Financial Questions – (Q & A)

May 2016


Q Dear Rick:
I have a couple of investment questions I hope you can help me with. The first deals with my portfolio. I have been using a financial advisor who I am generally happy with. My son, on the other hand, thinks I should be changing advisors. His reasoning is that my account does not do as well as the Dow Jones Industrial Average. My question is – is the Dow a good yardstick to measure my investments? My second question relates to my son. My son is a recent college graduate who is living on his own. Based on one of your columns, I have set up my own matching program in that whatever he puts away in her IRA, I will match. His employer does not have a 401(k) Plan. My gut feeling considering my son is 23 and in a low tax bracket is that I should use a Roth IRA. What do you think?

Dear U.M.C.:
What people sometimes don’t understand about the Dow Jones Industrial Average (Dow) is that it is not a broad-based index on the entire stock market. The Dow only contains 30 stocks and those 30 stocks are amongst the largest corporations in the United States. As a result, it doesn’t take into consideration small or medium-size companies as well as international-based companies. Therefore, the Dow does not give you a broad enough index to use to compare how your portfolio is doing overall. In addition, the way the Dow is calculated, it is possible for 25 stocks within the Dow to lose money and five to make money; as a result the entire Dow index rises.

In judging a portfolio against an index, whether it’s the Dow or the S&P 500 it is important to recognize that those indexes assume you are 100 percent invested in equities at all times. In most investor situations that doesn’t happen. Most investors have diversified portfolios that not only include stocks, but also bonds. Therefore, judging someone’s entire portfolio against a stock index does not make sense. After all, you’re not comparing apples to apples.

In reality, indexes are nice to know and provide useful information; however, they’re not as useful when it comes to looking at your overall portfolio. Remember, the goal of your portfolio is not to match an index but rather, to achieve your goals and objectives. If as an investor you focus on an index, you may find it’s at the detriment of achieving your goals and objectives.

With regard to your son’s situation, I love the fact that you have implemented a matching program. I think this is wonderful and believe it will pay dividends into the future. It is important that as soon as young people begin to work they save for their retirement. It is doubtful that Social Security will exist in the future the same way it does today and that is why it’s important that people begin to save for their retirement as soon as possible.

With regard to Roth versus traditional, I would definitely recommend the Roth IRA. Yes, there are some tax breaks with the traditional IRA; however, they only defer the taxes and in many situations you’ll put yourself into a higher bracket down the road. My belief is I’d rather take a short-term hit with taxes now for long-term gains in the future. After all, I think if any one of us with money in a 401(k) or an IRA could withdraw that money tax free versus taxable, it would make a substantial difference. Therefore, particularly for someone who is just starting their career, I definitely recommend Roth IRAs.

Good luck!

Rick is a fee-only financial advisor. His website is If you would like Rick to respond to your questions, please email Rick at