Need Help Investing

[Daseal]

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!

[Schneed10]

Originally Posted by Daseal

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.

[CrazyCanuck]

Sort of my area of expertise so I'll add in my 2 cents...

Considering I live in Canada and our laws are different concerning taxes, IRA, 401K, etc. I will refrain from giving global financial advice. Besides Schneed covered that very well, I would take his advice on all counts.

But I can comment regarding stocks. I've been through the recent crash as well as the dot com bubble in 2000 so I've taken my investing lumps and I've learned some lessons that I follow today.

- I NEVER buy individual stocks anymore. I lived through Enron and Worldcom and I will never trust an individual company again, I don't care how big they are. For instance I love Apple but I would never buy it straight up. They could go bankrupt tomorrow and it wouldn't even shock me. With that in mind I recommend buying ONLY mutual funds or ETFs.

- Personally I own zero mutual funds, 100% ETFs. Why pay a fund manager 2% to underperform the market when you can buy the market and save the 2%?? And don't try to "beat the market", just try to "match the market" and keep your fees as low as possible. Now I won't say all mutual funds are bad, the ones Schneed and Matty mention sound like solid investments with LOW FEES. So do your research, make sure you're diversified, and most importantly make sure the fees are low. Anything over 1% in fees is getting expensive.

- I prefer ETFs because they are cheap, can be bought and sold at any time just like a regular stock, and give you broad diversification in one investment. Now not all ETFs are created equal and a lot of the recent ones to come on the market are terrible for individual investors. For starters anything that is "levered" (ie double bull, double bear, etc.) are bad news for individuals. Unless you are a trader you will get killed over the long run. The key is to stick with the "standard" ETFs that have been around for a while.

If I was building a portfolio for a new US investor it would look like this:

- 40% SPY (S&P 500)
- 20% EFA (England, Europe, Japan... basically all developed markets outside of north america)
- 20% EEM and/or EEB (emerging markets and BRIC countries)
- 20% XIU.TO (Top 60 companies on the canadian market)

With the above portfolio you will have diversification across hundreds of companies all over the world, and you won't have to lose sleep if one company goes bankrupt or misses their earnings or cuts their dividend, etc.

As you get more comfortable you can start reweighting your portfolio to get more exposure to particular countries and/or particular industries.

I won't bother giving my macro views on the world cuz they are just my opinions and that's the whole point. Don't listen to anyone's opinions, just try to match the market and keep your fees as low as possible. That will serve you a million times better than taking stock tips from the dorks on CNBC.

GOOD LUCK!!

[saden1]

Originally Posted by Daseal

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!

Follow the "120 Minus Your Age" rule and you'll be alright. As for aggressiveness you need to make sure you allocated your purchase of aggressive funds in similar fashion.

[Hog1]

Care to get the ball rolling?

http://www.thewarpath.net/parking-lo...come-true.html

[budw38]

Great advice from Schneed , just remember he charges $ 100 for advice . The only thing I would add < my 2 cents > , would be to open an self-directed < brokerage > IRA House Your Retirement With Self-Directed Real Estate IRAs .Self-directed IRA offers investment alternatives You can buy individual stocks as well as Mutual Funds & ETF's . I doubt I will ever buy a M. Fund again , just seems too easy to beat them .... Individual stocks < many of them > pay much higher dividends then M. Funds and you have no fees and expense ratio's .... in an IRA , you also pay ZERO in taxes . Good luck and be ... pro-active .