Investments & Personal Finance

[La literatura]

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?

[La literatura]

Originally Posted by RyFo18

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]

Originally Posted by La literatura

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]

Originally Posted by Amnorix

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]

Originally Posted by Amnorix

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/fun...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]

Originally Posted by La literatura

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]

Originally Posted by Swanman

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]

Originally Posted by La literatura

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-Do.../dp/0393330338

[La literatura]

Originally Posted by RyFo18

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]

Originally Posted by Amnorix

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-Do.../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]

Originally Posted by La literatura

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]

Originally Posted by Swanman

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]

Originally Posted by La literatura

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]

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]

Originally Posted by La literatura

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]

Originally Posted by La literatura

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.