Need Help Investing

What about the lottery? I heard that's a great investment vehicle.

A 25 yr old forced to pay Social Security at $7,000 per year will be lucky if there is even any money left at age 65.

That's why we're talking about saving on our own, anybody that's relying on SS is insane. Or just dumb.

do what i did. build up a nice 401k over 5 years or so. have the stock market take a nose dive cutting your 401k in half. then when money gets tight and you need to pay the bills, you can take a loan out against your own 401k with penalties and all!!

i have a real question thoo. should i be putting money back into my 401k now? ive been putting money in my money market account (easier to access if you need some cash) and CDs.

If you have solid funds now is a great time to put money into a 401. Most of the time your buying units (might be call something else) and with stock prices down you units buy more stocks so when the stocks go back up you see a better return. When stocks are up an your investing your unit buy less stock for the same amount of money.

What about the lottery? I heard that's a great investment vehicle.
It must be because I have to wait in line 5 minutes everyday to pay for my coffee as the cashier has to run all those lottery cards for people who have no business playing the lottery.

Mine did too, because I didn't panic, didn't pull my money out or switch it to bonds. Instead I rode the rollercoaster down and then back up again, when the stock market bounced in 09. Now I'm not too much worse for the wear, because I kept a level head.

I actually increased my contribution shortly after the crash, just checked on my 401k and it actually has more than doubled since 11/08.

Mine did too, because I didn't panic, didn't pull my money out or switch it to bonds. Instead I rode the rollercoaster down and then back up again, when the stock market bounced in 09. Now I'm not too much worse for the wear, because I kept a level head.

trust me i tried not to tap into it b/c i knew taking money out (after i took the hit) was stupid since the market would bounce back. i wish i could have started pumping more money into it a year ago but i was broke broke and had no other alternative but to take a loan out.

i was between a rock and a hard place.

im sure my situation was like alot of other people. some of us just didnt have enough of a cushion to ride it out.

I actually increased my contribution shortly after the crash, just checked on my 401k and it actually has more than doubled since 11/08.

Really? What was your rate of return in 2009 and what funds are you buying?

Really? What was your rate of return in 2009 and what funds are you buying?

According to my year ending statement for 2009 my annualized rate of return was 26.5%

My funds are:

Janus Twenty 60%
Vanguard Total Bond Market Index Fund 20%
Vanguard Wellington Fund 20%

Schneed. Few questions here myself. First of all, I'm relatively young (26) so I have my 401K (taking advantage of the max amount of matching) on the most aggressive setting it can go on, last quarter it did pretty well. Considering I haven't worked much, it wasn't a lot of money, but that will change in time. How long would you leave it on aggressive? I was thinking the first 10 years, then pulling it down to moderate.

I know you push stock, but watching my grandmother deal with stock has really turned me off. Cost basis BS, the fact that turning it in can skyrocket your income bracket that year, etc. It's been such a hassle I kind of want to avoid it. If it ends up being the most effective investment vehicle, then so be it -- but it seems like a huge hassle.

Where do you stand on IRAs? I was under the impression that the return from IRAs were quite good and that should be the 2nd thing, after your 401K, that you focus on as a young person saving for the future.

Thanks!

Schneed. Few questions here myself. First of all, I'm relatively young (26) so I have my 401K (taking advantage of the max amount of matching) on the most aggressive setting it can go on, last quarter it did pretty well. Considering I haven't worked much, it wasn't a lot of money, but that will change in time. How long would you leave it on aggressive? I was thinking the first 10 years, then pulling it down to moderate.

I know you push stock, but watching my grandmother deal with stock has really turned me off. Cost basis BS, the fact that turning it in can skyrocket your income bracket that year, etc. It's been such a hassle I kind of want to avoid it. If it ends up being the most effective investment vehicle, then so be it -- but it seems like a huge hassle.

Where do you stand on IRAs? I was under the impression that the return from IRAs were quite good and that should be the 2nd thing, after your 401K, that you focus on as a young person saving for the future.

Thanks!

Glad to help. First let's clear up a little confusion. On one hand we're discussing account types, and on the other hand we're talking investments. The basic difference, the account holds your investments. There are different types of accounts which feature different tax advantages, but you can own the same investment in any given type of account. Let's talk about account types first, then get to the investments:

Account Types

A typical 401K and a Traditional IRA have the exact same tax benefits. You put money in tax free, then it's taxed when you take it out upon retirement.

It's just that with a 401K, your money gets deducted from your paycheck pre-tax, and dumped right into the 401K. With the IRA, you're actually taken money from your checking account (after taxes), and investing it. So with the IRA you can deduct it on your tax return, making your refund bigger. But in the end, the refund from such an action equates to the exact amount of taxes you save on an equal contribution to a 401K.

In other words, there's no difference between a 401K and a Traditional IRA.

Now a Roth IRA is different, and better. I advise contributing just enough to your 401K to get the match, and then direct any additional retirement contributions to a Roth IRA. The Roth IRA allows you to put the money in after taxes, so you get no immediate tax benefit. But when you withdraw from it in retirement, you get it all tax-free. With the way the math works on the compounding interest, you're MUCH better off with a Roth. You've got to make under a certain amount of money to qualify for a Roth, I think it's either $75K or $100K.

These retirement accounts (Roth IRA, 401K, and Traditional IRA) are all great for housing stock investments, because they offer tax advantages. If you own stock in a "taxable" or "brokerage" account, like your grandmother did, you miss out on maximizing the tax advantages. So keep that stock in a retirement account, you won't have the same horrendous capital gains hit.

So that's a summary of account types. As for investments (stocks vs bonds vs stock mutual funds vs bond mutual funds), you can own just about any investment in any of these account types.

Investments

For a retirement account (401K, Roth IRA, Traditional IRA), I suggest you stay 100% stocks until you are within 15 years of retirement. So if you expect to retire at 65, stay 100% stock until you're 50. From there, gradually mix in more bonds as you get closer to retirement. Reason: if you look at the S&P 500 over any given 10 year period in its history, it has never lost money. Ten years is enough time to rebound from any recession, so give it 10+ years, it's plenty of time to ride the roller coaster.

In a taxable or brokerage account, keep 6 months of expenses in cash (high-interest savings or money-market). That money HAS to stay very safe, because you may need it at any time. After that, any savings beyond that you can choose to get more aggressive with if you want, but follow these rules of thumb:

- If you think you may need or want to use the money inside of one year, choose money market or high-interest savings.

- If you think you may need or want to use it between 1-3 years, choose municipal bond funds or other government bond funds.

- If funds are needed 3-10 years out, feel free to mix in some corporate bond funds.

As for your grandmom and withdrawing from stock or any other investment vehicle, do it gradually. If you do it all at once, you'll jump in tax brackets and get hit with a big tax bill. In retirement, just take out what you need to support yourself for a six month period. Then when that dries up, withdraw another 6-month chunk.