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La literatura
01-25-2013, 08:29 AM
I was wondering what some of the more popular basic investment plans practiced in here are.

I don't know much about wealth management, so hopefully this leads to a fruitful discussion. I do know that it's best to start early so 'the miracle of compound interest' can take its course.

Other than that, my understanding is investing in index funds are the safe (and typically smartest) route to go for stock investments, and then treasury bonds and company bonds are a low-risk stable investment.

My understanding of a mutual fund is its a basket of selected investments that a company packages together and sells to you.

If you want to make your own basket of selected investments, you do things like E*Trade and ScottTrade, and it's not advisable to do this as your main investment vehicle (though fun to do on the side if you don't mind the trading fees).

If you invest into an index fund, which one do you use? Where did you go to set it up? If you do online brokerages, which company do you use?

Amnorix
01-25-2013, 08:33 AM
The miracle of compound interest is a helluva lot less miraculous now that interest rates are substantially south of 1%. You should look at bank accounts as rainy day funds and not as investments at all, given current interest rates. Even CDs are not offering any kind of significant rate that is worth looking at.

La literatura
01-25-2013, 08:39 AM
The miracle of compound interest is a helluva lot less miraculous now that interest rates are substantially south of 1%. You should look at bank accounts as rainy day funds and not as investments at all, given current interest rates. Even CDs are not offering any kind of significant rate that is worth looking at.

Just for fun, with an interest rate of 8%, a $10K initial deposit into a savings account would yield $20K in 9 years. But with an interest rate of 1.5%, it would take 48 years to reach that amount.

That is fun to think about, no?

So, what can get me an annual return on my investment of 8%? That's what I want.

Amnorix
01-25-2013, 08:40 AM
There are many, many books and websites on this, but good general rules of thumb:

1. index funds are the way to go because the fees are lower. Fees eat away at performance and can add up to very substantial amounts over long periods of time. Managed mutual funds tend, over the very long haul, to UNDERperform the broader market, so you're usually paying more in fees to get less return even before the fees are factored in.

2. Keep a rainy day fund worth of cash in a liquid account. Figure on several months of expenses at least.

3. In investing, diversity is important. You can and should diversify across types of investments (real estate, stocks, stocks versus bonds) and across geography (domestic versus international). Being young, you should be heavy on stocks and you will almost inevitably be heavy on domestic. That's not terrible, but just be mindful that diversity is usually good.

4. You can NEVER time the market. Don't try. Forget the miracle of compound interest and learn the joy of dollar cost averaging, which means steadily contributing the same amount of money to your various mutual funds on a monthly basis over a long period of time so that your money gets invested when the market is low (and the price per share is cheap) as well as high. When it's high, don't stop, because it may yet go higher.

5. You don't lose or make money until you sell. Stay the course. If you're 35 and the market is tanking, who cares? You're not taking the money out for 20+ years. STAY THE COURSE. If your plan is good and consistent, you should be fine in the long run.

6. Your friend's hot tip? It ain't hot and it's not a tip.

7. Do what you can to reduce your tax exposure and increase your income. At a minimum that means making sure you understand your employer's tax advantaged retirement plans, if any, and AT LEAST contributing the amount needed to get the maximum match. If they match $1 for every $2 up to $5,000, then do whatever you can to put in $10,000 and get that free money. After that, consider traditional and Roth IRAs. Keep in mind that that money is out of your pocket until retirement age, so you must balance retirement plan savings with "regular" savings.

Amnorix
01-25-2013, 08:43 AM
Just for fun, with an interest rate of 8%, a $10K initial deposit into a savings account would yield $20K in 9 years. But with an interest rate of 1.5%, it would take 48 years to reach that amount.

That is fun to think about, no?

So, what can get me a return on my investment of 8%? That's what I want.


Sure, fun, but you're forgetting (as everyone does), that money was tighter then, and inflation higher, and loan rates much higher. The average person could make 5+% on a bank account, and 8+% on a CD, but had to pay 10+% on their mortgage and 12% on their car loan while inflation is going up 5% per year. Your investment returns are subject to the LAW of inflation. If you make 1% on your ultra-conservative CD and inflation goes up 2%, you have LOST purchasing power.

Everything is relative to everything else. A 5% return in a 3% CPI inflationary year is BETTER than an 8% return in a 10% year (God help us).

La literatura
01-25-2013, 08:48 AM
Sure, fun, but you're forgetting (as everyone does), that money was tighter then, and inflation higher, and loan rates much higher. The average person could make 5+% on a bank account, and 8+% on a CD, but had to pay 10+% on their mortgage and 12% on their car loan while inflation is going up 5% per year. Your investment returns are subject to the LAW of inflation. If you make 1% on your ultra-conservative CD and inflation goes up 2%, you have LOST purchasing power.

Everything is relative to everything else. A 5% return in a 3% CPI inflationary year is BETTER than an 8% return in a 10% year (God help us).

Great point. How has the inflation rate been recently? How quickly does it fluctuate? How predictable is it (and does predictability help an average investor)?

Bwana
01-25-2013, 08:48 AM
401K and AR-15's. Guess which one will make me the most money? I have been offered $2500 for guns I bought for 1K a month ago.

Amnorix
01-25-2013, 08:49 AM
My understanding of a mutual fund is its a basket of selected investments that a company packages together and sells to you.



I can't spend forever on basics, but a mutual fund is a group of investments which are "sold" as a bundle, BUT there are different types of mutual funds -- there are managed mutual funds -- in which a guy who is paid alot of money specifically selects the investments that are in the fund -- versus index funds.

Index funds are also mutual funds, but they consist of a basket of investments that are determined by something other than some bright guy reading the WSJ. the Vanguard 500 index fund is a mutual fund which tracks the 500 largest US companies (by market capitalization). The companies that are "in" the 500 change from time to time, but not daily, and the Vanguard 500 simply reflects this.

But it's more than just that -- the Vanguard 500 also contains the same weighting as the market itself.

There are index funds for damn near anything. You can do the Vanguard 500 for teh biggest, or the Russel Small Cap (rules exist about what qualifies), or even "total market" indexes. Real estate via REIT index funds, international via international, etc. There are also bond index funds, so don't think it's just stocks.

Good luck!

RyFo18
01-25-2013, 08:49 AM
I have quite a few investments. It starts with my 401K (I make Roth Contributions) and I also have a separate Roth IRA. Like you would expect, I just send my money into them and never look at it. The nice part about having my Roth through a financial adviser is that they will rebalance and give me advice on where to allocate my 401K once a year.

I also have a Schwab account that I use to invest in stocks and ETFs. This is ideally going to be my "retirement" money when I retire early (fingers crossed) before I can start withdrawing from my 401K/Roth IRA. The nice part about this is that if I'm ever in a crunch for cash, I have the ability to sell some of my positions and withdraw from there. I would say I spend about 6 hours a month researching stocks to invest in and looking at the ones I already own. There will always be a lot of opinions out there on where a stock will head, but I just try to think "in the long-term, is this a company that's going to be around." I know, that's not the best advice, but I try not to get caught up in short-term volatility.

As far as picking stocks, a lot of the stocks I own are things I actually use. Apple, Whole Foods Market, TJ Maxx...Some aren't, but they're companies I've researched and like the products they offer (like oil, lol).

Good luck!

Amnorix
01-25-2013, 08:50 AM
401K and AR-15's. Guess which one will make me the most money? I have been offered $2500 for guns I bought for 1K a month ago.


I suspect the market for guns in Boston isn't as good as the market in Montana. :D

Besides, for guys like Lit and myself, the increase in value of the weapon is offset by the risk of medical costs relating to blowing one own's foot off because we barely know which end of a gun points towards the other guy. ;)

La literatura
01-25-2013, 08:50 AM
401K and AR-15's. Guess which one will make me the most money? I have been offered $2500 for guns I bought for 1K a month ago.

Nice. At some point ($3K?) you have to get rid of some.

Bwana
01-25-2013, 08:51 AM
I suspect the market for guns in Boston isn't as good as the market in Montana. :D

Heh, likely not, but it would surprise you how many people back east want them and what they will pay.

La literatura
01-25-2013, 08:52 AM
I can't spend forever on basics, but a mutual fund is a group of investments which are "sold" as a bundle, BUT there are different types of mutual funds -- there are managed mutual funds -- in which a guy who is paid alot of money specifically selects the investments that are in the fund -- versus index funds.

Index funds are also mutual funds, but they consist of a basket of investments that are determined by something other than some bright guy reading the WSJ. the Vanguard 500 index fund is a mutual fund which tracks the 500 largest US companies (by market capitalization). The companies that are "in" the 500 change from time to time, but not daily, and the Vanguard 500 simply reflects this.

But it's more than just that -- the Vanguard 500 also contains the same weighting as the market itself.

There are index funds for damn near anything. You can do the Vanguard 500 for teh biggest, or the Russel Small Cap (rules exist about what qualifies), or even "total market" indexes. Real estate via REIT index funds, international via international, etc. There are also bond index funds, so don't think it's just stocks.

Good luck!

Interesting. I take it that managed mutual funds are directed then towards consumers who want to have more input in what goes in the basket. But for a person who doesn't have ties to financial and business trends, the index fund is a better way to go, in general.

Amnorix
01-25-2013, 08:53 AM
Great point. How has the inflation rate been recently? How quickly does it fluctuate? How predictable is it (and does predictability help an average investor)?


Inflation has been <5% for many years now. The risk is that the value of the dollar is becoming increasingly worthless due to the Fed pumping cash into the system for a long while. There is an overhanging threat of dramatically increased inflation in the long run if this continues.

That is why people like BEP and TJ are so into gold. In theory it's an inflation hedge. There are many other inflation hedges, including the far simpler inflation protection type index funds.

https://personal.vanguard.com/us/funds/snapshot?FundId=0119&FundIntExt=INT

LiveSteam
01-25-2013, 08:53 AM
house payed for
Gold
silver
food
water
guns
ammo

La literatura
01-25-2013, 08:55 AM
I have quite a few investments. It starts with my 401K (I make Roth Contributions) and I also have a separate Roth IRA. Like you would expect, I just send my money into them and never look at it. The nice part about having my Roth through a financial adviser is that they will rebalance and give me advice on where to allocate my 401K once a year.

I also have a Schwab account that I use to invest in stocks and ETFs. This is ideally going to be my "retirement" money when I retire early (fingers crossed) before I can start withdrawing from my 401K/Roth IRA. The nice part about this is that if I'm ever in a crunch for cash, I have the ability to sell some of my positions and withdraw from there. I would say I spend about 6 hours a month researching stocks to invest in and looking at the ones I already own. There will always be a lot of opinions out there on where a stock will head, but I just try to think "in the long-term, is this a company that's going to be around." I know, that's not the best advice, but I try not to get caught up in short-term volatility.

As far as picking stocks, a lot of the stocks I own are things I actually use. Apple, Whole Foods Market, TJ Maxx...Some aren't, but they're companies I've researched and like the products they offer (like oil, lol).

Good luck!

You seem to be much more active in the industry than the average consumer. It's interesting you do your own research with your Schwab account. About what percent of your investments would you say you actively manage?

Bwana
01-25-2013, 08:55 AM
Nice. At some point ($3K?) you have to get rid of some.

Lets just say I keep very close track of what the good people on the hill are talking about. They will only increase in value for now.

Swanman
01-25-2013, 08:55 AM
There are many, many books and websites on this, but good general rules of thumb:

1. index funds are the way to go because the fees are lower. Fees eat away at performance and can add up to very substantial amounts over long periods of time. Managed mutual funds tend, over the very long haul, to UNDERperform the broader market, so you're usually paying more in fees to get less return even before the fees are factored in.

2. Keep a rainy day fund worth of cash in a liquid account. Figure on several months of expenses at least.

3. In investing, diversity is important. You can and should diversify across types of investments (real estate, stocks, stocks versus bonds) and across geography (domestic versus international). Being young, you should be heavy on stocks and you will almost inevitably be heavy on domestic. That's not terrible, but just be mindful that diversity is usually good.

4. You can NEVER time the market. Don't try. Forget the miracle of compound interest and learn the joy of dollar cost averaging, which means steadily contributing the same amount of money to your various mutual funds on a monthly basis over a long period of time so that your money gets invested when the market is low (and the price per share is cheap) as well as high. When it's high, don't stop, because it may yet go higher.

5. You don't lose or make money until you sell. Stay the course. If you're 35 and the market is tanking, who cares? You're not taking the money out for 20+ years. STAY THE COURSE. If your plan is good and consistent, you should be fine in the long run.

6. Your friend's hot tip? It ain't hot and it's not a tip.

7. Do what you can to reduce your tax exposure and increase your income. At a minimum that means making sure you understand your employer's tax advantaged retirement plans, if any, and AT LEAST contributing the amount needed to get the maximum match. If they match $1 for every $2 up to $5,000, then do whatever you can to put in $10,000 and get that free money. After that, consider traditional and Roth IRAs. Keep in mind that that money is out of your pocket until retirement age, so you must balance retirement plan savings with "regular" savings.

Great post. As per 1) about 80% of stylized/managed mutual funds underperform the benchmark they are up against over time. And the difference in fees annually can be astounding, like 2% compared to 0.10%.

To 3) Commodities are another decent asset class because they have virtually no correlation with other asset classes. And when the dollar tanks, your commodity investments will kick ass because they are normally denominated in USD. A general rule with equity/bond split is 100 minus your age should be your percentage allocation to stocks (some say 110 or 120 minus your age). The thought being, the younger you are, the more risk you can take so stocks are a better bet. Lastly, don't be afraid to put a percentage into Emerging Markets (either stocks or bonds).

As to timing of buying and selling, as Warren Buffet once said, "Be fearful when others are greedy, be greedy when others are fearful". In English, that means sell high and buy low.

La literatura
01-25-2013, 08:58 AM
Inflation has been <5% for many years now. The risk is that the value of the dollar is becoming increasingly worthless due to the Fed pumping cash into the system for a long while. There is an overhanging threat of dramatically increased inflation in the long run if this continues.

That is why people like BEP and TJ are so into gold. In theory it's an inflation hedge. There are many other inflation hedges, including the far simpler inflation protection type index funds.

https://personal.vanguard.com/us/funds/snapshot?FundId=0119&FundIntExt=INT

Would you agree that it's essential to a diversified portfolio to have some investment in commodities like gold or silver? And what percentage is a good "hedge against inflation"?

RyFo18
01-25-2013, 09:00 AM
You seem to be much more active in the industry than the average consumer. It's interesting you do your own research with your Schwab account. About what percent of your investments would you say you actively manage?

I only actively manage about 15% of it. My Roth IRA I just send quarterly contributions to, and it's a preset mix of different allocations that money will go to. My 401K I barely even look at besides once year.

As far as stocks, that is the 15% I manage. I just set aside a certain amount of money per check that I get into my Schwab account. Once I hit a certain threshold, I will invest in a new stock. With an $8.95 fee everytime I buy or sell a stock, I make sure that this fee is <1% of my investment.

La literatura
01-25-2013, 09:00 AM
As to timing of buying and selling, as Warren Buffet once said, "Be fearful when others are greedy, be greedy when others are fearful". In English, that means sell high and buy low.

About this (famous) token advice, how contradictory is it to the principle of "dollar cost averaging?" Are these two separate strains of financial advice, or are they compatible?

Amnorix
01-25-2013, 09:01 AM
Interesting. I take it that managed mutual funds are directed then towards consumers who want to have more input in what goes in the basket. But for a person who doesn't have ties to financial and business trends, the index fund is a better way to go, in general.


The consumer has no input over what goes into the basket, it's managed by the mutual fund manager.

You can, of course, directly buy/sell specific stocks. I typically avoid that myself, as I have neither the time nor the skill.

Index funds are generally the better way to go.

There are a hundred million books on these topics, but one very good one that lays out a simple, straight-forward intelligent plan is this one, written by a Wharton professor, which is now on its 12th edition or whatever. It's sort of "timeless" advice for effective investing.


http://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338

La literatura
01-25-2013, 09:02 AM
I only actively manage about 15% of it. My Roth IRA I just send quarterly contributions to, and it's a preset mix of different allocations that money will go to. My 401K I barely even look at besides once year.

As far as stocks, that is the 15% I manage. I just set aside a certain amount of money per check that I get into my Schwab account. Once I hit a certain threshold, I will invest in a new stock. With an $8.95 fee everytime I buy or sell a stock, I make sure that this fee is <1% of my investment.

I would like to do that, but more around the 10% range. I've been looking into online brokers. Any reason you particularly like Schwab?

It sounds better than a casino, imo.

La literatura
01-25-2013, 09:03 AM
The consumer has no input over what goes into the basket, it's managed by the mutual fund manager.

You can, of course, directly buy/sell specific stocks. I typically avoid that myself, as I have neither the time nor the skill.

Index funds are generally the better way to go.

There are a hundred million books on these topics, but one very good one that lays out a simple, straight-forward intelligent plan is this one, written by a Wharton professor, which is now on its 12th edition or whatever. It's sort of "timeless" advice for effective investing.


http://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338

I bought that (used!) recently, along with The Elements of Investing, co-authored by the writer of "Random Walk" -- it's all directed towards newbies like myself who went to school for history and have no business acumen.

Amnorix
01-25-2013, 09:06 AM
About this (famous) token advice, how contradictory is it to the principle of "dollar cost averaging?" Are these two separate strains of financial advice, or are they compatible?


You can mix and match as you like. You can dollar cost average most of your investments and "play around" with a percentage of them, whether by trying to time the market, or doing individual investments, etc.

Buffet's advice is really a caution against the herd mentality that so many succumb to. He can time the market if he likes, I'm not going to bother to try. I have a full-time job, and it's not investing.

Amnorix
01-25-2013, 09:08 AM
Great post. As per 1) about 80% of stylized/managed mutual funds underperform the benchmark they are up against over time. And the difference in fees annually can be astounding, like 2% compared to 0.10%.



Further to this -- you aren't likely to pick the 20% that outperform the market and by the time you identify the one that is, everyone else has too and when everyone else jumps in, it will promptly stop outperforming the market because it will be unable to stay true to its investment methodology due to too much influx of cash.

So yeah, forget managed funds, by and large, unless it hits some kind of diversity type that you want and you don't like an index fund that covers it (unlikely at best).

Amnorix
01-25-2013, 09:10 AM
I would like to do that, but more around the 10% range. I've been looking into online brokers. Any reason you particularly like Schwab?

It sounds better than a casino, imo.


I use Fidelity personally, but all the big ones should be fine.

La literatura
01-25-2013, 09:14 AM
So, after 25 posts in this thread, here's my initial investment/personal finance strategy:

-- Put 5% of my paycheck into my retirement account (employer matches up to 2%)
-- By the end of my first working year, have $12K in investment vehicles other than my retirement account ($10K in index fund; $1K in managed mutual fund; $1K in online brokerage for my own amusement)
-- Have a pot of money for house down-payment
-- Fund bucket of 3 months emergency fund (about $6K)

And that should dry up my salary due to my remaining loan payments, insurance costs, and living expenses.

Sound good?

RyFo18
01-25-2013, 09:18 AM
I would like to do that, but more around the 10% range. I've been looking into online brokers. Any reason you particularly like Schwab?

It sounds better than a casino, imo.

Not really. Schwab has some good research tools and provide their own stock ratings, but I honestly don't pay much attention to it.

If I could do it all over again, I would find a place that is cheaper to trade stocks. But since all my money is in Schwab, I don't want to go through the trouble to try and move it.

Swanman
01-25-2013, 09:18 AM
About this (famous) token advice, how contradictory is it to the principle of "dollar cost averaging?" Are these two separate strains of financial advice, or are they compatible?

Not really contradictory. The way I used to average out my holdings is I would have let's say 5 different index funds that I wanted to keep at certain proportions. After a certain amount of time when I wanted to invest more, I would look at the current proportions. If one had underperformed the others, I would need to buy more to bring the proportion back to where I wanted, thus dollar-averaged down.

Buying low and selling high is a classic contrarian approach and is the opposite of the normal herd mentality. Contrarians will dump stocks when they are at/near their 52 week highs and buy the shit out of stocks that are at their 52 week low (unless there are fundamental reasons why the stock is tanking). Many people use the momentum approach where they keep buying the stock as it's price continues to go up and up. That's great with stocks like Apple but you always run the risk of buying right before the stock falls off a cliff. A classic example is a buddy of mine that bought Etoys right at the beginning of the tech bubble. He bought it at $77 and later sold it for $2.

La literatura
01-25-2013, 09:20 AM
Not really. Schwab has some good research tools and provide their own stock ratings, but I honestly don't pay much attention to it.

If I could do it all over again, I would find a place that is cheaper to trade stocks. But since all my money is in Schwab, I don't want to go through the trouble to try and move it.

I'm guessing there's a significant fee to moving it, too. Okay, thanks for the advice.

La literatura
01-25-2013, 09:21 AM
I also need a second job to pay for a wedding fund bucket, about $7K. I figure I could work a second job for about a year.

Amnorix
01-25-2013, 09:22 AM
So, after 25 posts in this thread, here's my initial investment/personal finance strategy:

-- Put 5% of my paycheck into my retirement account (employer matches up to 2%)
-- By the end of my first working year, have $12K in investment vehicles other than my retirement account ($10K in index fund; $1K in managed mutual fund; $1K in online brokerage for my own amusement)
-- Have a pot of money for house down-payment
-- Fund bucket of 3 months emergency fund (about $6K)

And that should dry up my salary due to my remaining loan payments, insurance costs, and living expenses.

Sound good?

The $10K in index fund should be $10K in index fundSSSS. I suppose you could just go in for the total market index or something, but I'd spread across various ones, rather than going for just one.

Saving for a house downpayment makes sense. Remember that you want to try go get to 20% of the value of the home to avoid paying PMI. If you DO pay PMI because you can't get to the 20%, remember that you can always either refinance to add more cash, or get the house re-appraised after a while to establish that the THEN-existing balance on the loan is <20% of the value of the house, at which time you tell your mortgage company and PMI should be able to stop.

The critical piece here is that you must TELL your mortgage company. They won't figure it out for you. There's no nice note that says "oh, you don't need PMI anymore" that they will send. You need to manage that on your own.

Amnorix
01-25-2013, 09:23 AM
Not really. Schwab has some good research tools and provide their own stock ratings, but I honestly don't pay much attention to it.

If I could do it all over again, I would find a place that is cheaper to trade stocks. But since all my money is in Schwab, I don't want to go through the trouble to try and move it.

Dependign on what it's invested it, you basically just tell the new investment company and they prepare everything and send you stuff to sign, you sign and return, and they take it from there. Pretty easy actually.

La literatura
01-25-2013, 09:24 AM
I absolutely believe in the 80/20 rule mortgage rule and have a near moral objection to not using it as a bare minimum. I'd really like to go 70/30.

Amnorix
01-25-2013, 09:24 AM
I'm guessing there's a significant fee to moving it, too. Okay, thanks for the advice.


Nope. No fees. The new brokerage wants to business. And no tax impact -- nobody has to buy/sell any of those securities. It's just a paper transaction and the holdings move from Old Brokerage to New Brokerage.

ChiTown
01-25-2013, 09:26 AM
My investment strategy is 3 fold:

1. Largest portion of my money is tied up in businesses that I either own or am a partner in.

2. Mutual Funds, Insurance and some Stocks

3. 401K Type Fund/Savings

Amnorix
01-25-2013, 09:26 AM
I absolutely believe in the 80/20 rule mortgage rule and have a near moral objection to not using it as a bare minimum. I'd really like to go 70/30.


Your hopes may be dashed against the rocks of reality when you find out what houses cost.

Also, at current interest rates, you're well-advised to buy earlier rather than later. I've been saying this for years, and been wrong for years, but how the hell can rates get any lower?

I'm not going to pull out a calculator to prove it, but I'd bet that 80/20 at 3.25% interest over 30 is better than 70/30 at 6% over 30. And 6% is low by historical standards. I paid points back in 2000 or so to get my loan DOWN to 7%. That seems absurd now, but back then 7% was very low, historically speaking.

Keep in mind also the tax benefit of deducting the interest. That makes the effective rate even lower. The factor in that the housing market seems to be recovering.

Bottom line -- consider whether it makes more sense to keep waiting/saving to buy a house, or whether you'd be better off buying now before the rates get higher and the prices get higher. You'd need to be saving at a pretty fast clip to stay ahead.

*obviously, many factors here and my crystal ball is no clearer than yours.

La literatura
01-25-2013, 09:27 AM
The $10K in index fund should be $10K in index fundSSSS. I suppose you could just go in for the total market index or something, but I'd spread across various ones, rather than going for just one.


Thanks. The index funds is something I understand in theory, but not really in practice. I was initially planning on one total market index, but your advice is that several 500 or 3000 or 5000 indices is better? (presumably, for the diversification principle)

La literatura
01-25-2013, 09:30 AM
Your hopes may be dashed against the rocks of reality when you find out what houses cost.

I've been looking at houses in my targeted area, and I have a set price range that won't budge. Fortunately, I'm going to live in an area where housing prices are pretty cheap right now. I also will be happy to fix it up.

But I do understand your insistence on the interest rate being a huge factor, and it will be for me.

RyFo18
01-25-2013, 09:32 AM
Dependign on what it's invested it, you basically just tell the new investment company and they prepare everything and send you stuff to sign, you sign and return, and they take it from there. Pretty easy actually.

Thanks for the info!

La literatura
01-25-2013, 09:32 AM
My investment strategy is 3 fold:

1. Largest portion of my money is tied up in businesses that I either own or am a partner in.

2. Mutual Funds, Insurance and some Stocks

3. 401K Type Fund/Savings

You are more risky than I am, but I suppose that is the nature of an entrepreneur.

Do actively manage your partnership businesses, or are you more a [edit: limited partner]?

FD
01-25-2013, 09:34 AM
There are many, many books and websites on this, but good general rules of thumb:

1. index funds are the way to go because the fees are lower. Fees eat away at performance and can add up to very substantial amounts over long periods of time. Managed mutual funds tend, over the very long haul, to UNDERperform the broader market, so you're usually paying more in fees to get less return even before the fees are factored in.

2. Keep a rainy day fund worth of cash in a liquid account. Figure on several months of expenses at least.

3. In investing, diversity is important. You can and should diversify across types of investments (real estate, stocks, stocks versus bonds) and across geography (domestic versus international). Being young, you should be heavy on stocks and you will almost inevitably be heavy on domestic. That's not terrible, but just be mindful that diversity is usually good.

4. You can NEVER time the market. Don't try. Forget the miracle of compound interest and learn the joy of dollar cost averaging, which means steadily contributing the same amount of money to your various mutual funds on a monthly basis over a long period of time so that your money gets invested when the market is low (and the price per share is cheap) as well as high. When it's high, don't stop, because it may yet go higher.

5. You don't lose or make money until you sell. Stay the course. If you're 35 and the market is tanking, who cares? You're not taking the money out for 20+ years. STAY THE COURSE. If your plan is good and consistent, you should be fine in the long run.

6. Your friend's hot tip? It ain't hot and it's not a tip.

7. Do what you can to reduce your tax exposure and increase your income. At a minimum that means making sure you understand your employer's tax advantaged retirement plans, if any, and AT LEAST contributing the amount needed to get the maximum match. If they match $1 for every $2 up to $5,000, then do whatever you can to put in $10,000 and get that free money. After that, consider traditional and Roth IRAs. Keep in mind that that money is out of your pocket until retirement age, so you must balance retirement plan savings with "regular" savings.

Basically all of this.

FD
01-25-2013, 09:39 AM
Would you agree that it's essential to a diversified portfolio to have some investment in commodities like gold or silver? And what percentage is a good "hedge against inflation"?

Holding a broad based stock fund is itself a hedge against inflation. I know that saying this will bring out the crazies, but gold isn't a hedge against inflation so much as a hedge against instability. This is fine for short run thinking but if you are investing for the long run its not something you need to worry about. The S&P has outperformed gold over every 30 year period ever.

Amnorix
01-25-2013, 09:41 AM
Thanks. The index funds is something I understand in theory, but not really in practice. I was initially planning on one total market index, but your advice is that several 500 or 3000 or 5000 indices is better? (presumably, for the diversification principle)


Read Malkiel, but all else being equal, I might do something like a total market index, a REIT index, an international index, and a bond index. Say 10% on the REIT and 30% on the rest.

That gives you quite a bit of diversity. You'd be somewhat less in domestic stocks than I would like for a person just starting out, however, but that's better, I think, than just doing 100% in a total market index.

Amnorix
01-25-2013, 09:44 AM
Holding a broad based stock fund is itself a hedge against inflation. I know that saying this will bring out the crazies, but gold isn't a hedge against inflation so much as a hedge against instability. This is fine for short run thinking but if you are investing for the long run its not something you need to worry about. The S&P has outperformed gold over every 30 year period ever.


Excellent point, and one that I failed to make. Stock investments in and of themselves are an inflation hedge.

La literatura
01-25-2013, 09:45 AM
Holding a broad based stock fund is itself a hedge against inflation. I know that saying this will bring out the crazies, but gold isn't a hedge against inflation so much as a hedge against instability. This is fine for short run thinking but if you are investing for the long run its not something you need to worry about. The S&P has outperformed gold over every 30 year period ever.

It seems the difference of opinion here is your reasonable faith in the market vs the gold peddlers who have a strong belief in a collapse of the system/severe instability.

If so, I share that faith in the market. Thanks for the comment.

ChiTown
01-25-2013, 09:52 AM
You are more risky than I am, but I suppose that is the nature of an entrepreneur.

Do actively manage your partnership businesses, or are you more a [edit: limited partner]?

I am actively involved in all Partnerships (of which I have 4)

Swanman
01-25-2013, 09:57 AM
Thanks. The index funds is something I understand in theory, but not really in practice. I was initially planning on one total market index, but your advice is that several 500 or 3000 or 5000 indices is better? (presumably, for the diversification principle)

Here are a few indexes to look at:

S&P 500 - broad based large cap US index
Russell 3000 - index of small cap US stocks, bit more risky than S&P
MSCI-EAFE - international index covering developed countries outside of the US
MSCI Emerging Markets - index covering the emerging markets outside of the US (Brazil, Russia, India, China, etc)

There are also several different fixed income index funds you can look into.

La literatura
01-25-2013, 10:01 AM
Read Malkiel, but all else being equal, I might do something like a total market index, a REIT index, an international index, and a bond index. Say 10% on the REIT and 30% on the rest.

That gives you quite a bit of diversity. You'd be somewhat less in domestic stocks than I would like for a person just starting out, however, but that's better, I think, than just doing 100% in a total market index.

Thanks for the measures. I have to look up what an REIT index is. My understanding is that bond indices should start out low for the young investor and gradually reach up to 50% as I near retirement.

That is just my initial plan for a portfolio balance, but I hadn't really given it much thought yet.

La literatura
01-25-2013, 10:03 AM
I am actively involved in all Partnerships (of which I have 4)

Do you have them all in the same industry, or do you spread it out?

I would like to become a partner of a business sometime in the future (other than my own), but I'm not sure what industry. And I wouldn't want to actively manage it.

Swanman
01-25-2013, 10:06 AM
Read Malkiel, but all else being equal, I might do something like a total market index, a REIT index, an international index, and a bond index. Say 10% on the REIT and 30% on the rest.

That gives you quite a bit of diversity. You'd be somewhat less in domestic stocks than I would like for a person just starting out, however, but that's better, I think, than just doing 100% in a total market index.

I would break up the US index funds into large cap/small cap (as mentioned in my other post). You can break the international equities into developed and emerging markets. REITs are good because they give you exposure to real estate. I would add in something in a commodities fund.

My investment portfolio looked something like this:

20% S&P
20% Russell
20% US Bond Index
10% Emerging Markets Bond Index
20% MSCI-EAFE stock index
10% Commodities Index

I avoided real estate as that was during the free-fall of 2009.

La literatura
01-25-2013, 10:06 AM
Here are a few indexes to look at:

S&P 500 - broad based large cap US index
Russell 3000 - index of small cap US stocks, bit more risky than S&P
MSCI-EAFE - international index covering developed countries outside of the US
MSCI Emerging Markets - index covering the emerging markets outside of the US (Brazil, Russia, India, China, etc)

There are also several different fixed income index funds you can look into.

So, practically speaking, how does this work? I take my $10K to a financial adviser, and say, "I want to put 1/3 in S&P 500, 1/5 in emerging markets, a 1/3 in Russell 3000, and the rest in a bond index." And then they know what to do?

Amnorix
01-25-2013, 10:07 AM
Thanks for the measures. I have to look up what an REIT index is. My understanding is that bond indices should start out low for the young investor and gradually reach up to 50% as I near retirement.

That is just my initial plan for a portfolio balance, but I hadn't really given it much thought yet.


A REIT is a real estate investment trust. It basically is about the only simple way for a casual investor to be invested broadly in real estate.

Amnorix
01-25-2013, 10:09 AM
So, practically speaking, how does this work? I take my $10K to a financial adviser, and say, "I want to put 1/3 in S&P 500, 1/5 in emerging markets, a 1/3 in Russell 3000, and the rest in a bond index." And then they know what to do?


The Russell 3000 is a broad market index that pretty much every brokerage will have to offer. Same for Vanguard 500 (or similar 500 fund). Emerging markets -- go with MSCI Index (again, every brokerage will offer). Bond fund -- there are different ones. I dont' think I'm familiar with a broad based bond fund. They're usually tied to geographic region, etc.

ChiTown
01-25-2013, 10:09 AM
Do you have them all in the same industry, or do you spread it out?

I would like to become a partner of a business sometime in the future (other than my own), but I'm not sure what industry. And I wouldn't want to actively manage it.

More or less, in and around the energy business. If you are not involved, you better have some serious cash.

Amnorix
01-25-2013, 10:10 AM
So, practically speaking, how does this work? I take my $10K to a financial adviser, and say, "I want to put 1/3 in S&P 500, 1/5 in emerging markets, a 1/3 in Russell 3000, and the rest in a bond index." And then they know what to do?


Oh, and phone works fine. You don't need to walk anywhere. 1-800-Fidelity or wherever you go, and they have all kinds of folks available by phone.

Amnorix
01-25-2013, 10:11 AM
More or less, in and around the energy business. If you are not involved, you better have some serious cash.


I remember working on prospectuses to sell limited partnerships in oil well drilling investments. Apparently it had a great tax advantage or something...? That was 15 or so years ago and tax laws may have changed.

Swanman
01-25-2013, 10:12 AM
So, practically speaking, how does this work? I take my $10K to a financial adviser, and say, "I want to put 1/3 in S&P 500, 1/5 in emerging markets, a 1/3 in Russell 3000, and the rest in a bond index." And then they know what to do?

They should know as long as you tell them you want index-based funds. I did it the manual way through Etrade. I am hands on like that.

La literatura
01-25-2013, 10:14 AM
I remember working on prospectuses to sell limited partnerships in oil well drilling investments. Apparently it had a great tax advantage or something...? That was 15 or so years ago and tax laws may have changed.

I've heard that dot-comers becoming limited partners in things like Houston real estate was fairly popular for the tax losses it would generate in the first few years.

Yeah, that would be ideal. "I need a company that will lose in order to offset my high gains."

Amnorix
01-25-2013, 10:15 AM
I've heard that dot-comers becoming limited partners in things like Houston real estate was fairly popular for the tax losses it would generate in the first few years.


No idea about that.

The oil wells or natural gas wells seemed to be perfectly legitimate investments, but there was also a tax component to it as well, as I recall.

Dayze
01-28-2013, 07:45 AM
my 401 was wiped out in 2008.
lost job; took job at 42% less pay; no money to contribute significantly.

finally got a new gig in August where Ill be able to, but I'm paying off all debt first. only 2 years (maybe less) to go. Paid off about 80% of debt was I was carrying.

been a long 4 years, but light at the end of the tunnel is finally here. THen going to sock back as much as I can in 401k to reduce taxable income; save a ton, and either buy a small house in about 5 years; or put down about 50% or more and finance for 15.

will never carry debt again if at all possible.

Rain Man
01-28-2013, 02:44 PM
I've heard that a person shouldn't be in more than 3 or 4 mutual funds, because the more you have, the less likely you are to beat the market. Of course, I presume you're also less likely to underperform, too, but that's never what I read about.

I do the online brokerage, because I'm not convinced that a broker can pick a mutual fund better than I can. The data is pretty much all out there.

I also have a fair number of individual stocks. I've been using a system that I like to pick them, though I can't really tell if I'm doing better or worse than I'm doing in my mutual funds. It's kind of fun to follow them, though, and I like to think that it's my chance to pick a skyrocketing star and get rich. That's not going to happen when you own mutual funds.

The crash of '08-'10 was painful on the stock side, but that was more bad luck than anything. I had been buying more bank and finance stocks recently because I liked the dividends they were paying. I had a couple of small bank stocks that got bought by big banks right before everything blew up, and all my finance stocks got destroyed. So I guess buying individual stocks takes a little more steel than buying mutual funds.

RedNeckRaider
01-28-2013, 02:48 PM
I'm investing in lottery tickets! I'm not very good at math but after losing all these years I'm thinking I'm due!

KC native
01-28-2013, 06:12 PM
I've heard that a person shouldn't be in more than 3 or 4 mutual funds, because the more you have, the less likely you are to beat the market. Of course, I presume you're also less likely to underperform, too, but that's never what I read about.

I do the online brokerage, because I'm not convinced that a broker can pick a mutual fund better than I can. The data is pretty much all out there.

I also have a fair number of individual stocks. I've been using a system that I like to pick them, though I can't really tell if I'm doing better or worse than I'm doing in my mutual funds. It's kind of fun to follow them, though, and I like to think that it's my chance to pick a skyrocketing star and get rich. That's not going to happen when you own mutual funds.

The crash of '08-'10 was painful on the stock side, but that was more bad luck than anything. I had been buying more bank and finance stocks recently because I liked the dividends they were paying. I had a couple of small bank stocks that got bought by big banks right before everything blew up, and all my finance stocks got destroyed. So I guess buying individual stocks takes a little more steel than buying mutual funds.

If the professionals have a hard time beating the market, your chances (with divided attention, gotta work right?) are even worse. I'm not saying it can't be done but on a consistent basis it probably isn't going to happen.

If you are running your own money, you'd probably be much better off with buying ETFs (a combination of sectors and indices) and going with a tactical rebalancing/reweighting semiannually to annuallly.

When you're picking ETFs, you eliminate the selection risk of being in the right sector but picking the wrong stock. You also greatly reduce the fees you'll pay on your mutual funds. In addition, the ETFs allow you to be more nimble and institute a stronger sell discipline.

Most average joes can pick a good stock. They have a hard time knowing when to sell losers or ring the register.

Also, in terms of mutual fund portfolios, it's ok to have more than 4 funds as long as they aren't duplicating each other. It depends on what the funds are (market cap, domestic/international, concentrated/diversified), what their strategies are (value, growth, momentum, fundamental), and the fees.

KC native
01-28-2013, 06:19 PM
I remember working on prospectuses to sell limited partnerships in oil well drilling investments. Apparently it had a great tax advantage or something...? That was 15 or so years ago and tax laws may have changed.

Yes, the success rate is terrible on new holes. The LP allows all the expenses to pass through to the investors. They do this with real estate a lot as well.

RedNeckRaider
01-28-2013, 06:26 PM
Yes, the success rate is terrible on new holes. The LP allows all the expenses to pass through to the investors. They do this with real estate a lot as well.

So you have no advice on my lottery ticket strategy?

KC native
01-28-2013, 06:30 PM
So you have no advice on my lottery ticket strategy?

Buy all that you can afford.

KC native
01-28-2013, 06:32 PM
And a timely column from one of my favorite money managers

http://www.washingtonpost.com/business/keep-it-simple-avoid-the-pitfalls/2013/01/24/210063fc-65a3-11e2-9e1b-07db1d2ccd5b_story.html

Keep it simple, avoid the pitfalls

By Barry Ritholtz, Published: January 25

“A simple, albeit less than optimal, investment strategy that is easily followed trumps one that will be abandoned at the first sign of under-performance.”

That’s from Tadas Viskanta of Abnormal Returns, a “forecast free” investment blog. He was talking about the disadvantages of complexity when creating an investment plan. Even though specific complex strategies can be mathematically shown to outperform the market over time, they often fail to do so.

The primary reason? The people running them never seem to stick with them long enough. Computer help desks have an acronym for this issue — PEBKAC, or “problem exists between keyboard and chair.” Fear, higher volatility and significant drawdowns derail all but the most disciplined investors. As soon as trouble shows up, they are gone.

We must recognize our own behavioral errors. To be blunt, you are not likely to become a cognitive Zen master anytime soon. But a little enlightenment could keep you from making some common investing errors.

Knowing these limitations, we can design an investment plan to circumvent the behavioral pitfalls. And a good step is to simplify. Toward that end, keep these 10 ideas in mind when approaching your portfolio:

1 Go passive. Here is a dirty little secret: Stock-picking is wildly overrated. Sure, it makes for great cocktail party chatter, and what is more fun than delving into a company’s new products? But the truth is that individual stocks are riskier than broad indices. Managing those positions through the ups and downs is complicated and time-consuming, and most investors lack the skills and discipline to do it well.

Consider this: The world’s greatest stock-pickers got creamed in 2008. And the world’s worst stock-pickers made a killing in 2009.

Your solution is index ETFs, vastly preferable to picking individual stocks. Lower cost, reduced turnover, fewer taxes — and much less risk.

2 Diversify across asset classes. Owning a variety of asset classes means that some part of your portfolio will be doing well when the cyclical turmoil arises. A broadly diversified portfolio includes large capitalization stocks, small cap, emerging markets, fixed income, real estate and commodities.

A typical portfolio might look like this: 33 percent big cap, 25 percent small cap, 20 percent emerging markets, 15 percent bonds, 5 percent REITs and 2 percent commodities. Younger investors will want to include technology or biotech as a class as well. Older investors might want more income-producing holdings such as REITS and lower-risk holdings such as bonds.

3 Be mindful of valuation. When making purchases, valuation matters more than anything else. What you pay for an investment is the single biggest determinant for how successful that investment will be. When equity prices are high, your returns will be lower. When they are cheap, your returns will be higher.

The valuation challenge is that stocks become cheap during a panic and expensive during a boom. Your instincts will lead you to do what feels good — buy high, sell low — the exact opposite of what you should do. Our next step solves this.

4 Dollar cost averaging. This means automatically putting the same amount of money each month or quarter into several broad indices. When stocks are high, the fixed dollar amount means you buy fewer shares; when they are less low, you end up buying more. Just about all of the retirement custodians and online brokers can automate this for you.

5 Keep costs and expenses low. Overhead is a big drag on returns. Compounding of the (noninvestment) costs and expenses adds up to be an enormous sum after a few decades.

Let’s assume that 30 years ago, you invested $100,000 and had an average annual return of 8 percent. If you put it into an ETF that had an expense ratio of 0.20 percent, it would now be worth about a million dollars. That same investment into a higher-cost fund with an expense ratio of 1.19 percent would be worth $242,079 less.

Reducing your costs may be the only free lunch in all of investing.

6 Rebalance your portfolio. I mentioned holding various asset classes in a hypothetical model of 33 percent big cap, 25 percent small cap, 20 percent emerging markets, 15 percent bonds, 5 percent REITs and 2 percent commodities. After a good run in any asset class, your model will have drifted from the original allocation. Rebalance at least once a year for smaller holdings and semiannually or quarterly for larger portfolios (in which the frictional costs won’t matter much).

Rebalancing back to the original allocations accomplishes three things: You buy more of what has become cheap, sell a little of what has become dear and keep the diversification of the original design. This should be easy to do, with most online brokers having automated tools for rebalancing.

7 Avoid the noise. Our goal is to block out the things that send you down the path of pointless complexity. A good start includes dramatically paring down your consumption of online, print and TV financial news.

You don’t have to go cold turkey, but ask yourself: Has this outlet helped me make money? If the answer is yes, then keep it. Pare back 90 percent of everything else. You will be much better off spending your time reading classic investing books than consuming ephemeral market gossip.

8 Review your portfolio regularly. At least once a quarter. Check your allocations, see what is working, what is lagging. If you like to look at charts, use weekly, not daily, charts. A lesson we learned over the past century was that when markets are down 30 percent or more, you can raise your allocation to equities some; when markets are down 50 percent, raise it some more.

Throughout the collapse, I heard tales of investors who refused to so much as open their monthly account statements for three years. They missed a lot of opportunities by putting their head in the sand. The ostrich approach to investing hardly ever pays off.

9 Steer clear of venture capital and private equity. With the new rules on marketing private investments, hedge funds and other non-public forms of risk-taking, I expect to hear about a lot of losses over the next few years.

Why? These forms of investing are extremely challenging. The numbers of even the best venture investors are lots of zeros, a handful of break-evens or small winners and very few home runs. It ain’t easy — and odds are you lack the skills, capital and risk tolerance for these sorts of high-risk early-stage investments. What is available to you are the leftovers — typically, what the VCs have already picked over and passed on.

9b Most IPOs are a sucker play.

10 Avoid new financial products at all costs. New financial products are seemingly created all the time. They tend to be complex, expensive and dangerous. For the most part, they are designed primarily to capture a fee for the underwriters.

The major asset classes have hundreds of years of history. When products have proven themselves, like low-cost ETFs, you can freely buy them. Their costs, risks and downsides are known entities.

10b Don’t buy “house product,” either.

Investing has become so complicated because so many entities have a vested stake in keeping you active and paying excessive fees.

By keeping it simple, you avoid that problem. You reduce your costs and stay on target to meet your goals. But most of all, you prevent yourself from doing something rash that you later regret.

Simplicity is a virtue.

Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. On Twitter: @Ritholtz.

RedNeckRaider
01-28-2013, 06:34 PM
Buy all that you can afford.
So the one ticket every two or three months is not aggressive enough. Damn it I knew there had to be a reason this had not paid off yet~

KC native
01-28-2013, 06:36 PM
So the one ticket every two or three months is not aggressive enough. Damn it I knew there had to be a reason this had not paid off yet~

Yea, you need to be buying like 3-4 of them a day.

RedNeckRaider
01-28-2013, 06:47 PM
Yea, you need to be buying like 3-4 of them a day.

Thanks I should have sought advice a longtime ago~

chefs fan in omaha
01-28-2013, 06:52 PM
Berkshire Hathaway, best mutual fund you can buy. The managers only make $200k a year.

I think most mutual funds are rip offs, you can get the same results by throwing darts at the stock page of the paper without paying some over priced money manager.

lewdog
01-28-2013, 07:11 PM
Your hopes may be dashed against the rocks of reality when you find out what houses cost.

Also, at current interest rates, you're well-advised to buy earlier rather than later. I've been saying this for years, and been wrong for years, but how the hell can rates get any lower?

I'm not going to pull out a calculator to prove it, but I'd bet that 80/20 at 3.25% interest over 30 is better than 70/30 at 6% over 30. And 6% is low by historical standards. I paid points back in 2000 or so to get my loan DOWN to 7%. That seems absurd now, but back then 7% was very low, historically speaking.

Keep in mind also the tax benefit of deducting the interest. That makes the effective rate even lower. The factor in that the housing market seems to be recovering.

Bottom line -- consider whether it makes more sense to keep waiting/saving to buy a house, or whether you'd be better off buying now before the rates get higher and the prices get higher. You'd need to be saving at a pretty fast clip to stay ahead.

*obviously, many factors here and my crystal ball is no clearer than yours.

You have had many great posts in this thread. Very informative for some of us youngins.

From what I have read, the Feds plan to keep interest rates low until 2015. I am socking as much money into my savings account now, as I would prefer to also buy sooner rather than later with the low interest rates on mortgage loans. While 20% is the recommended, I am also thinking putting 10-15% down now with a lower interest rate could save more in the long run than waiting a few more years to gather 20% and chancing rising interest rates.

Thoughts?

KC native
01-28-2013, 07:44 PM
You have had many great posts in this thread. Very informative for some of us youngins.

From what I have read, the Feds plan to keep interest rates low until 2015. I am socking as much money into my savings account now, as I would prefer to also buy sooner rather than later with the low interest rates on mortgage loans. While 20% is the recommended, I am also thinking putting 10-15% down now with a lower interest rate could save more in the long run than waiting a few more years to gather 20% and chancing rising interest rates.

Thoughts?

The Fed anticipates ZIRP (zero interest rate policy) through 2014.

I wouldn't bank on that though. If inflation starts to show up (unlikely before then as it has been nonexistent for the last couple of years and there is a lot of capacity out there), then they will start to raise.

But yes, all things considered you want the lowest interest rate possible. Locking in a low rate now on a long term loan (such as a mortgage) is ideal. That being said, if interest rates go up you may see a little price decline due to less purchasing power by buyers.

KC native
01-28-2013, 07:47 PM
Berkshire Hathaway, best mutual fund you can buy. The managers only make $200k a year.

I think most mutual funds are rip offs, you can get the same results by throwing darts at the stock page of the paper without paying some over priced money manager.

Until Warren kicks the bucket. Buffet and Munger have been legendary. But there is no guarantee that their successors will be a good as they have been.

Amnorix
01-28-2013, 09:46 PM
Yes, the success rate is terrible on new holes. The LP allows all the expenses to pass through to the investors. They do this with real estate a lot as well.


But what is the point of intentionally losing money for a tax advantage. You don't get a dollar for dollar reduction in your income taxes... For every dollar loss that offsets a dollar of income, you save, say, 40 or so cents in taxes. Why lose a buck to save 40 cents?

I never could quite follow that part of tax shelters, but obviously the math must work somehow since I guess people do intentionally do that kind of thing.

Amnorix
01-29-2013, 08:13 AM
Until Warren kicks the bucket. Buffet and Munger have been legendary. But there is no guarantee that their successors will be a good as they have been.


Yeah, if Buffet was 50, I'd buy some Berkshire Hathaway, but that massive empire may wobble and eventually fall apart after he's gone. That is one GIGANTIC enterprise he's running there.

tredadda
01-29-2013, 08:22 AM
There are many, many books and websites on this, but good general rules of thumb:

1. index funds are the way to go because the fees are lower. Fees eat away at performance and can add up to very substantial amounts over long periods of time. Managed mutual funds tend, over the very long haul, to UNDERperform the broader market, so you're usually paying more in fees to get less return even before the fees are factored in.

2. Keep a rainy day fund worth of cash in a liquid account. Figure on several months of expenses at least.

3. In investing, diversity is important. You can and should diversify across types of investments (real estate, stocks, stocks versus bonds) and across geography (domestic versus international). Being young, you should be heavy on stocks and you will almost inevitably be heavy on domestic. That's not terrible, but just be mindful that diversity is usually good.

4. You can NEVER time the market. Don't try. Forget the miracle of compound interest and learn the joy of dollar cost averaging, which means steadily contributing the same amount of money to your various mutual funds on a monthly basis over a long period of time so that your money gets invested when the market is low (and the price per share is cheap) as well as high. When it's high, don't stop, because it may yet go higher.

5. You don't lose or make money until you sell. Stay the course. If you're 35 and the market is tanking, who cares? You're not taking the money out for 20+ years. STAY THE COURSE. If your plan is good and consistent, you should be fine in the long run.

6. Your friend's hot tip? It ain't hot and it's not a tip.

7. Do what you can to reduce your tax exposure and increase your income. At a minimum that means making sure you understand your employer's tax advantaged retirement plans, if any, and AT LEAST contributing the amount needed to get the maximum match. If they match $1 for every $2 up to $5,000, then do whatever you can to put in $10,000 and get that free money. After that, consider traditional and Roth IRAs. Keep in mind that that money is out of your pocket until retirement age, so you must balance retirement plan savings with "regular" savings.

^ Sage advice there. I would also like to state that the best hold period for stocks is forever. Day traders consistently lose, while the guy who takes it slow and steady over the years usually wins in the end.

KC native
01-29-2013, 06:21 PM
But what is the point of intentionally losing money for a tax advantage. You don't get a dollar for dollar reduction in your income taxes... For every dollar loss that offsets a dollar of income, you save, say, 40 or so cents in taxes. Why lose a buck to save 40 cents?

I never could quite follow that part of tax shelters, but obviously the math must work somehow since I guess people do intentionally do that kind of thing.

I'm not sure. The only people that are using LPs to intentionally lose money are really wealthy.

KC native
01-29-2013, 06:23 PM
^ Sage advice there. I would also like to state that the best hold period for stocks is forever. Day traders consistently lose, while the guy who takes it slow and steady over the years usually wins in the end.

That is absolutely incorrect. Buy and hold is a guaranteed money loser.

KC native
01-29-2013, 06:25 PM
Yeah, if Buffet was 50, I'd buy some Berkshire Hathaway, but that massive empire may wobble and eventually fall apart after he's gone. That is one GIGANTIC enterprise he's running there.

Yes, I love reading about Warren and Munger and how they work. They are the best value investors ever.

One of the more interesting things I've learned about Buffet is that they leave the people of the businesses they acquire in charge. They figure that those people can run the business better than them. They will come in with people to help make them more efficient, but for the most part they retain management at firms they acquire.

mlyonsd
01-29-2013, 06:39 PM
Yes, I love reading about Warren and Munger and how they work. They are the best value investors ever.

One of the more interesting things I've learned about Buffet is that they leave the people of the businesses they acquire in charge. They figure that those people can run the business better than them. They will come in with people to help make them more efficient, but for the most part they retain management at firms they acquire.
Absolutely true.

Also true is how the bottom line is more important than his workers. The people in charge of his businesses do better when they make their companies appear to do well. And the employee at the end of the line suffers.

He's rich for a reason and is either out of touch or doesn't give a shit about who works for him.

You should feel great satisfaction for idolizing him.

RedNeckRaider
01-29-2013, 06:52 PM
Absolutely true.

Also true is how the bottom line is more important than his workers. The people in charge of his businesses do better when they make their companies appear to do well. And the employee at the end of the line suffers.

He's rich for a reason and is either out of touch or doesn't give a shit about who works for him.

You should feel great satisfaction for idolizing him.

So you are saying the lottery ticket plan is good or bad?

go bowe
01-29-2013, 07:14 PM
house payed for
Gold
silver
food
water
guns
ammo

*perk* gold and silver?

how many guns do you have? I'd like to send someone over to pick up a few silver bars, just to be neighborly and all...

go bowe
01-29-2013, 07:17 PM
So you are saying the lottery ticket plan is good or bad?

eh, playing the lottery is just throwing money away...

i'd rather buy a bottle of fine rum...

RedNeckRaider
01-29-2013, 07:18 PM
eh, playing the lottery is just throwing money away...

i'd rather buy a bottle of fine rum...

I do both does that increase my odds?

go bowe
01-29-2013, 07:30 PM
I do both does that increase my odds?

it certainly will increase your odds of having a good time... :D

RedNeckRaider
01-29-2013, 07:40 PM
it certainly will increase your odds of having a good time... :D

Winning :p

Amnorix
01-29-2013, 09:57 PM
That is absolutely incorrect. Buy and hold is a guaranteed money loser.


For individual stocks, no doubt, though nowhere near as bad as day trading, where you can get burned alot worse alot faster. For mutual funds over the long haul, though, buy and hold is not a bad way to go.

Fundamentally, alot of people just aren't going to pay very close attention to their investments, and/or lack the knowledge/skill/time to move in and out of various types of investments. Buying and holding isn't at all bad over the long run if you have a sufficiently diversified portfolio.

KC native
01-30-2013, 10:41 AM
Absolutely true.

Also true is how the bottom line is more important than his workers. The people in charge of his businesses do better when they make their companies appear to do well. And the employee at the end of the line suffers.

He's rich for a reason and is either out of touch or doesn't give a shit about who works for him.

You should feel great satisfaction for idolizing him.

ROFL You just don't like him because he is liberal. If it were any other business (like one of the Koch's) you'd tell those people to deal with it or find a new job.

KC native
01-30-2013, 10:48 AM
For individual stocks, no doubt, though nowhere near as bad as day trading, where you can get burned alot worse alot faster. For mutual funds over the long haul, though, buy and hold is not a bad way to go.

Fundamentally, alot of people just aren't going to pay very close attention to their investments, and/or lack the knowledge/skill/time to move in and out of various types of investments. Buying and holding isn't at all bad over the long run if you have a sufficiently diversified portfolio.

Day trading should be left to the pros and very dedicated. The leverage and short sightedness of day trading fucks a lot of people.

Buy and hold with a mutual fund isn't bad because there will be turnover in the portfolio by the manager.
Buy and hold forever with individual stocks is a recipie for disaster. Names like Enron and Dell are perrfect examples. Great names when they were runnning up. Now Enron is gone and Dell sets new 52 week lows every year.

Hoover
01-30-2013, 11:03 AM
There are many, many books and websites on this, but good general rules of thumb:

1. index funds are the way to go because the fees are lower. Fees eat away at performance and can add up to very substantial amounts over long periods of time. Managed mutual funds tend, over the very long haul, to UNDERperform the broader market, so you're usually paying more in fees to get less return even before the fees are factored in.

2. Keep a rainy day fund worth of cash in a liquid account. Figure on several months of expenses at least.

3. In investing, diversity is important. You can and should diversify across types of investments (real estate, stocks, stocks versus bonds) and across geography (domestic versus international). Being young, you should be heavy on stocks and you will almost inevitably be heavy on domestic. That's not terrible, but just be mindful that diversity is usually good.

4. You can NEVER time the market. Don't try. Forget the miracle of compound interest and learn the joy of dollar cost averaging, which means steadily contributing the same amount of money to your various mutual funds on a monthly basis over a long period of time so that your money gets invested when the market is low (and the price per share is cheap) as well as high. When it's high, don't stop, because it may yet go higher.

5. You don't lose or make money until you sell. Stay the course. If you're 35 and the market is tanking, who cares? You're not taking the money out for 20+ years. STAY THE COURSE. If your plan is good and consistent, you should be fine in the long run.

6. Your friend's hot tip? It ain't hot and it's not a tip.

7. Do what you can to reduce your tax exposure and increase your income. At a minimum that means making sure you understand your employer's tax advantaged retirement plans, if any, and AT LEAST contributing the amount needed to get the maximum match. If they match $1 for every $2 up to $5,000, then do whatever you can to put in $10,000 and get that free money. After that, consider traditional and Roth IRAs. Keep in mind that that money is out of your pocket until retirement age, so you must balance retirement plan savings with "regular" savings.
This is all great advice.

Here is some additional stuff to think about.

1. Pay down your debt. Its amazing how much power you have over your finances and life when you don't have debt. My wife and I built a house in 2010 and its the only debt we have. We should have it paid for in 10 years.

2. Rainy Day fund. This is important, and I might do it differently than other people. My wife and I have about 6 months of expenses socked away, but we actually use this money to fund major purchases when they pop up. We just spent 3k on electrical work for example. We put on the credit card which gives us 2% cash back and an extra month to pay the expenses. The CC bill comes and we pay in full. So while that $ came out of the emergency fund, we actually floated 2/3s of it. We basically sock away 1k a month into the reserve fund. We always replenish it, but it allows one to make large purchases much easier.

3. Live on a budget. Its the best thing I ever did. Know what you are spending your money on. It makes a difference.

mr. tegu
02-01-2013, 09:47 AM
Didn't read through the whole thread. Has or does anyone have an HSA? I heard about five years back from professor how it was a good thing to utilize. I just don't recall the benefits. Any one?

Amnorix
02-01-2013, 09:51 AM
Day trading should be left to the pros and very dedicated. The leverage and short sightedness of day trading fucks a lot of people.

Buy and hold with a mutual fund isn't bad because there will be turnover in the portfolio by the manager.
Buy and hold forever with individual stocks is a recipie for disaster. Names like Enron and Dell are perrfect examples. Great names when they were runnning up. Now Enron is gone and Dell sets new 52 week lows every year.


Right. Very few stocks are good basically "forever", so at some point you want to sell, and most people (including myself) have no idea when that is. That's why I tend to stay away from individual stocks.

The only time I'll buy individual stocks, typically, is when an otherwise very solid stock is getting beaten up for short term reasons that are FAR more likely due to investor panic than any rational reason. My most successful effort there is buying into and out of Goldman Sachs a few times when banks were getting hammered. Frankly, if GS goes down, then we're all fucked anyway, so... :D

Amnorix
02-01-2013, 09:53 AM
This is all great advice.

Here is some additional stuff to think about.

1. Pay down your debt. Its amazing how much power you have over your finances and life when you don't have debt. My wife and I built a house in 2010 and its the only debt we have. We should have it paid for in 10 years.

YES. Control your debt, OR YOUR DEBT WILL CONTROL YOUR ENTIRE LIFE!!

I see it indirectly in my profession -- lives ruined, marriages ruined, families wrecked -- over an inability to control debt. It's mind-boggling.

And RULE NUMBER 1 -- NEVER CHARGE ANYTHING IF YOU CAN'T PAY THE BALANCE AT THE END OF THE MONTH. There are very, VERY few exceptions to that rule. For God's sake, don't pay 10+% on debt. Seriously.

Amnorix
02-01-2013, 09:55 AM
Didn't read through the whole thread. Has or does anyone have an HSA? I heard about five years back from professor how it was a good thing to utilize. I just don't recall the benefits. Any one?

Health Savings Account. Dont' know much about them, but I believe they allow you to pay health-related costs (including, presumably, prescriptions and dental etc.) with pre-tax dollars.

If you have a HSA available to you, usually through your employer, you definitely should look into it.

Legal tax avoidance / minimization is a big part of developing one's wealth. Use pre-tax dollars whenever possible.

Count Zarth
01-03-2014, 10:38 AM
Just invested in Disney, Yahoo! and Ubiquiti Networks.

What are you guys buying this year?

2bikemike
01-03-2014, 11:08 AM
Didn't read through the whole thread. Has or does anyone have an HSA? I heard about five years back from professor how it was a good thing to utilize. I just don't recall the benefits. Any one?

I signed up for it this year. My share of my insurance Premium doubled so I opted for the High Deductible Low Premium plan. My wife and I are healthy with very few visits to the Doctor. I invested the difference in premiums to the HSA. My employer also threw in a grand.

My plan is to treat it just like the 401k. It works very similarly. Tax free as long as you use it for HC. I believe you can even apply the money to premiums later on. So hopefully I stay healthy and when I retire I have a nice little nest egg to apply for medical coverage in my later years.