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

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]

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]

Originally Posted by 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?

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]

Originally Posted by RyFo18

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]

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]

Originally Posted by La literatura

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]

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]

Originally Posted by La literatura

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]

Originally Posted by Amnorix

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]

Originally Posted by Amnorix

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]

Originally Posted by Amnorix

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]

Originally Posted by ChiTown

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]

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.

Basically all of this.

[FD]

Originally Posted by La literatura

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]

Originally Posted by La literatura

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.