Category: Investments

ETFs vs. Mutual Funds: What’s the Real Difference?

Posted on by Brian Colvert

ETFs vs. Mutual Funds: What’s the Real Difference?

Why This Matters

When it comes to building a smart, diversified portfolio, knowing whether to invest via ETFs vs. mutual funds can make a significant difference. These two investment vehicles share many core features. They are both pooled investments managed under the Investment Company Act of 1940, offer exposure to a range of assets, and cater to different risk and strategy preferences.

But while they are similar in concept, the nuances matter. From trading flexibility to cost, tax efficiency, and suitability for beginners, understanding how ETFs and mutual funds differ can help you make informed decisions and potentially save you money along the way.

Today we will cover:

  • What ETFs and mutual funds actually are

  • Their key differences and similarities

  • Pros and cons of each, including insights not always covered in mainstream articles

  • A detailed FAQ to answer your most common questions

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What Is a Mutual Fund?

A mutual fund pools money from many investors and is managed by a professional or team that buys a diversified portfolio of securities such as stocks, bonds, or other assets based on a stated investment objective.

Key features of mutual funds:

  • Pricing and transactions: Priced once per day, after the market closes. This price is called the Net Asset Value (NAV). No matter when you place your order during the trading day, you receive that end-of-day price.

  • Fees and expenses: May include management fees, distribution (12b-1) fees, and potentially loads, either front-end (paid when buying) or back-end (paid when selling).

  • Minimum investment: Often designed for small or starter accounts. You can invest small amounts like $100 without worrying about buying full shares.

What Is an ETF?

An ETF, or Exchange Traded Fund, is also a pooled investment vehicle, but it behaves more like a stock in how it is traded.

Key features of ETFs:

  • Intraday trading: You can buy or sell ETF shares any time during market hours, and prices change live based on supply and demand.

  • Trading strategies: ETFs allow use of limit orders, stop orders, margin, short-selling, and even options in some cases.

  • Cost structure: Generally, there is no load, and expense ratios tend to be lower, especially for index-based ETFs, though some specialty ETFs may have higher fees.

  • Tax efficiency: The in-kind creation and redemption mechanism allows ETFs to avoid triggering taxable capital gains within the fund structure.

Side-by-Side Comparison: ETFs vs. Mutual Funds

Trading

  • Mutual Funds: Once per day at Net Asset Value (NAV).

  • ETFs: Intraday trading like stocks

Fees

  • Mutual Funds: May include loads, management, and 12b-1 fees

  • ETFs: Generally lower expense ratios and no loads

Minimum Investment

  • Mutual Funds: Often low, ideal for starter accounts

  • ETFs: Need full shares, though fractional trading is becoming more common

Tax Efficiency

  • Mutual Funds: Can trigger capital gains distributions

  • ETFs: In-kind mechanism reduces tax drag

Trading Features

  • Mutual Funds: Limited flexibility, trades only at NAV

  • ETFs: Flexible, allow limit orders, margin, and options

Transparency

  • Mutual Funds: Holdings disclosure may be delayed

  • ETFs: Typically disclose holdings daily

Best For

  • Mutual Funds: Small accounts, automatic investing, beginners

  • ETFs: Active traders, tax-sensitive investors, niche exposure

When to Pick ETFs and When Mutual Funds Fit Better

Choose ETFs if you:

  • Want real-time price control and use trading tools like limit orders

  • Are tax-conscious, especially in taxable accounts

  • Seek inexpensive access to niche or thematic strategies

  • Prefer daily transparency on fund holdings

Choose Mutual Funds if you:

  • Are building an account with small contributions, such as $100

  • Prefer simplicity and automatic investing

  • Are limited by retirement plans that only support mutual funds

  • Value the stability of once-per-day pricing

Hidden Costs and Risks to Know

  • ETFs may incur bid-ask spreads and sometimes trade at premiums or discounts to NAV. Liquidity matters, since thinly traded ETFs can cost more.

  • Mutual funds may carry loads or 12b-1 fees, which can reduce returns, especially in actively managed funds.

  • Behavioral risks: Some investors misuse ETFs by trading too often, which can reduce returns compared to buy-and-hold strategies.

FAQs: ETFs vs. Mutual Funds

Which is more cost-effective, ETFs or mutual funds?
ETFs generally have lower expense ratios and better tax efficiency, but certain mutual funds, especially institutional share classes, can be competitive.

Can ETFs reduce tax liabilities compared to mutual funds?
Yes. ETFs use an in-kind redemption process that helps avoid capital gains distributions, making them more tax-efficient than most mutual funds.

Are mutual funds better for small investors?
Often yes. Mutual funds let small investors start with minimal amounts without needing to buy full shares, which is ideal for new accounts or smaller contributions.

Can I use stop-loss or limit orders with mutual funds?
No. These tools are available only with ETFs because mutual funds transact only at end-of-day NAV.

Is one inherently safer than the other?
Neither structure is inherently safer. Safety depends on the underlying investments. However, mutual funds may feel less volatile because they do not trade intraday.

Are actively managed ETFs and mutual funds the same?
Yes, both can be actively managed. ETFs now include many actively managed strategies, though mutual funds are still more common in this category.

Can investors lose out by switching to ETFs?
Possibly. ETFs offer cost and tax benefits, but overtrading and poor timing decisions can hurt returns compared to long-term holding in mutual funds.

Do ETFs or mutual funds pay dividends?
Yes. Both ETFs and mutual funds can pay dividends if the underlying securities generate income. With ETFs, dividends are usually paid quarterly. Mutual funds may distribute dividends monthly, quarterly, or annually depending on the fund.

Can I buy ETFs in my 401(k)?
Most 401(k) plans do not allow direct ETF purchases. They typically offer mutual funds instead. However, if your 401(k) has a brokerage window, you may be able to access ETFs.

Which is better for retirement accounts?
Both can be appropriate. Mutual funds often dominate retirement plans because of their automatic investment features, while ETFs may offer better tax efficiency in taxable accounts.

Do ETFs have minimum investments?
No official minimums exist for ETFs, but you must buy at least one share (unless your broker allows fractional share investing). Mutual funds often have minimum investments ranging from $100 to $3,000.

Which has more options available, ETFs or mutual funds?
There are more ETFs and mutual funds combined than individual stocks on the U.S. exchanges. ETFs have grown rapidly and now offer thousands of strategies, from index funds to niche thematic investments.

Do ETFs or mutual funds have better performance?
Neither structure guarantees better performance. Returns depend on the fund’s strategy, management, and underlying assets. However, ETFs often outperform similar mutual funds after fees and taxes.

Can I dollar-cost average into ETFs?
Yes, but it may require your broker to support automatic investing in ETFs. Mutual funds are generally easier for dollar-cost averaging since they allow automatic contributions.

Which is better for beginners?
Mutual funds are often considered beginner-friendly due to their simplicity and automatic investment options. ETFs may appeal more to investors comfortable with brokerage accounts and trading.

Do ETFs ever close or shut down?
Yes. If an ETF does not attract enough assets, the provider may close it. Investors receive cash for their shares. Mutual funds can also close, though it is less common.

Are ETFs always cheaper than mutual funds?
Not always. While ETFs are often cheaper, some ultra-low-cost mutual funds rival ETFs on fees. Always compare expense ratios before deciding.

Can I trade ETFs after hours?
Yes. Many brokers allow ETF trading in pre-market and after-hours sessions. Mutual funds cannot be traded outside of standard market hours.

Do ETFs or mutual funds have commissions?
Most brokers today offer commission-free trading for ETFs and no-load mutual funds. However, some funds may still have transaction fees or loads.

Which is better for tax-advantaged accounts like IRAs?
Both can work well. Since taxes are deferred in IRAs, the ETF tax advantage is less important, so either structure can be suitable depending on investment goals.

Choosing What’s Right for You

ETFs and mutual funds share the same purpose: to help investors diversify with a single investment. The main differences are in trading flexibility, costs, tax treatment, and suitability for different types of investors.

  • ETFs are often best for those who want flexibility, low costs, and tax efficiency.

  • Mutual funds are often better for beginners, small accounts, or investors who want simple, automated investing.

  • The smartest move is to understand both options and choose what fits your strategy and goals.

Next Steps

Understanding the differences between ETFs vs. mutual funds is a great start, but the real question is how they fit into your financial plan. The right mix depends on your goals, your timeline, and the bigger picture of your financial life.

At Bonfire Financial, we help clients cut through the noise and build portfolios that actually work for them. If you are unsure whether ETFs or mutual funds are the right choice, or simply want a second opinion on your current strategy, we are here to help.

👉 Schedule a call with us today and get personalized guidance on your investments. A 15-20 minute conversation could help you save on costs, avoid common mistakes, and feel more confident about your financial future.

FOMO and Investing: Why Emotions Sabotage Your Strategy

Posted on by Brian Colvert

“Buy low, sell high.” It’s one of the oldest investment mantras in the book. Yet, time and time again, investors do the opposite. Why? Because of FOMO, the fear of missing out. When the market is soaring, the hype is loud, and our emotions start to override our logic. Today, we explore why even smart investors fall into the FOMO trap and what you can do to avoid it.

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What Is FOMO in Investing?

FOMO in investing is the emotional response that pushes people to jump into a market or an asset because others are making money. It’s driven by a fear that if you don’t act now, you’ll miss out on big gains. This fear often overrides rational decision-making, leading to poor timing, buying when prices are high, and selling when they dip. Studies show it amplifies emotional reactions to market trends and encourages risky behavior like overtrading and speculative bubbles, often overshadowing sound, long-term decision-making

Why Smart Investors Still Fall for It

No one is immune to FOMO. Even seasoned investors get caught up in it. When everyone around you seems to be winning, it’s hard not to feel like you’re falling behind. You hear stories of friends doubling their money or news headlines about a stock up 1,000%, and it creates pressure to act fast.

The Psychology Behind FOMO

FOMO is rooted in behavioral finance. Our brains are wired to follow the crowd and avoid missing out. When we see others succeed, we assume they know something we don’t. Add to that the emotional buzz of gains and the regret of past missed opportunities, and it’s easy to see how logic gets thrown out the window. Money is emotional. Investing isn’t just numbers—it’s tied to our goals, dreams, and fears. That emotional charge makes it hard to stay rational, especially when markets are volatile or social proof is strong.

Real-World Examples: From Bitcoin to Barbecue Tips

Let’s say you’re at a barbecue, and a friend starts talking about how their investment in Bitcoin or a hot tech stock has skyrocketed. It’s hard not to feel a pang of regret or curiosity. Suddenly, you’re considering jumping in on Monday morning. But what you’re not hearing is when they bought in or how much risk they took.

Take Bitcoin, for example. When it’s at an all-time high, that’s when Brian gets the most questions from clients. When it dips, the same clients say they’re glad they stayed away. But the smart move? That was getting in when prices were lower. The opportunity to buy came with fear, not excitement.

Why Buying High Feels Safer (But Isn’t)

When the market is booming, it feels safe. News coverage is positive, everyone seems to be making money, and the fear of missing out kicks in. But this is often when prices are inflated. The reality? The best opportunities usually show up when things look bleak.

When markets are down, people hesitate. They worry things will get worse. But historically, downturns are when investors have made their biggest gains, not because they timed it perfectly, but because they acted when prices were low.

Don’t let FOMO derail your investing strategy.

How to Flip the Script: Buy Low, Sell High

To reverse the typical FOMO cycle, you need to train yourself to act when it feels uncomfortable. This is where strategy beats emotion. When markets are down, think of it like a sale. If you loved a company or fund a month ago, and nothing significant has changed, why wouldn’t you want to buy it for 20% less?

It’s the same logic as shopping. If a shirt you love goes on sale, you’re thrilled. But with investments, people often react the opposite way. They see the price drop and assume something is wrong. But in many cases, it’s just the market doing what it always does: cycling.

The Role of a Plan: Discipline Over Emotion

A solid investment plan is your best defense against FOMO. When you have a plan, you’re less likely to get swayed by hype or panic. Dollar-cost averaging is one of the best strategies to stay disciplined. By investing regularly, regardless of market conditions, you remove emotion from the equation.

In fact, when you’re dollar-cost averaging and the market drops, you’re buying more shares for the same amount of money. It’s a hidden win that sets you up for greater long-term returns.

What to Watch For: Market Cycles and Hype Triggers

FOMO often spikes when:

  • A specific asset hits all-time highs
  • Media coverage is overwhelmingly positive
  • Friends or coworkers are bragging about gains
  • Star ratings on mutual funds suddenly rise

These are signals to pause and evaluate. Ask yourself:

  • Has anything fundamentally changed with this investment?
  • Am I reacting emotionally or strategically?
  • Would I be just as excited to buy this if it were down 20%?

Tips to Avoid FOMO and Invest Smarter

  • Stick to your plan: Let your long-term goals guide your decisions, not the news cycle.
  • Dollar-cost average: Invest consistently to reduce the impact of timing.
  • Turn down the noise: Limit exposure to hype-driven media or investing tips from unverified sources.
  • Use risk questionnaires: Revisit your risk tolerance regularly and ensure your strategy matches it.
  • Embrace the downturns: They’re opportunities, not warnings.
  • Review fundamentals: Make sure your investments align with solid financial principles.
  • Ask better questions: Instead of “What’s hot?”, ask “What’s undervalued and solid?”

In Summary

FOMO in investing is real, and it affects every investor at some point. But you don’t have to let it derail your goals. By acknowledging its influence and building systems that favor discipline over emotion, you can stay on track and actually buy low, sell high.

The next time someone tells you about a stock that “went to the moon,” don’t rush to copy them. Pause, assess, and stick to your plan. Investing isn’t about chasing what’s hot. It’s about building wealth over time—intentionally and intelligently.

Next Steps

Need help building your strategy? We are here to help. Schedule a call with us today!

Investing in CDs: A Low-Risk Strategy You’re Probably Overlooking

Posted on by Brian Colvert

If you’re looking for a low-risk, predictable way to grow your money, investing in CDs (Certificates of Deposit) might be worth a second look. While they might not be the flashiest option in your portfolio, CDs offer stability, security, and in today’s market, surprisingly decent returns. Let’s break down what CDs are, how they work, and why they might deserve a spot in your financial plan.

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What Is a CD (Certificate of Deposit)?

A Certificate of Deposit is a financial product offered by banks and credit unions. It allows you to deposit money for a fixed period, typically ranging from three months to five years, in exchange for a guaranteed interest rate. In return, you agree not to withdraw your funds during that term without paying a penalty.

The trade-off?

A higher interest rate than you’d typically earn from a traditional savings account. Plus, your investment is protected by FDIC (Federal Deposit Insurance Corporation) insurance, up to $250,000 per depositor, per bank, which provides peace of mind and a sense of financial security. CDs are often seen as a great way to safeguard cash that you want to grow without exposure to market volatility. They’re straightforward, easy to understand, and come in a variety of terms that fit most savings goals.

Why CDs Are Gaining Popularity Again

In recent years, low interest rates made CDs less appealing. But as interest rates have risen, so have CD yields. In some cases, one year CDs have offered rates exceeding 5%, which is competitive with many bonds but with less risk and complexity. In a time when inflation and market volatility are top of mind for investors, CDs have become a compelling option. With guaranteed returns and federal insurance backing, they offer peace of mind in uncertain times.

Another reason for renewed interest is that CDs can serve as a temporary parking place for cash you may not need immediately. For example, if you plan to buy a home in the next year or want to set aside funds for a child’s tuition, a CD allows that money to earn more than a savings account while remaining protected.

Understanding CD Laddering: A Smart Strategy

One challenge with investing in CDs is that your money is locked up for a set time. That can create issues if you need liquidity. Enter: CD laddering.

CD laddering is a strategy that involves opening multiple CDs with different maturity dates. For example:

  • 3 month CD
  • 6 month CD
  • 9 month CD
  • 12 month CD

As each CD matures, you reinvest the money into a new 12 month CD. Over time, you’ll have a CD maturing every quarter, providing access to your funds without sacrificing returns. This strategy gives you the best of both worlds: higher returns from longer term CDs and consistent access to cash.

Why laddering works:

  • Provides ongoing liquidity
  • Takes advantage of rising rates
  • Reduces the impact of rate fluctuations
  • Helps maintain a balanced, conservative cash management approach

Laddering is especially effective when you’re managing cash for short to medium term goals but still want to earn something meaningful on your money.

The Safety Net: FDIC Insurance

One of the biggest advantages of investing in CDs is the built in safety net: FDIC insurance. If your bank fails, the federal government covers your deposit (up to $250,000 per depositor, per bank). This makes CDs one of the safest investment vehicles available.

Want to invest more than $250,000? You can still stay insured by spreading your CDs across multiple banks. For high net worth individuals, brokered CDs, offered by firms like Schwab, Fidelity, or Merrill Lynch, allow you to manage large CD portfolios and stay within insurance limits.

Brokered CDs vs. Traditional Bank CDs

Traditional CDs are offered by your local bank or credit union. Brokered CDs, on the other hand, are sold through investment firms and allow you to:

  • Access CDs from multiple banks
  • Get competitive rates
  • Stay within FDIC insurance limits
  • Integrate CD investing into a broader portfolio with a financial advisor

However, brokered CDs may have less flexibility for early withdrawals. If you need to cash out early, you’ll likely have to sell it on the secondary market, and that could result in a loss if rates have risen since your purchase. That’s why brokered CDs are better suited for those who are confident they won’t need to touch the funds before maturity.

What Happens if You Need to Cash Out Early?

CDs aren’t known for their liquidity. If you break a CD before it matures, you may face penalties:

  • Bank CDs: Early withdrawal fees, typically a portion of the interest earned.
  • Brokered CDs: You’ll need to sell on the open market, where prices fluctuate with interest rates.

That’s why planning your liquidity needs is critical. CD laddering can help here, but make sure you have other liquid assets available for emergencies. A good rule of thumb is to keep 3 to 6 months of living expenses in a highly liquid account, like a savings or money market account.

Comparing CDs to Other Investments

Bonds vs CDs:

  • CDs are FDIC insured; most bonds are not.
  • Bonds may offer higher returns but come with credit and market risk.
  • Bonds fluctuate in value; CDs pay a fixed return if held to maturity.

Savings Accounts vs. CDs:

  • CDs generally offer higher interest rates.
  • Savings accounts offer better liquidity and flexibility.
  • CDs require committing to a time period; savings accounts do not.

Money Market Accounts vs CDs:

  • CDs can have better fixed rates.
  • Money markets offer variable rates and check-writing privileges.
  • Both may be FDIC insured but have different liquidity profiles.

When Do CDs Make Sense?

CDs are ideal if:

  • You’re saving for a specific short to mid term goal
  • You’re risk averse and want principal protection
  • You don’t need immediate access to the funds
  • You’re looking for a place to earn interest on cash you’ve already set aside

Common use cases:

  • Emergency reserves (when laddered)
  • Saving for a home, car, or large future purchase
  • Parking cash during market volatility or downturns
  • Stashing business reserves for tax or payroll obligations

Risks and Downsides of Investing in CDs

While CDs are low risk, they’re not risk free:

  • Inflation Risk: If inflation rises significantly, your CD’s return may lose purchasing power.
  • Liquidity Risk: Your money is tied up unless you’re willing to pay a penalty or take a loss.
  • Opportunity Cost: If interest rates rise after you lock in a CD, you miss out on the higher return.

The key is balance. CDs shouldn’t be your only investment, but they can serve an important role alongside more aggressive or growth-focused strategies.

Maximizing CD Returns

To get the most from CD investing:

  • Compare rates across institutions and platforms
  • Use CD ladders to maintain flexibility and manage cash flow
  • Look into brokered CDs if you’re managing large balances
  • Reinvest matured CDs at new, higher rates if available
  • Avoid tying up all your liquid cash,  keep a buffer in savings

Online banks and credit unions often offer higher CD rates than brick and mortar institutions. Keep an eye on rate changes, especially in a rising rate environment.

Final Thoughts: Are CDs Right for You?

Investing in CDs isn’t going to make you rich overnight, but they can be a smart, low-risk part of your portfolio, especially when rates are attractive. Whether you’re building a ladder, protecting a cash reserve, or just looking for a better alternative to your savings account, CDs offer a blend of security and predictability that’s hard to beat.

As always, your overall financial goals, timeline, and risk tolerance should guide your decision. CDs are one tool in the toolbox, but when used strategically, they can help you sleep better at night, knowing your money is working for you.

Next Steps

If you want help deciding if CDs fit your financial plan, let’s talk. Schedule a consultation call today!

Mutual Funds Explained: Because No One Ever Actually Reads the Fine Print

Posted on by Brian Colvert

Mutual Funds Explained

Mutual funds are like your sock drawer. You know it’s full of something useful, but you’re never quite sure exactly what’s in there. Occasionally, you find something surprisingly valuable, kind of like that lost gift card from three Christmases ago.

Recently, at a dinner party, your friend confidently declared, “My Fidelity fund was up 25% last year!” And sure, that sounds impressive. But let’s face it, most of us aren’t entirely sure if that’s amazing or just dumb luck.

In this article, we’ll cut through the confusion, getting mutual funds explained clearly, highlighting mutual fund vs ETF differences, and squashing a few misconceptions along the way. And we’ll try to do it without making your eyes glaze over.

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Misconceptions: The Sock Drawer Problem

One of the biggest misunderstandings about mutual funds is that they’re all basically the same. But they come in countless varieties, much like those socks we mentioned earlier. They’re just bundles of stocks, bonds, or other investments, chosen by professionals. (Hopefully professionals who don’t rely on tips from Reddit.)

Here’s a fun-but-scary fact: there are around 8,700 mutual funds registered in the U.S. alone, and almost 135,000 if you toss ETFs into the mix. Compare that to just 6,000 publicly traded companies and you start wondering if everyone and their cat has their own mutual fund.

Clearly, understanding your mutual fund choices is important for smart financial planning.

Mutual Fund vs ETF Differences: Grandma Calls vs. Caffeine Moods

Mutual funds and ETFs might look like identical twins, but they’ve got distinct personalities. Mutual funds trade just once per day, kind of like your grandma calling every evening at exactly 7 pm. Predictable. Stable. Comforting.

ETFs, meanwhile, trade throughout the day, matching the unpredictable energy of someone who’s had three triple-espressos by noon…looking at you Dave. Understanding these differences matters, especially when you’re thinking seriously about optimizing your retirement accounts.

Beyond just trading behavior, mutual funds and ETFs differ in how they’re managed and taxed. Most mutual funds are actively managed, meaning a team of professionals is trying to beat the market by picking winning stocks. That often comes with higher fees, usually baked into something called an “expense ratio.” ETFs tend to be passively managed, simply tracking an index like the S&P 500. That hands-off approach often translates to lower costs and fewer surprise charges hiding in the fine print.

Then there’s how taxes work. ETFs are generally more tax efficient thanks to something called the “in kind redemption” process, which helps them avoid triggering capital gains distributions when investors buy or sell. Mutual funds? Not so much. If someone else in the fund sells a big chunk, you might end up with a tax bill even if you didn’t sell a thing. While grandma’s routine might be comforting, ETFs often give you more control, agility, and fewer tax headaches; we all can deal with less headaches, especially if you just had three triple-espressos.

Your Friend’s Mutual Fund Brag: The Biggest Misconception

Another classic misconception: vague bragging about owning a “Schwab fund.” Saying you own a mutual fund without knowing what’s in it is like proudly announcing, “I drive a vehicle,” without specifying if it’s a Ferrari or a riding mower. Details matter, especially when they involve your money.

Getting clarity about what’s in your fund helps you make smarter financial moves, such as improving your portfolio’s diversification. Plus, it’ll give you something clever to say the next time your friend starts talking finance.

Mutual Funds Explained 

Mutual funds aren’t a one-size-fits-all thing. Some focus on big, steady companies (“large-cap”). Others chase growth in smaller, ambitious ventures (“small-cap”). Then you’ve got funds that specialize in international markets or emerging economies. Some even hold gold, oil, or cows. Literal cows.

Understanding exactly what’s inside clears up confusion and gives you more confidence about where your money is going. And hey, confidence looks great on you.

Another consideration is performance reporting. Mutual funds often compare their results to a benchmark, like the S&P 500, but actively managed funds do not always beat those benchmarks. In fact, many underperform after accounting for fees. That is why it is smart to look past just past performance and ask whether the fund’s strategy, costs, and holdings align with your long-term plan. Because at the end of the day, investing should serve your goals, not just chasing returns, or cows in some instances.

Understanding Mutual Funds Matters

Navigating thousands of mutual funds and ETFs can be overwhelming, no matter how smart you are. That’s why working with a CFP® is a pretty smart move. Think of us like your financial Siri, except funnier, and more helpful.

When you clearly understand your investments, you feel calmer, smarter, and way less stressed. Not a bad trade-off.

Ready for Clarity? Let’s Chat

We’ve covered a lot here, but at the end of the day, your financial goals are unique, and personalized advice is crucial.

So, if you’re ready for tailored financial help (minus the judgment), go ahead and schedule a free introductory call. Because your retirement plan deserves better than vague bragging at dinner parties. 

How Diversification Can Save You From a Retirement Meltdown

Posted on by Brian Colvert

If you ask most people what the secret to a successful retirement is, you might hear answers like “save early,” “invest in the right stocks,” or “work with a good financial advisor.” All great advice. But there’s one strategy that often gets overlooked because it’s not flashy, it’s not new, and it won’t land you on the cover of Forbes. That strategy? Diversification.

Let’s be honest: Diversification isn’t exciting. It doesn’t come with big headlines or viral TikToks. But if you’re heading into retirement (or already there), diversification could be the very thing that helps you sleep at night when the markets get bumpy. And that’s worth talking about.

Today we’re going to break down why diversification is more than just a buzzword, it’s a lifeline. We’ll look at how it works, why it matters more in retirement than during your growth years, and how to use it strategically to protect your hard-earned assets.

Listen Now:

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—–

What Is Diversification, Really?

At its core, diversification means not putting all your eggs in one basket. In investment terms, it means spreading your money across different asset classes, sectors, industries, and geographies. The goal? To reduce your exposure to any single risk.

It doesn’t mean you won’t ever lose money. It does mean that when one area of the market is down, another might be up—helping to smooth out the ride.

Why Diversification Matters More in Retirement

When you’re in your 30s, 40s, or even early 50s, you’re in growth mode. You have income coming in, time on your side, and the ability to take on more risk. You might go all in on tech stocks, try your hand at crypto, or take a flyer on a promising startup. And when those bets pay off, it feels great.

But retirement changes the game.

You’re no longer building your nest egg, you’re relying on it. Your paycheck is gone. Your expenses? Still very much alive and well. And the fear of running out of money? Real.

This is where diversification becomes critical.

A highly concentrated portfolio might have served you well in your accumulation phase. But in retirement, big swings in value become dangerous. A 50% drop in a single stock might not have phased you before, but it hits differently when you’re drawing from your portfolio to cover everyday expenses.

Growth vs. Protection: The Shift in Strategy

Think of it like this: In your career, being specialized often leads to higher pay. A cardiac surgeon earns more than a general practitioner. A software engineer specializing in AI might command a bigger paycheck than a generalist developer.

The same logic applies in investing. Specializing—or concentrating—can yield big results. But it comes with more volatility.

As you near retirement, your strategy needs to shift from growing your wealth to protecting it. You don’t need 40% returns. You need reliable, steady performance and the confidence that your money will be there when you need it.

What Diversification Looks Like in Retirement

So what does a diversified portfolio actually look like for someone in or near retirement? Here are the main components:

  1. Equities Across Sectors and Sizes: Investing in a broad mix of stocks, including large-cap, mid-cap, and small-cap companies across different sectors (technology, healthcare, consumer goods, etc.) helps avoid overexposure to one area of the market.
  2. ETFs and Mutual Funds: Exchange-traded funds (ETFs) and mutual funds offer built-in diversification. One fund can give you exposure to hundreds or even thousands of companies.
  3. Fixed Income (Bonds, CDs, Treasuries): Bonds are a staple of retirement portfolios. From Treasury bonds backed by the U.S. government to corporate bonds and municipal offerings, they provide income and stability. CDs and short-term Treasuries offer ultra-safe options for near-term needs.
  4. Real Estate: Whether through REITs or directly owned property, real estate can provide a stable income stream. It also adds a layer of diversification that doesn’t always move in lockstep with the stock market.
  5. Alternative Investments: Private credit, private equity, or commodities like gold can offer additional diversification. Alternative investments often behave differently than stocks and bonds.
  6. Cash Reserves: Don’t underestimate the power of having some cash on hand. In market downturns, cash gives you flexibility to avoid selling assets at a loss.

It’s Not Just About What You Own—It’s About When You Use It

Diversification isn’t only about what you invest in. It’s also about how and when you draw on those assets. If the stock market drops 20%, you don’t want to be forced to sell equities to fund your living expenses. Instead, you might pull from your bond ladder, real estate income, or cash reserves. This approach gives your equities time to recover—and your overall portfolio a better chance of staying intact.

Strategic diversification gives you flexibility. It gives you options. And options are everything in retirement.

Common Misconceptions About Diversification

Let’s clear up a few myths:

  • Myth 1: “I already own five stocks, so I’m diversified.”Not quite. True diversification spans sectors, asset classes, and risk profiles. Five tech stocks? That’s not diversification—it’s concentration.
  • Myth 2: “Diversification means I won’t make as much money.”Possibly true, but also missing the point. You don’t need outsized gains in retirement—you need consistency. Remember: doubling your money won’t change your life as much as losing half of it.
  • Myth 3: “All diversification is equal.”Nope. Diversifying across mutual funds that all hold the same top 10 stocks isn’t true diversification. Look under the hood of your investments.

How to Tell If You’re Truly Diversified

A few good questions to ask yourself :

  • How much of my portfolio is in one sector or company?
  • Am I exposed to different types of investments (stocks, bonds, real estate, etc.)?
  • Do I have income sources that don’t rely on the stock market?
  • If the market dropped 30% tomorrow, would I be forced to sell something at a loss?
  • Is my risk level aligned with my retirement goals?

If you’re unsure, it’s time for a checkup.

The Real Goal: Peace of Mind

At the end of the day, diversification isn’t about being fancy. It’s about creating a plan that gives you confidence.

You don’t want to be the retiree glued to CNBC, wondering if your favorite stock is about to tank. You want to be the retiree sipping coffee, knowing your portfolio is built to weather the storm.

Because here’s the thing: the market will dip. There will be recessions. Headlines will get scary. But a well-diversified portfolio doesn’t panic—it pivots.

Final Thoughts: Diversify Like Your Retirement Depends on It (Because It Does)

If you’re still chasing big returns with concentrated bets as you near retirement, it’s time to reconsider. There’s nothing wrong with going big during your accumulation years. But once you’re approaching or entering retirement, the name of the game is preservation.

And that’s where diversification shines.

It may not be exciting. It may not be trendy. But it works. And when it comes to your retirement, that’s exactly what you want.

Next Steps

Need help creating a diversified retirement plan that actually fits your life? Let’s talk. At Bonfire Financial, we help clients build smart, stable portfolios that are designed to go the distance. Schedule a call with us today! 

Why the Dollar-Cost Averaging Investment Strategy Wins in Down Markets

Posted on by Brian Colvert

When the market drops, the headlines scream, the talking heads debate, and investors everywhere feel their stomachs drop. It’s natural. Nobody enjoys seeing their portfolio shrink. But instead of letting fear dictate your next move, what if you could approach down markets with a calm, calculated strategy? Enter: the Dollar-Cost Averaging (DCA) investment strategy. DCA isn’t flashy. It’s not some hot stock tip or a wild market-timing maneuver. In fact, it’s often dismissed because of its simplicity. But as Brian explains in this episode of The Field Guide, sometimes boring is brilliant.

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Understanding Dollar-Cost Averaging

Dollar-cost averaging is the strategy of investing a fixed amount of money at regular intervals, regardless of what the market is doing. Whether stocks are up, down, or sideways, the same amount goes in on schedule. This means that when prices are high, you buy fewer shares. When prices are low, you buy more.
You might already be doing it without realizing it. Most 401(k) plans are built around this principle. Every two weeks, a portion of your paycheck gets invested, buying into the market consistently over time.

The beauty of this approach? It takes emotion out of investing. And emotion, as history has shown, is often the enemy of smart financial decision-making.

What’s Happening in the Market Right Now

As of the recording, markets are down roughly 10–12%. That’s enough to make even seasoned investors sweat a little. And if you look at various indicators—forward P/E ratios, the Buffett Indicator, the Case-Shiller Index—there’s an argument to be made that stocks are still overvalued. That means we could see more downward momentum before things turn around. Add in the geopolitical uncertainty, government policy shifts, and general economic anxiety, and it becomes even more tempting to retreat, pull your money out, and wait on the sidelines.

But here’s the thing: that’s rarely a winning move.

The Opportunity Hidden in the Downturn

Brian emphasizes a simple truth that many forget in moments like this: markets don’t move in straight lines. They ebb and flow. They breathe in and out. And history shows that downturns are followed by recoveries. Often strong ones.

Just look at 2008. The Great Recession was brutal. But what followed was one of the longest bull runs in history. The same happened after the dot-com bubble, and again after the COVID-19 crash. Over time, the market has always rebounded.

So why not take advantage of the downturn instead of fearing it?

Dollar-Cost Averaging  in Down Markets in Action:

A simple, effective game plan when markets are down, is dollar-cost averaging which allows you to buy more shares for the same amount of money. If you were investing $2,000 per month before the drop, you’re now getting more bang for your buck. That means when the market does recover—and it likely will—those extra shares will have a higher value.

It’s like buying quality stocks on sale.

Brian points out that this is the perfect time for high-income earners to lean into their plans. If you’re already maxing out your 401(k) and Roth IRA, you can consider adding more to a taxable account. Even small adjustments—like contributing a little extra when the market hits specific downturn thresholds—can significantly boost long-term returns.

For example:
Market down 10%? Add an extra $500.
Down 15%? Add another $500.
Down 20%? Add even more if cash flow allows.

This isn’t market timing. It’s staying consistent while being opportunistic within a well-thought-out plan.

Why This Works: The Psychology of Automation

One of the greatest strengths of DCA is that it removes decision-making from the process. When emotions run high, logic tends to take a backseat. By setting up automated contributions, you protect yourself from reacting to fear or greed.

Think of it like autopilot for your finances. The money comes out of your account. It gets invested according to your plan. And you don’t have to think about it.
Instead of checking your portfolio every day and stressing about red numbers, you can rest knowing your strategy is working for you behind the scenes.

The Power of Long-Term Thinking

If you’re five to ten years out from retirement, this might be one of the best opportunities you’ll have to accumulate more wealth. When you’re contributing consistently, especially during down markets, you’re setting yourself up for potential growth when the market eventually rebounds.

It’s important to remember that investing isn’t about hitting a home run on every pitch. It’s about building wealth slowly and steadily over time. DCA helps you do exactly that.

But What If This Time Is Different?

Every time there’s a downturn, you’ll hear someone say, “This time is different.” But as Brian wisely notes, those four words are usually wrong. In almost every major downturn in modern history, the market has come back stronger. Betting that “this time is different” is risky business.

A better bet? Stick with what works. Stick with the plan. Trust the process.

Start With a Plan

None of this works without a plan. Whether you’re investing $500 a month or $5,000, having a clear strategy is crucial. Decide how much you’re going to contribute, how frequently, and how you’ll adjust (if at all) when the market shifts.

Make your plan based on your goals, not the headlines.

If you have extra cash flow right now, put it to work. If not, just stay consistent. The key is to avoid pulling out or pausing your contributions out of fear.

The Takeaway

The dollar-cost-averaging in down markets isn’t glamorous. It doesn’t make headlines or get featured in hot stock newsletters. But it works. Especially in volatile markets like the one we’re in now.

It’s a strategy that rewards discipline, consistency, and long-term thinking. And it’s accessible to everyone, whether you’re just starting out or deep into your career. So the next time you see the market in the red, take a deep breath. Remember the plan. Keep investing.

Because when it comes to building wealth, boring often wins.

Next Steps

Want help building your investment strategy or creating a plan that works in any market? Reach out to us,  we’re here to guide you every step of the way.

Roth Conversion: Turning Market Lows Into Tax-Free Growth

Posted on by Brian Colvert

Market downturns can be nerve-wracking. When stocks dip, it’s easy to feel like you should hit pause on any big financial moves. But what if a downturn was actually an opportunity? If you’ve been considering a Roth conversion, now might be the best time to act.

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A Roth conversion allows you to move money from a tax-deferred retirement account (like a traditional IRA) into a Roth IRA. The trade-off? You’ll pay taxes now on the converted amount, but in return, your money grows tax-free and can be withdrawn tax-free in retirement. And when markets are down, this strategy becomes even more attractive.

In this post, we’ll break down why a downturn is an ideal time for a Roth conversion, how it works, and what you need to consider before making your move.

What Is a Roth Conversion?

A Roth conversion is the process of moving pre-tax retirement funds from a traditional IRA or 401(k) into a Roth IRA. Normally, traditional retirement accounts are tax-deferred, meaning you don’t pay taxes when you contribute, but you will when you withdraw in retirement.

With a Roth IRA, the opposite is true—you pay taxes upfront but enjoy tax-free withdrawals later. By converting funds now, you lock in today’s tax rates and eliminate the uncertainty of potentially higher tax rates in the future.

Why a Market Downturn Is a Smart Time for a Roth Conversion

A downturn in the stock market may seem like a time to retreat, but for savvy investors, it can be the perfect moment to make strategic financial moves. Here’s why:

1. You Get More Shares for Your Money

When stock prices drop, the value of your traditional IRA also declines. If you convert those assets to a Roth IRA during a downturn, you’re moving shares at a lower valuation, meaning you pay taxes on a lower dollar amount.

For example:

  • If your traditional IRA held $100,000 before a downturn and its value drops to $80,000, a Roth conversion would only trigger taxes on the $80,000 instead of $100,000.
  • When the market recovers, those assets will grow tax-free within your Roth IRA.

By converting at a discount, you position yourself for greater tax-free growth when the market rebounds.

2. You Can Pay Less in Taxes

Since the IRS taxes Roth conversions as ordinary income, the lower your conversion amount, the less you’ll owe in taxes. If a downturn reduces your taxable income (for example, if you have lower capital gains or fewer bonuses this year), you may land in a lower tax bracket—making a Roth conversion even more attractive.

3. No Required Minimum Distributions 

Unlike traditional IRAs, Roth IRAs don’t require minimum distributions (RMDs) when you hit age 73. That means you can keep your money invested longer, allowing it to grow tax-free for as long as you want.

4. More Flexibility in Retirement

A Roth conversion now can provide greater flexibility later. By having both traditional and Roth funds, you can better control your taxable income in retirement, pulling from different accounts depending on your tax situation each year.

Breaking It Down: A Simple Roth Conversion Example

Let’s say you’re planning to convert $8,000 into a Roth IRA. Here’s how the numbers might play out in different market conditions:

  • When the market is high: The stock you want to buy is $100 per share. Your $8,000 buys 80 shares.
  • When the market is low: The same stock is now $80 per share. Your $8,000 buys 100 shares.

If the stock eventually rebounds to $100 per share, the account value in each scenario would be:

  • Market High Conversion: 80 shares × $100 = $8,000
  • Market Low Conversion: 100 shares × $100 = $10,000

That’s a 25% gain in your tax-free Roth account simply because you converted during a downturn.

How to Decide If a Roth Conversion Is Right for You

While a Roth conversion can be a smart move, it’s not a one-size-fits-all strategy. Consider these factors before moving forward:

1. Your Current vs. Future Tax Bracket

  • If you expect your tax rate to be higher in retirement, a Roth conversion now at a lower tax rate makes sense.
  • If you’re currently in a high tax bracket but expect it to drop later, waiting might be a better choice.

2. Your Ability to Pay the Taxes

  • Taxes on the conversion should ideally be paid from a non-retirement account.
  • Using IRA funds to pay taxes means you’ll be left with a smaller balance growing tax-free.

3. Your Retirement Timeline

  • If you plan to retire soon and need the money within five years, a Roth conversion might not be ideal. Withdrawals from converted funds within five years of conversion trigger a penalty.

4. Your Estate Planning Goals

  • If you want to pass on wealth tax-free to heirs, a Roth conversion is a great tool.
  • Unlike traditional IRAs, Roth IRAs don’t require heirs to pay taxes on withdrawals.

How to Execute a Roth Conversion in a Downturn

If you decide a Roth conversion makes sense, here’s how to get started:

  1. Evaluate Your Portfolio – Identify which assets are best suited for conversion.
  2. Estimate Taxes Owed – Work with a fiduciary financial advisor or CPA to calculate tax liability.
  3. Choose a Conversion Amount – Decide how much you can afford to convert while staying in your tax bracket.
  4. Initiate the Conversion – Work with your brokerage to move funds from your traditional IRA to a Roth IRA.
  5. Pay the Taxes – Ensure you have cash on hand to cover the tax bill without tapping into retirement savings.

Common Roth Conversion Mistakes to Avoid

Before you jump in, avoid these pitfalls:

  • Converting Too Much at Once – Large conversions can push you into a higher tax bracket. Consider a multi-year conversion strategy.
  • Not Planning for the Tax Bill – Don’t forget you’ll owe taxes on the converted amount in the year of conversion.
  • Overlooking the Five-Year Rule – If you convert funds, you must wait five years before withdrawing them without penalty.

Final Thoughts: Should You Convert to a Roth During a Downturn?

A Roth conversion is one of the smartest moves you can make during a market downturn. By converting assets when their value is temporarily lower, you reduce your tax burden and set yourself up for greater tax-free growth in the future.

However, this strategy isn’t right for everyone. If you’re unsure whether a Roth conversion fits your financial plan, contact us today to discuss whether a Roth conversion is the right move for you.

Dividend Paying Stocks: Income, Growth, and Risks Explained

Posted on by Brian Colvert

Retirement planning often requires balancing income needs with the desire for portfolio growth. One popular strategy for achieving both is investing in dividend paying stocks. These investments offer a unique combination of regular income and potential capital appreciation, making them an attractive option for many retirees and investors planning their financial future. But what exactly are dividend paying stocks, and are they right for you? Let’s dive into the details, exploring the benefits, risks, and strategies to consider.

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What Are Dividend Paying Stocks?

Dividend paying stocks are shares of companies that distribute a portion of their profits to shareholders as dividends. These payments are typically made quarterly but can vary depending on the company. Dividends can be a consistent source of income, especially during retirement, and can help offset living expenses or be reinvested to grow your portfolio further.

How Do Dividends Work?

When a company earns profits, it has several options: reinvest in the business, pay down debt, or return value to shareholders through dividends. Companies in industries like utilities, consumer goods, or financials often pay dividends because their businesses generate steady cash flows. The amount and frequency of dividends can differ widely based on the company’s strategy and financial health.

Qualified vs. Ordinary Dividends

One key factor to consider is the tax treatment of dividends. Qualified dividends are taxed at a lower rate than ordinary income, making them more tax-efficient. Knowing how your dividends are classified can significantly impact your after-tax incom

Benefits of Dividend Paying Stocks

These stocks offer several advantages that make them a compelling choice for retirement portfolios and other investment strategies.

1. Regular Income Stream

Dividends provide a steady source of income, which can be especially valuable in retirement. Unlike some other investments, dividends are typically paid regardless of market conditions, offering a level of predictability.

2. Potential for Capital Appreciation

In addition to generating income, dividend paying stocks can increase in value over time. If the underlying company performs well, the stock price can rise, offering investors the opportunity for capital gains while still receiving dividend payments.

3. Inflation Hedge

Dividend paying stocks can act as a hedge against inflation. Companies that consistently grow their dividends often signal strong financial health and the ability to pass inflation-related costs onto consumers, helping maintain purchasing power.

4. Lower Volatility

Stocks that pay dividends tend to be less volatile than non-dividend paying stocks. This is because these companies are often more established and financially stable, providing investors with some downside protection during market turbulence.

5. Tax Advantages

As mentioned earlier, qualified dividends are taxed at lower rates than ordinary income, offering a tax-efficient way to generate retirement income.

Risks of Dividend Paying Stocks

While dividend paying stocks have many benefits, they are not without risks. Understanding these risks is essential to making informed investment decisions.

1. Dividend Cuts or Suspensions

Dividends are not guaranteed. Companies facing financial difficulties may reduce or suspend their dividend payments. For example, during economic downturns, even well-established companies might prioritize conserving cash over paying dividends.

2. Stock Price Volatility

Dividend paying stocks are still stocks, meaning their prices can fluctuate with market conditions. A significant drop in stock price can offset the income generated by dividends, impacting the overall value of your investment.

3. Inflation Risk

While dividends can act as an inflation hedge, they may not always keep pace with rising costs. If a company’s dividend growth lags behind inflation, the real value of your income could decline over time.

4. Sector Concentration

Certain sectors, such as utilities or real estate, are known for higher dividend yields. Overconcentration in these sectors can expose your portfolio to specific economic or regulatory risks, reducing diversification benefits.

5. Management Risk

The performance of dividend paying stocks also depends on the quality of the company’s management. Poorly managed companies can face financial challenges, even in strong economic conditions, leading to dividend cuts or declining stock values.

Building a Dividend Paying Stock Portfolio

Investing in dividend paying stocks requires thoughtful planning to balance income, growth, and risk. Here are some key strategies to consider when building your portfolio.

1. Diversify Across Sectors

Diversification is critical when investing in dividend paying stocks. Avoid overloading your portfolio with stocks from a single sector. Instead, invest across various industries to reduce risk and enhance stability.

2. Focus on Dividend Growth

Look for companies with a history of consistently increasing their dividends. Dividend growth is a strong indicator of financial health and management’s commitment to returning value to shareholders.

3. Reinvest Dividends

Consider reinvesting your dividends to purchase additional shares. This strategy, known as dividend reinvestment, can help grow your portfolio over time and increase your future income potential.

4. Monitor Financial Health

Regularly review the financial health of the companies in your portfolio. Check key metrics like payout ratios, debt levels, and earnings growth to ensure they can sustain and grow their dividends.

5. Balance Yield and Risk

While high-yield stocks can be tempting, they often come with higher risks. Focus on stocks with sustainable yields rather than chasing the highest payout.

Dividend Stocks vs. Other Income Investments

Dividend paying stocks are just one of many options for generating income in retirement. Here’s how they compare to other popular income investments:

1. Bonds

  • Pros: Bonds provide a fixed income stream with lower risk than stocks.
  • Cons: They lack the potential for capital appreciation and may underperform in inflationary environments.

2. Annuities

  • Pros: Annuities offer guaranteed income for life, reducing longevity risk.
  • Cons: They lack flexibility and can have high fees.

3. Real Estate

  • Pros: Real estate investments provide income and potential appreciation.
  • Cons: Real estate investments require active management and can be illiquid.

Dividend paying stocks can complement these investments as part of a diversified income strategy, offering the potential for growth alongside regular income.

Common Myths About Dividend Paying Stocks

1. Myth: Only Retirees Should Invest in Dividend Stocks

While dividend stocks are popular among retirees, they can also be valuable for younger investors seeking to reinvest dividends for long-term growth. Younger investors can leverage the power of compounding by reinvesting dividends to accumulate more shares over time. This strategy can lead to significant growth in portfolio value, even if the primary goal isn’t immediate income.

2. Myth: High-Yield Stocks Are Always Better

High yields can be a red flag. They may indicate financial distress or an unsustainable payout ratio. While a high yield might seem attractive, it’s crucial to look beyond the number and assess the company’s financial stability. Companies with excessively high yields may struggle to maintain them, leading to potential dividend cuts and stock price declines. Instead, focus on companies with a history of sustainable and growing dividends.

3. Myth: Dividend Stocks Are Risk-Free

All stocks carry risk, including dividend paying ones. Understanding the underlying company and its financial health is essential to managing this risk. These stocks may offer lower volatility compared to non-dividend -paying stocks, but they are still subject to market fluctuations, economic downturns, and company-specific issues. Building a diversified portfolio can help mitigate these risks.

4. Myth: Dividend Investing Is “Set It and Forget It”

While dividend paying stocks can provide a stable income stream, they require active monitoring. Companies’ financial situations can change, impacting their ability to pay or grow dividends. Regularly reviewing your portfolio ensures it aligns with your financial goals and risk tolerance. Staying informed about market trends and company performance is key to long-term success in dividend investing.

5. Myth: Dividend Stocks Don’t Offer Growth

Some investors mistakenly believe dividend paying stocks are only for income and lack growth potential. In reality, many companies that pay dividends also experience significant capital appreciation. Dividend growth stocks, in particular, can provide the best of both worlds—steady income and the opportunity for substantial long-term gains.

How to Get Started

If you’re considering dividend paying stocks, here’s how to begin:

  1. Define Your Goals: Determine whether you’re seeking income, growth, or a combination of both.
  2. Research Stocks: Look for companies with strong financials, a history of dividend growth, and a reasonable payout ratio.
  3. Build a Plan: Diversify your portfolio and decide whether to reinvest dividends or take them as income.
  4. Consult a Professional: Seek the guidance of a professional to help make sure you pick the best stocks for your individual situation.

In Conclusion

Dividend paying stocks can be a powerful tool in your financial strategy, offering steady income, growth potential, and portfolio stability. However, understanding the risks and tailoring your investment choices to your unique goals is crucial for success. If you’re ready to explore how dividend paying stocks can fit into your retirement plan or overall investment strategy, our team of Certified Financial Planners (CFPs) is here to help. Schedule a call with us today to get personalized guidance and build a portfolio designed to meet your financial goals

5-10 Years to Go: Retirement Reality Check -Are You Really Ready?

Posted on by Brian Colvert

5-10 Years to Retirement

As you get closer to retirement, the financial planning landscape changes. Those final 5-10 years bring new priorities, questions, and a natural desire for clarity. Do I have enough to retire comfortably? Will my savings and investments support my lifestyle? This period is critical for setting up the financial security and peace of mind that most people seek as they step away from work. Below, we’ll dive into how to build confidence in your retirement planning by addressing key steps and practical strategies to ensure you’re ready.

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Step 1: Start with Your Expenses

The foundation of a successful retirement plan is understanding your current expenses. The goal is to get a clear picture of what it costs to live your life on a monthly and annual basis. To do this:

  1. Track your monthly spending: Look at your recent bank statements and credit card bills to get an idea of your average monthly spending. Include every category, from housing to groceries to entertainment.
  2. Account for yearly fluctuations: Certain months are often higher-spend months. For example, holiday season costs or summer travel expenses can raise expenses significantly. Make sure to average out these costs for a realistic annual spending figure.
  3. Consider future changes: Think about how your expenses might change in retirement. Will you be mortgage-free, or do you anticipate moving? Are there hobbies you plan to pursue that might increase costs?

Once you have a firm grasp on your current and anticipated expenses, you’ll have a more accurate starting point to build your retirement plan.

Step 2: Identify Income Sources

After estimating your expenses, it’s time to look at income sources you can rely on in retirement. For most people, these will fall into a few main categories:

  1. Social Security: Check your Social Security statement to see what you can expect to receive monthly. Remember that delaying Social Security benefits past your full retirement age can increase your monthly payments.
  2. Pensions: If you’re fortunate enough to have a pension, include it here. Know the details, such as whether the payout is fixed or adjusted for inflation, and if any survivor benefits are available.
  3. Investment Income: Income from investments in retirement accounts, brokerage accounts, or real estate holdings is crucial. This is where the bulk of many people’s retirement income comes from.
  4. Other Sources: You may have other income sources like part-time work, royalties, or annuities. Consider whether these will be consistent and predictable.

Tally these income sources to see how they measure up against your projected expenses. Many retirees find that guaranteed income from Social Security and pensions falls short of covering their needs. This difference, or “gap,” is what your investments need to cover.

Step 3: Calculating Your “Gap” and Understanding Withdrawal Strategies

Once you have an estimate of your guaranteed income versus your expenses, you can calculate your “gap.” This is the amount you’ll need to withdraw from savings and investments each year to meet your spending needs.

For instance, if your annual expenses are $120,000 and your guaranteed income covers only $60,000, then your gap is $60,000 per year. This is the amount you’ll need to draw from your investments to maintain your lifestyle.

Step 4: Implementing the 4% Rule

The “4% rule” is a popular rule of thumb for retirement planning. It’s a straightforward way to estimate how much you can sustainably withdraw from your investments each year without depleting your savings prematurely.

The rule suggests that if you withdraw 4% of your retirement portfolio each year, your savings should last approximately 30 years, even with inflation adjustments.

Here’s how to use the 4% rule to estimate your retirement readiness:

  1. Calculate your gap: For example, if your gap is $60,000, you’ll need enough saved to cover this annually.
  2. Divide by 4%: Divide your gap by 0.04 to estimate how much you need saved. Using our example, $60,000 / 0.04 = $1.5 million.

The 4% rule provides a conservative starting point. However, remember that it’s just a guideline. Depending on your personal situation, investment portfolio, and tolerance for risk, you may need to adjust this percentage.

Step 5: Assessing Risk and Adjusting Your Portfolio

As you near retirement, consider adjusting your investment portfolio to better align with your time horizon and risk tolerance. This often means reducing your exposure to high-risk assets, such as stocks, and increasing holdings in more stable assets like bonds or cash equivalents.

That said, maintaining some exposure to growth assets, like stocks, is still essential to keep pace with inflation over what could be a lengthy retirement. We can help you determine the right balance based on your needs and market conditions.

Step 6: Creating a Flexible Withdrawal Plan

A successful retirement plan includes flexibility. The 4% rule is a useful baseline, but there are times when adjusting withdrawals can help stretch your retirement savings further.

  1. Stay adaptable in lean years: If markets are down, consider withdrawing slightly less or pausing major expenses. Adjusting withdrawals during market downturns can prevent you from selling investments at a loss.
  2. Re-evaluate annually: Each year, assess your expenses, investment performance, and overall portfolio balance. Staying engaged helps you avoid surprises and make minor course corrections as needed.
  3. Bucket Strategy: Some retirees find it helpful to use a “bucket strategy,” where they segment their savings into short-term, medium-term, and long-term buckets. For example, keeping 1-3 years’ worth of expenses in cash equivalents can cover immediate needs, while medium and long-term investments grow to support later years.

Step 7: Plan for Taxes and Healthcare Costs

Taxes and healthcare costs are among the largest expenses retirees face, so accounting for them in your retirement planning is essential.

  1. Plan for taxes: Withdrawals from tax-deferred accounts, like traditional IRAs and 401(k)s, are typically subject to income tax. Understanding your tax liability and strategies to minimize it, like Roth conversions or strategic withdrawal planning, can make a significant difference in retirement income.
  2. Healthcare expenses: Medicare will cover some costs, but it doesn’t cover everything. Consider supplemental insurance, long-term care insurance, HSA, or creating a separate savings account for healthcare costs to ensure you’re prepared for medical expenses.

Step 8: Pay Attention to Inflation

Retirement can span two or three decades, and inflation will erode purchasing power over time. Make sure your income sources and withdrawal strategy account for inflation so your savings can cover the rising costs of living.

  1. Use inflation-adjusted estimates: When calculating future expenses, consider the effect of inflation. A 3% annual increase in expenses is a conservative estimate many financial planners use.
  2. Inflation-resistant assets: Keeping some investments in assets that typically rise with inflation, such as stocks or Treasury Inflation-Protected Securities (TIPS), can help offset inflation’s impact on your retirement income.

Step 9: Take Advantage of Catch-Up Contributions

For those 50 and older, catch-up contributions allow you to add extra money to retirement accounts, such as 401(k)s and IRAs. Maximizing these contributions can help bolster your savings in the final years leading to retirement.

  1. 401(k) catch-up contributions: As of 2024, you can contribute an extra $7,500 to your 401(k) annually if you’re over 50. This is in addition to the regular contribution limit.  >>> Check here for this year’s contribution limits <<<
  2. IRA catch-up contributions: Similarly, individuals over 50 can contribute an extra $1,000 annually to IRAs.

These catch-up contributions can add up significantly over time, especially when invested wisely.

Step 10: Seek Professional Guidance

Planning for retirement involves many variables, and even with simple rules, the calculations can become complex. Professional guidance can be valuable for ensuring your plan is realistic. We can work with you to create a tailored financial plan that addresses your unique needs, assets, and goals. We can also guide you in making adjustments and keeping your strategy on track as conditions change.

The Bottom Line: Retire with Confidence

The final years before retirement are the perfect time to refine your plan, reduce uncertainties, and build confidence in your financial future. By knowing your expenses, identifying reliable income sources, and understanding your investment strategy, you’ll be well-prepared to retire with peace of mind. As you refine your strategy in these critical years, small incremental steps, like boosting savings rates, can compound into big benefits.

Remember, retirement planning doesn’t have to be overwhelming. Each of these steps, from budgeting to the 4% rule, provides you with a roadmap to a secure retirement. Following these strategies and seeking guidance when needed can set you up to transition from work to retirement with confidence, knowing you’ve planned well for the years ahead.

The Art of Asset Allocation

Posted on by Brian Colvert

Asset Allocation

In the world of financial planning, one term that often comes up is “asset allocation.” Asset allocation is the practice of dividing an investment portfolio across different asset classes to balance risk.  Think a pie chart. It’s a foundational concept that plays a crucial role in designing investment portfolios. But while it may sound straightforward, the reality is far more nuanced. In fact, I’d argue that asset allocation is more of an art than a science.

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What is Asset Allocation?

At its core, asset allocation refers to how an investment portfolio is divided among different asset classes. These can include equities (stocks), fixed income (bonds), private equity, commodities, real estate, your home equity, and even alternative investments like cryptocurrencies or collectibles. The goal is to find the right mix that balances risk and reward based on the investor’s goals, time horizon, and risk tolerance.

Often, the first step in determining asset allocation is through some sort of quiz or a conversation with a financial advisor. These quizzes typically ask questions designed to assess risk tolerance, how much market volatility an investor can stomach. They aim to gauge whether someone would prefer a conservative approach, leaning more towards fixed income and less risky investments, or a more aggressive strategy, favoring equities and other higher-risk assets.

Why Asset Allocation is an Art, Not a Science

Why do I call asset allocation an art rather than a science? The answer lies in the human element. For the many years I’ve been in this industry, I have yet to see a quiz that can’t be manipulated or one where people don’t try to put their best foot forward.

Investors often say they want all the upside and none of the downside. And why wouldn’t they? If we could guarantee such outcomes, everyone would be wealthy, and financial planning would be a breeze. But reality doesn’t work like that. There’s no perfect formula that offers maximum returns with zero risks. Even the best investors can’t avoid downturns entirely.

Most quizzes ask questions like, “Would you be willing to take a 50% loss for the chance of a 150% gain?” People tend to focus on the potential gains and say “yes” without fully understanding the emotional impact of actual losses. Here’s another issue: quizzes often frame things in percentages, but real-life losses are felt in dollars. For example, a 10% loss on a $2 million portfolio isn’t just 10%; it’s $200,000. When markets are down, people think about what those lost dollars could have bought—a new car, a home, years of living expenses. These losses are visceral and deeply personal.

Conversely, when the market is up, we often think in percentages rather than dollar gains. We may say, “My portfolio is up 20%,” without immediately converting that to actual dollar gains. This inconsistency in how we perceive gains versus losses underscores the complexity of human emotions in investing, making asset allocation an art that requires understanding psychology, not just spreadsheets.

The Role of Emotions in Investing

The emotional response to gains and losses can lead investors to make irrational decisions. Fear and greed are two powerful emotions that drive market behavior. During a market downturn, investors may panic, thinking, “This time is different; it’s going to zero. I need to get out now.” This reaction is called capitulation, and it’s the point at which investors sell off their investments to avoid further losses. But by selling when the market is low, they lock in their losses and miss the eventual recovery.

For instance, during the 2008 financial crisis, the markets fell over 50%. If you were heavily invested in equities and panicked, selling your investments to move into a more conservative portfolio, you would have locked in those losses. When the markets rebounded, as they historically have, those conservative investments wouldn’t have recovered as quickly as a diversified portfolio that stayed the course. This is why it’s essential to maintain a consistent risk tolerance. Selling low and buying high is a recipe for long-term underperformance.

Learning from the Great Investors

Even the most successful investors have faced significant downturns. Ray Dalio, known for his “All Weather” portfolio designed to perform well in any economic environment, still saw his strategy down by 20% in 2022. Warren Buffett, perhaps the most renowned investor of our time, saw his portfolio down by approximately 24% in 2022 and nearly 50% during the 2008 crisis. Yet, over the long term, these investors have achieved phenomenal returns. The key is their ability to stay invested through the tough times, not letting fear dictate their investment decisions.

Finding Your Comfort Zone

Working with a CERTIFIED FINANCIAL PLANNER™ can help tailor an asset allocation strategy that aligns with your comfort zone, goals, and life situation. A good advisor takes the time to understand your emotional triggers. They’ll know how to guide you through downturns without making knee-jerk reactions that could harm your financial future.

Risk tolerance isn’t static—it changes with life events, age, and personal circumstances. When you’re working and have a steady income, you might feel more comfortable taking on risk than when you’re retired and living off your investments. The birth of a child, the death of a parent, or even market news can shift your risk tolerance.

Timing the Market vs. Time in the Market

One of the common misconceptions among investors is the idea of timing the market, getting out when things are bad and getting back in when things look good. While it sounds logical, it’s nearly impossible to do consistently. The market often moves without clear signals, and by the time you react, it’s usually too late. Instead, a more reliable strategy is to focus on “time in the market.” Staying invested over the long term allows you to ride out the volatility and benefit from compounding returns.

The Value of Diversification

Another crucial aspect of asset allocation is diversification, not putting all your eggs in one basket. By spreading investments across various asset classes, sectors, and geographies, you reduce the impact of a downturn in any single area on your overall portfolio. Diversification doesn’t eliminate risk, but it can mitigate it, providing a smoother ride during turbulent times.

The Science of Asset Allocation: Data and Analysis

While I’ve emphasized the art side, there’s no denying that science plays a role in asset allocation. Data analysis, historical performance, economic forecasts, and quantitative models all contribute to determining the optimal asset mix. However, these tools should be seen as guides rather than definitive answers. They provide valuable insights, but they can’t predict the future or account for every nuance of human behavior.

Making Asset Allocation Work for You

Creating a well-balanced portfolio that aligns with your risk tolerance and investment goals is the ultimate aim of asset allocation. It’s about managing the trade-off between risk and return, ensuring you’re neither too aggressive nor too conservative. A portfolio should reflect not just your financial goals but your emotional comfort zone. The peace of mind that comes from knowing you’re invested in a way that feels right for you is invaluable.

Final Thoughts

Navigating the complexities of asset allocation can be daunting. Partnering with a knowledgeable advisor can provide clarity and guidance, helping you avoid emotional pitfalls and stay focused on your long-term goals. An advisor serves as a steady hand, keeping you grounded during market turbulence and ensuring your portfolio evolves with your changing needs.

At Bonfire Financial, we specialize in helping clients find that balance and strategically slice up your investments. We listen to your goals, understand your risk tolerance, and craft a personalized asset allocation strategy and financial plan that aligns with your financial and emotional well-being. If you’re ready to take the next step in your financial journey, reach out to us.

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