Need Help Investing

[MTK]

My 401k has bounced back pretty strong after the '08 dive it took.

[Schneed10]

Originally Posted by over the mountain

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.

Yes, you should be contributing to your 401K, especially if your company matches contributions.

If they match, and you don't take advantage of it, it's like walking right on by a table with a pile of money and a sign that says "free".

I know this is too late now, but never tap into your 401K before retirement, this is extraordinarily costly. Instead build an emergency fund to tap into when emergency strikes. Once the emergency fund is sufficiently established, increase your contributions to your 401K.

[Schneed10]

Originally Posted by Mattyk

My 401k has bounced back pretty strong after the '08 dive it took.

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.

[Schneed10]

Oh, and it goes without saying, live within your means! Don't spend more than you earn. In fact, spend less than you earn, save the rest.

[firstdown]

Originally Posted by Schneed10

And one last thing, when you invest in stock, be prepared to ride the roller coaster. You will see your balance go up and down, sometimes drastically, from year to year. In 2008 my account lost 45%. In 2009 it gained 35%. Over the long haul, these big swings tend to even out in your favor, and you end up earning more with stock than you would with bonds.

Stocks are generally a bad idea for any money which you will possibly need to use within 10 years. Once you get within that time horizon, it's time to add some bonds to the mix. That's why you choose very safe investments for your emergency nest egg, and aggressive ones for retirement funds.

You've got a long way towards retirement, so get the earning power of stocks on your side:

A 25 year old investing $3000 per year in stocks, at an average of 8.5% return, will have a balance of $965,000 upon retirement at age 65.

A 25 year old investing the same $3000 per year in bonds, at an average of 6.5% return, will have a balance of $565,000 upon retirement at age 65.

The extra 2% earning power is worth nearly double the $ over a 40-year period.

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.

[saden1]

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

[MTK]

Originally Posted by firstdown

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.

[firstdown]

Originally Posted by over the mountain

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.

[firstdown]

Originally Posted by saden1

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.

[MTK]

Originally Posted by Schneed10

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.

[over the mountain]

Originally Posted by Schneed10

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.

[saden1]

Originally Posted by Mattyk

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?

[MTK]

Originally Posted by saden1

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%

[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.