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Investment Fundamental #9 – Brokerage Account

joint brokerage account

flickr – justin silles

There will come a day when there is extra cash left over after you’ve maxed  out the 401k, Roth IRA, and saved up an emergency fund. What should you do with the left over cash? Spend it on a nice new shiny iGadget? Go out and celebrate at The French Laundry? click below…

Wrong Answer! I love The French Laundry, but if we go celebrate every month there is no way I can retire early. (Plus we’d have to fly down there.)

Maxing out on 401k and Roth IRA is not enough for me to retire by 40. It took us a long time to get to this point, but every month we have a little bit left over and we send it to our online Brokerage Account.

Many of my friends are leery of investing in the stock market because of the last big correction. IMO, this is a mistake because stock investment historically has been one of the best way to grow your net worth. We kept up our 401k contribution and also invest in the joint account through the downturn. After a big 2010, we have recovered and surpassed our previous high. The most important thing is to figure out an asset allocation that you will be comfortable with and stick with it through thick and thin.

Asset Allocation

Asset Allocation is a very personal thing. You need to figure out your risk tolerance and then sit down and make an asset allocation sheet. After two bear markets (internet and housing bubbles), I finally figured out an allocation that I am comfortable with. I rebalance once or twice a year to keep the portfolio in line with the allocation. You can follow the link and read about how I rebalance the portfolio in 2010. I think you need to go through the up and down of the stock market a few times before you can really figure out your risk tolerance. It’s important to take the whole portfolio into account when you check the asset allocation and that’s where the non retirement account shines.

The problem with 401k is the limited choice of investments. In my plan, there are only a few mutual funds that I like. The Roth IRA and the brokerage account make a nice counter balance to the staid 401k account. At the broker, I can invest in anything I want. This is the place where you can invest in Apple, Netflix, and Sina. I also invest in emerging market ETF (VWO) with the discount broker since there are no good choices in my 401k plan. I plan to move some of my account to dividend stocks once I execute my exit strategy. This way I will have a bit of extra income and do not have to touch the retirement accounts until later.

retirebyforty’s strategy

  • If you have extra money at the end of the month invest it.
  • Use Roth IRA and joint account at a brokerage to balance your 401k account.
  • Figure out your risk tolerance and make an asset allocation plan. This is one of the most important thing you need to do when investing in stock and bond.

What do you do with extra cash at the end of the month? Do you go out and reward yourself or do you invest it? I’m not saying you shouldn’t travel or quit going out. Those things should be in the budget and I’m just talking about extra money.

disclosure: I am invested in Netflix and VWO. This post is not an endorsement.

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 31 comments… add one }
  • LifeAndMyFinances January 24, 2011, 3:45 am

    My wife and I are planning to buy a house soon, so I think much of our extra money will go toward that. But, if we do have additional funds outside of our 401(k)’s, I would love to invest through a brokerage. I have done it in the past, and it’s a very free feeling. Plus, I think I’ve picked all winners! Thanks for the post.

    • retirebyforty January 24, 2011, 9:05 am

      We are trying to buy a 4 plex so most of our extra money now is going into a saving account also. Once that’s done, then we’ll start sending money to the brokerage account again. Wow, all winners? That’s great! But I learn the most about myself when the market crashed though. 😯

  • Kevin @ Thousandaire.com January 24, 2011, 6:09 am

    I agree with you, except I throw money in the investment account before I put anything in this “emergency fund” thing. 🙂

    • retirebyforty January 24, 2011, 9:07 am

      Yeah, I like your approach too. You can always move in with the parental units if there’s an emergency right? 😉

  • Aloysa January 24, 2011, 8:31 am

    I’ve never even heard about The French Laundry! 🙂 When the time comes when we have some extra left, we will definitely think about invesitng it. So far… we are getting rid off that debt we still have.

    • retirebyforty January 24, 2011, 9:09 am

      We’ve only been there once, but it’s definitely the best culinary experience we ever had! Yes, invest in The French Laundry!
      I guess it’s a good thing we don’t live close by.

  • MoneyCone January 24, 2011, 9:56 am

    Sensible advice if you know what you are investing in or have a good asset mix. Putting extra money in penny stocks or Enron-like operators would be terrible. (Enron at that time was a good company – no one except insiders could’ve known the shape Enron was).

  • everyday tips January 24, 2011, 11:56 am

    Extra money at the end of the month either goes toward the mortgage or into investments. I kind of mix it up. (That is, assuming I am not dreaming and I actually do have extra money at the end of the month.) Our paychecks are so automated with ‘x’ amount going into this investment, ‘x’ amount going extra on the mortgage, ‘x’ amount going in to college, etc that we don’t usually have extra at the end.

  • Jessica07 January 24, 2011, 12:16 pm

    Great strategies–#3 can seem rather tricky at times, though…

  • Nicole January 24, 2011, 12:32 pm

    We also have access to a 457(b) on top of our 403(b) and our mandatory retirement… so (as a couple) we could invest up to 76K towards retirement tax-advantaged. We won’t be doing that any time soon. And if we did, before then we want to funnel money into our 529 since (if we’re lucky and get raises and stuff) we’ll be on the hook for 100% of our kids’ future college expenses.

    • retirebyforty January 24, 2011, 12:54 pm

      76k annually? That’s huge! We can only put in 33k toward 401k every year as a couple. We can’t add to Roth IRA anymore.
      I’m still thinking about 529… I’m still not sure if we should contribute or if it’s better to invest in rental income. Hopefully in 18 years, the monthly rental income will cover college expense.
      If we have any money left at the end of the year, I’ll probably put it in 529.

  • krantcents January 24, 2011, 5:37 pm

    What extra money? I am maxing out my 403B ($22,000 per year), IRA, and Roth IRAs. I am paying down my mortgage so it will be paid off in 6.5 years (coincide w/retirement). We are at a point where we replace things in the house or travel with any excess funds.

    • retirebyforty January 24, 2011, 9:10 pm

      I think you’re further along than most people. 🙂

  • Buck Inspire January 24, 2011, 5:52 pm

    Great advice. Extra money is spread across a Roth, more toward my 401k, and building back a drained emergency fund from last year’s travel. I currently have some play money in my brokerage account. Small wins and losses. It feels like I need more money to make more money. 🙁 Better work harder on passive income streams. 🙂

    • retirebyforty January 24, 2011, 9:11 pm

      You and me both have to work on that passive income!

  • Barb Friedberg January 24, 2011, 7:38 pm

    Hi retire, Definitely great advice. Although, I always suggest automatic transfer into ALL accounts. If you don’t see it you won’t miss it. I know it seems like a lot to max out 401 K, add to ROTH, and invest more in a brokerage account, but the feeling of financial freedom is worth it!

    • retirebyforty January 24, 2011, 9:13 pm

      Auto transfer into a brokerage account would be tough for us. I guess we could try it and set up an auto transfer with a small amount and see if that works.

  • 101 Centavos January 25, 2011, 4:09 am

    RB40, the limited choices in (one-half of) our 401k have been a pet peeve of mine for a while. Our extra cash flow right is dedicated to improving our second house and paying it off in a couple years.

    • retirebyforty January 25, 2011, 10:29 am

      Our 401k choices expanded a few years ago and it’s much better now. When I first started, there were a bunch of mediocre choices.
      The Mrs’ 401k choices are limited to a index funds.
      Are you still maxing out contribution even with limited choices?

      • 101 Centavos January 25, 2011, 7:50 pm

        I’m contributing enough to get the employer match. The rest is going in after-tax investments.

        • retirebyforty January 25, 2011, 8:15 pm

          Any particular reason why you don’t max out to take advantage of pre tax? The limited choice of investment?

          • 101 Centavos January 25, 2011, 8:34 pm

            Correct. The plan does not allow us to set aside more than 50 percent of the total 401K into a self-directed brokerage.
            The SDB portion passed the 50 percent mark quite some time ago, so the new contributions (and employee match) must perforce go into the “company” portion. I’ve allocated them mostly to cash and a little bit to bonds. I actually have a few hundred in some of the largecap/midcap/smallcap/emerging/lifepath/blahblah mutual funds, just to track their performance, which has been less than stellar.

        • Clay Ivy Finance January 26, 2011, 10:12 pm

          Good idea with only contributing up to the employer match.

  • Roshawn @ Watson Inc January 25, 2011, 5:56 am

    We do invest extra money like you. This just makes sense in the end: buying assets rather than increasing expenditures!

    • retirebyforty January 25, 2011, 10:30 am

      Right! The most difficult thing to control is the lifestyle inflation. I think we wised up and spend only as needed now. Well, a few luxuries thrown in here and there. 🙂

  • Clay Ivy Finance January 26, 2011, 10:05 pm

    The only real benefit to the 401k is the employer match. Contribute the maximum your employer will match and not a penny more. You hit the nail on the head. The problem with most of them is the lack of investment choices. Most people would be better off to put their money in a total market index, like the Vanguard 500. Many 401k programs do not offer low cost index funds.

    • retirebyforty January 27, 2011, 10:36 am

      I think you are underestimating the importance of the pre tax advantage. Let’s say you’re in the 25% bracket for example.
      You can contribute $10,000 in 401k and stash it in an index fund.
      OR you can pay tax and have $7,500 to invest and put the money in VTSMX.
      After 30 years, the 10k would grow a lot more than the 7.5k even if the cost is lower with VTSMX.
      I’m generalizing, but that’s what it looks like to me.

  • Charlie July 10, 2012, 8:56 am

    Having 401k, IRA and ROTH IRA and at age 70 1/2, will be forced to beging withdrawal, which account should I withdraw from 1st. That is should I withdraw from the tax deffered account 1st or should I begin with the ROTH IRA? Substitute a federal TSB account, does that make any difference in the answer.


  • Eric October 24, 2013, 4:55 am

    The required minimum distribution rules don’t apply to Roth’s.

    I think there is an important point being made in this thread, that if you have one account (like mabye your 401(k)) that is limited in choices or flexibility, you can balance it out with other accounts such as a Roth or regular account at a brokerage. Think of your diversification and risk tolerance in terms of the overall, combined picture.

    Maybe you keep your 401(k) in something quiet and don’t muck around with it much, while doing more aggressive trading in other types of accounts. That sort of thing.

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