Long Term Investments

Overview​

Long term investment management is a vital component of any person’s financial planning path. The goal here is to investor for things like retirement, vacations, a house and mortgage, a car, and any large expenses you plan out for the future.

 

The key here is getting your money to work for you in a prudent way that you’re comfortable with. 

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As I mentioned in the headline above, in most cases it's worth reviewing the short term budgeting section, and debt and loan section before coming here. Secure those parts of your financial life before worrying about long term investment management.

 

At the end of the day, it’s all about risk vs reward. The reward is relatively simple – it’s what sort of investment return you’re getting from your long term investments.

 

Risks to Consider

Permanent Loss of Capital

• The risks are a little more complicated. One risk to consider is the permanent loss of capital – meaning you permanently lose your investment (a company goes bankrupt you invest in goes bankrupt, real estate gets seized, etc).

 

Low Returns

• Another risk, thought it may seem counterintuitive, is that you may be TOO conservative and not get a high enough return on your investment, and thus don’t meet the financial goals you set in place.

 

Volatility

• Volatility is only risky in investing in the event you want to take out your money, but that investment has lowered in value (likely for the time being, but still – you wanted to pull it when you wanted to pull it). For example, let’s say you’re planning on retiring in 40 years. You have 90% of you investment in stocks and 10% in bonds. Stocks provide great returns over the long run, although do have the tendency of temporarily decreasing farther than other investments. Your goal is to have $1M by the time you retire. Let’s say you get to $1.1M in 39 years. The stock market crashes, and in year 40 you now only have $800K. You now have to work, save, and invest a few more years to bring your portfolio’s value back up to $1M, whereas this likely could’ve been avoided if you had invested in less volatile investments closer to the point you needed those investments in cash.  Generally, the longer your time horizon, the more volatility you should take.

 

Liquidity

• One other main risk when investing is liquidity risk, which is interconnected to volatility in a way. Liquidity means how easy is it to convert that investment to cash (how quickly, and how safely – AKA not losing value b/c you’re taking it out sooner).​ The more liquid an investment is, the easier it is to convert that investment to cash. 

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Retirement Accounts for Freelancers

SEP (Simplified Employee Pension) IRA​

• Overview: Self-employed individuals can calculate their compensation for the purpose of SEP IRA contributions as the lesser of 1) their net earnings from self-employment minus half of their self-employment tax or 2) the SEP IRA contribution for the calendar year.

• Tax Implication: Your contributions are tax deductible. Your withdrawals in retirement are taxed at ordinary income tax levels

• Annual Contribution Amount: Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $66,000 for 2023

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Solo-401K

• Overview: Another option for self-employed individuals. 

• Tax Implication: You can choose which way to be taxed - as a traditional 401(k) or Roth solo 401(k)

• Annual Contribution Amount: Lesser of $22,500 or 100% of your income AND 25% of your income for a maximum of $66,000 per year

• Catch up: If you're over 50, you can contribute an additional $7,500 per year for a total of $73,500 per year

• Early Withdrawal Penalties: almost always pay taxes and penalties if taking distributions before the age of 59.5

• Other notes: The IRS will require you to fill out a form if assets in this account grow to $250K or more​​

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Options (generally from highest return, highest risk to lowest return lowest risk)

• Stocks/ETF’s/Mutual Funds

• Real Estate

• Bonds

• CD’s, Money Market Funds, T-Bills, Savings accounts, etc)

• Cash​​​​