†explains Rowell. He also recommends that McMullen max out his thrift saving plan contributions and make sure he has a broad brush of assets, including bonds and international investments.- Reinvest dividends: McMullen was so disappointed with the lack of growth in his brokerage account that he started receiving dividends. Rowell advises that he reinvest them. “When they are paid in a down market, you are more likely to invest at cheaper prices,†says Rowell
– Build savings for son’s education: Rowell suggests two options: a 529 plan or the Uniform Gift to Minors Act. With a 529 savings plan, your investment grows tax-deferred and withdrawals are tax-free, as long as the money is used for college-related expenses. The UGMA allows money or other assets to be given as a gift to a minor child while you maintain control of it. The money doesn’t have to be used only for college, Rowell says.
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“Jeremy seemed to like this because the money could be used for many purposes. He should explore the trade-offs of both,†says Rowell, who recommends McMullen talk with a tax professional to help him make a choice. Rowell suggests using the $2,000 contest winnings to seed the college fund and then saving $100 a month systematically. If he starts with $2,000 and adds $100 a month, assuming a 6% average rate of return annually, he would have nearly $40,000 in 17 years.
– Protect and prepare for the future: While McMullen has a $400,000 life insurance policy through the Navy, he’s vulnerable. “He should consider an additional, outside policy. He recommends that McMullen consider an $800,000, 30-year policy, which would cost $80 a month. “He’s young, healthy; a term policy would be inexpensive and help take care of his son’s needs,†says Rowell. “He has a 1-year-old son and no will. If something happens to Jeremy, the state will determine what happens to his son. He needs to speak with an attorney and get his will and trust done.â€
Rowell also suggests McMullen consider buying a long-term care policy now obtain disability insurance through his employer.
– Tighten budget: There are several online tools offered by Wells Fargo or websites such as Mint.com that will help keep him on track to meet his financial goals. Rowell recommends McMullen find a good financial adviser and meet at least once a year for an annual checkup to determine adjustments to his finances.
–By Karen Thomas