Brokerage Accounts: When, Where, and Why?

Now that you have set up your 401(k) or 403(b) account and are making regular contributions, what next? Is there ever a time when you should be utilizing a typical brokerage account? Yes! But when, where, and why? Good questions.

Like a savings account, a brokerage account is a container, but for investments instead of cash. These investments range from stocks and bonds to mutual funds, ETFs, and other options. While a brokerage account doesn’t offer the same tax advantages that can be present in retirement accounts, this type of account still has an important role to play in your overall financial strategy.

Brokerage accounts can be a perfect tool for your mid-range investments. A mid-range investment strategy is designed to help you contribute money in a way that could yield a greater return than a traditional savings account, but will remain sufficiently liquid to be accessible when you plan to use it. A mid-range savings goal could have a time horizon of anywhere from 3-20 years, and range from saving up for the sabbatical you want to take 4 years from now to the down payment you want to be able to make on a house in the next 10-15 years. This may sound broad, but this is where personal finance becomes personal 🙂 and is highly individualized to each person, couple, or family, and their unique goals. For much of personal finance there are often sound principles and guidelines, but not necessarily any single one-size-fits-all approach.

Unlike a 401(k), 403(b) or other retirement account, a brokerage account doesn’t have any special contribution limits set by the government, no special tax advantages (although capital gains can be taxed a bit differently than ordinary income from your job), and also no rules around when/if/how you can take the money out. It’s accessible in the sense that you can sell your investments and take your money out any time without any government penalties - you’ll just have to accept the gain or loss from the investments you chose.

You can open a brokerage account through any of a number of investment management companies (i.e. Fidelity, Schwab, Vanguard, or eTrade, among others). There will typically be a button at the top to Open Account, and you can select Brokerage Account from the pulldown menu. In general, which institution you open a brokerage account at depends on your personal preference - where your other accounts are, which investments you would like to pick (e.g. index funds vs individual stocks), their level of customer service, etc and doesn’t have too, too much bearing on which investments you actually select once it’s open.

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But wait, do I have to be able to calculate an optimal mix of assets and research all the different funds in order to start my brokerage account? No! (Thank goodness. See this primer on investing for more info.)

Index funds and general multi-asset funds (like target date funds) (an all-in-one umbrella version of an index fund) are a fantastic way to invest in a range of assets just through buying shares of a single (or just a few) funds. Instead of poring over the details of individual stocks – double-checking your research and then holding your breath that you made a good choice . . . but also worried that “good choice” might morph into a “bad choice” within a few months due to market changes – index funds in general allow you to buy into the market at a broader level. This means your risk can be distributed much more widely than investing in individual stocks, and you are able to invest in the concept of human innovation overall without taking on the individual company-level risks. 

An additional benefit of target date funds is that they are designed and adjusted to reflect a reasonable asset mix for the time horizon of your choice (reducing risk over time as you come closer to needing the money for the specific need you have in mind). A target date fund is typically listed with a year listed in the title, and you should select the fund with a year which correlates with when you would want to utilize the money. Many of these funds include “retirement” next to the year, indicating that the fund investments and risks are intended for an individual planning to retire in that year. This listing may read as “Target retirement 2060” after the fund symbol identifier. You can also find multi-asset funds that remain at a set allocation over time as well.

Once you have selected the fund or funds that fit your needs, it is critical to remember to check in at least annually (on a schedule) to reassess your goals and rebalance your portfolio. Have their time horizons moved up or been pushed back? If so, this could change the degree of risk you are willing to take on with the investments you are planning to use to achieve those goals and the investments should be adjusted accordingly. Typically, the further out you will need the money, the greater risk you might be willing to take on, which would often lead to a greater proportion of stocks in the asset mix of choice.

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In summary, opening a brokerage account for mid-range investment goals when you have your emergency fund set and are making regular contributions to your 403(b) or 401(k) account is probably a smart choice. You can open such a brokerage account through any of a number of investment companies, often through a few simple clicks online. Don’t let your nervousness or intimidation stop you!

To learn more about how brokerage accounts could help with your projected upcoming goals, reach out to Sarah at sarah@momentumfinancialcoaching.com. You can also schedule a free intro chat or sign up for blog updates to stay on top of the latest posts!