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?

[Amnorix]

Originally Posted by La literatura

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]

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]

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.

[RNR]

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]

Originally Posted by Rain Man

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]

Originally Posted by Amnorix

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.

[RNR]

Originally Posted by KC native

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]

Originally Posted by RedNeckRaider

So you have no advice on my lottery ticket strategy?

Buy all that you can afford.

[KC native]

And a timely column from one of my favorite money managers

http://www.washingtonpost.com/busine...d5b_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.

[RNR]

Originally Posted by KC native

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]

Originally Posted by RedNeckRaider

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.

[RNR]

Originally Posted by KC native

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]

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]

Originally Posted by Amnorix

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]

Originally Posted by lewdog

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.