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Speaker 1: Hello there. So, today, here's what I want to do. I want to do a little bit different podcast today than I normally do on a Sunday because Sunday's I just kind of think are, let's give you something motivational, inspirational. And then on Thursdays let's deal with straight finance. But I'm kind of in the mood to do a financial podcast for a Sunday, and the reason is this. You are writing to me and you are really, really getting into this thing about index funds that I keep telling you all about. Do a Standard and Poor's 500 index fund and you'll be fine. But here's the problem, I'm not talking about that being the solution for everything for all of your money.I even had a football player who I will let go unnamed who wrote me and said, Suze, I'm putting $50 million that I have into an index fund. I'm like, no, no, that's not what I meant. The goal of investing is for you to be able to be diversified when you have small amounts of money. And when your money starts to grow and grow, and now maybe you have enough money to buy a portfolio of individual stocks, there's nothing wrong with that as well. So, so many of you are taking me so literally. You're going to take all your money and you're going to put it into what? You're going to put it into an index fund.Now, I love indexed funds. I love them. What is an index fund? An index fund is simply a fund, a pool of money that buys all the stocks in a particular index, or they create an index and buy a variety of stocks for that index. All technology, all biotech, whatever it may be. And when you need total diversification, as I said, the easiest thing to do is dollar-cost average into an index fund. And then a lot of you are writing me and you're telling me you have $1.2, $3, $4 million and you are interviewing managers that are going to put you in index funds and mutual funds. And is that better than using a personal financial advisor that buys individual stocks for you and charges you a 1% advisory fee?So today, I want to talk to those of you who have a lot of money. I know this podcast sometimes deals with you don't have money, you don't know what to do, you're starting over, you have to get out of debt. But sometimes, believe it or not, there are people who have listened to me now for over 20, 30 years and they have a substantial amount of money. They have one, two, three, four, even more millions of dollars. And they are confused about why should they use a personal financial advisor vs. just putting it all in index funds and paying only maybe .25% or .30% in advisory fees that are within index funds. What is the difference? So, I want to explain that to you right now. I personally in my own portfolio do not own one index fund. Not one. Did I use to when I was just starting out and I didn't have a lot of money? Of course, I did. But as I started to accumulate wealth, I went to buying individual stocks; individual stocks, some that paid me what? A dividend. And I also went into more speculative stocks with the money that I could risk. And the majority of my portfolio is in municipal bonds. Now, the reason that the majority of my portfolio is in municipal bonds is that I want them to be safe and sound. So, I do research and I know which bonds that I feel are safe and sound and won’t go belly up. And because I did so long ago, I'm still getting 4.5-5% state and federally tax-free. But then again, I have a substantial amount of money in individual stocks that run the gamut of all types of investing.Now, I tell you that because here's what I want you to look out for. If you go to a personal financial advisor, a registered investment advisor, that takes your money under management, and what that means is this: You give them your money, they do not get any commissions to buy or sell anything, they get a percentage of the amount of money that you have under management with them. I personally think you should never pay more than 1% in an advisor's fee, and the reason is you really don't have to because they will negotiate with you. That person will get 1% of anything normally that you have under management with them. So, if they take you from $100k to $200k, now they're getting 1% of $200k. If they take you from $100k down to $50k, now, they're only getting 1% of $50k. If they make money for you, they make money for themselves, if they lose money for you, they're losing money for themselves. Now you are on the same side of the fence as the person handling your money. However, here's what I want you to pay attention to. Do you know how I just said a little bit ago that the majority of my money is in municipal bonds? Listen carefully now. When you buy a municipal bond, and a municipal bond is a bond that is issued by a municipality and that interest that you earn on that bond is federally tax-free. That's a big deal. If you buy municipal bonds in the state that you are a resident, it is also state income tax-free. Because I am a resident of Florida, and maybe you are a resident of a state that has no state income tax, I can buy a municipal bond in any municipality I want throughout the entire United States and not pay income tax on it on the federal level as well as the state tax level. Therefore, I can get tremendous diversification in municipal bonds. The reason that I like individual municipal bonds over a municipal bond fund, again, you could have a mutual fund that simply invests in municipal bonds and get diversification. But the reason that I like doing it the way that I do it is this: All municipal bonds have a maturity date. They are issued today, let's say, and maybe 10 years, 20 or 30 years from now, they have a date where you hope, if they are a good quality municipal bond, you will be paid back the amount of money that you invested. During the time that you purchased it and when it matures, it will fluctuate in value. If interest rates go down, the value of your municipal bond will go up. This is true for all fixed-income vehicles. The value of your municipal bond will go up. But if interest rates go up, the value or the price of your municipal bond will go down. But that's only if you're going to buy or sell it in between the time that you purchased it and it matures. Got that? During that time, however, you are getting the income or the bond yield every six months usually paid into your account. In a municipal bond fund, there is no maturity date. So, when you purchase it, you are never guaranteed to get back what you put in. If interest rates go up, the value of the shares of that municipal bond fund most likely will go down. The interest rate on a municipal bond fund is not fixed, so therefore it can go up or it can go down, depending on what's happening in the bond market. And when new people put in money in that fund and it has to get invested, and if interest rates are lower at that time, it will affect your yield as well. In individual bonds, the interest rate is fixed and that is what it is for the entire time that you own that bond. Are we clear about that so far? Again, when I'm teaching, you can go back and listen to it over and over again. I'm being very simplistic here so that you understand what I am talking about.In municipal bonds, when you purchase them through a financial advisor, there is a built-in commission in the price of the municipal bond. So, a great, now listen closely to me, a great financial advisor would never hold the bonds that you have purchased in an account that has an investment advisory fee on it. So, my own portfolio, I have one account that has all my municipal bonds in it and there is no investment advisory fee on that account what so ever because the financial advisor that purchased those bonds for me got the commission when they did so.My stocks, all of my stocks are held in another portfolio that is under an investment advisory fee and a very small one. I think I pay a quarter of a percent to have it managed because of the amount of money that's in there. Now, you may be wondering, but Suze, why do you need money under an investment advisory situation? And that is because I travel, I do things, I want somebody who watches it for me. We discuss it and that's how I want to do it, I've been using this person for 20 years and I love this person. Therefore, how do you invest? If you want to use an investment advisor, fine. I don't have a problem, just make sure if you buy individual municipal bonds, it is not under an investment advisory fee. Why? If you are paying 1% to an investment advisor, is that better for you than simply buying an index fund at maybe .25% or .35%, a fraction of the cost? That is because a great investment advisor is going to bring things to you that are not just individual stocks. They may be bringing you preferred offering, certain types of stocks that give you dividends that you don't have to pay ordinary income tax on, you can pay capital gains tax rates on, and on and on. Maybe they are part of syndication which can offer you stock that was part of an IPO. There are many reasons to use an investment advisor over putting all your money in indexed funds, but that investment advisor better be beating the returns of an index fund by at least 5% or they're not worth it. So, I make with the person that I use, we constantly outperform the Standard and Poor's 500 index by at least 4 or 5% a year. Also, when the market goes down, we don't lose as much because of certain strategies that we also use than an index fund will suffer. So, I'm just trying to give you a small Suze School lesson here as to why a great investment advisor may be worth their weight in gold over just putting money in index funds. Now, you then say to me, but Suze, what should I do? Should I do index funds and just do it that way? Or should I use an investment advisor? And here is my answer to you. Do 50/50. Put 50% of your money with where you want to do it with index funds, put 50% of your money with an investment advisor that, you know, is reputable, that you know, has done well, that you've been able to check their returns. Somebody you can relate to. All right? Who doesn't put your money under management if it's in municipal bonds, an honest one, they are out there. And after a year, two or three, see which one has done better. Then whichever one has done better, you can switch it. The thing is, you don't want to be an all or nothing investor. You don't want to do everything with all of your money or nothing with all of your money. You have got to at least try. So, in today's podcast, I just wanted to give you a little bit of an education as to what you should be thinking about, especially if you have a large sum of money.Let's go back to index funds for a second. If you don't have a large amount of money and you want to be putting them in index funds for you to start, I love Fidelity, I love T.D. Ameritrade, I love Charles Schwab, they're all good. Again, if you're going to be putting money in an index fund, you then say to me, the next question is, well, should I do a fund or should I do an exchange-traded fund? The difference between those two things is an exchange-traded fund that will also invest in indexes for you is traded as a per-share value. Every day it trades like a normal stock on the stock market where you can buy and sell it at any time. A mutual fund can only be bought or sold at the end of business after the markets have closed. That is a big difference if something is going on in the stock market. The difference, however, is most exchange-traded funds come with the commission. A good index fund obviously is a no-load fund that you don't have a commission to buy or sell. So, unless you find a discount brokerage firm that will allow you to buy exchange-traded index funds for free, then stick with no-load index mutual funds, especially if you are going to be using dollar-cost averaging, which I suggest all of you do right now because the markets could be iffy here, especially starting February of next year. We can get iffy, everybody. So just dollar cost average and be safe no matter what. One last thing for those of you looking for advice, you don't know where to go, you don't want to use a financial advisor. Suze Orman, do you have any services that you really love? I have to tell you, I love the Motley Fools. I think they are smart, they have many portfolios, one that will obviously meet your needs. They will tell you when to buy, they will tell you when to sell, they will educate you on that. They even have an exchange-traded fund called the Motley Fool Index. The symbol on that is TMFC, the Motley Fool, C, whatever C stands for, a hundred of their stocks that they really like. I don't have a problem with you doing that either. So, check them out, check their podcast out, take a look at their letters. It's just something that you might want to look at. I can't personally, in the position that I hold here, give you individual things to buy this and that. I can't do that. They can, so, you might just want to check them out. Is your head absolutely spinning? I bet it is. So, I'll leave you here with what I've just told you. But this gives you an idea of what you need to know to become the strong, smart and secure women when it comes to your money that I want all of you to be. In providing answers neither Suze Orman Media nor Suze Orman is acting as a Certified Financial Planner, advisor, a Certified Financial Analyst, an economist, CPA, accountant, or lawyer. Neither Suze Orman Media nor Suze Orman makes any recommendations as to any specific securities or investments. All content is for informational and general purposes only and does not constitute financial, accounting or legal advice. You should consult your own tax, legal and financial advisors regarding your particular situation. Neither Suze Orman Media nor Suze Orman accepts any responsibility for any loss, which may arise from accessing or reliance on the information in this podcast and to the fullest extent permitted by law, we exclude all liability for loss or damages, direct or indirect, arising from use of the information. To find the right Credit Union for you, visit https://www.mycreditunion.gov/. Interested in Suze's Must Have Documents? Go to https://shop.suzeorman.com/checkout/cart/index/.