Okay, let’s talk about serious investing, i.e. long-term, retirement, solid companies, etc.
FWIW, I currently feel that the index funds aren’t a great play right now, I think we’re slightly above the curve and expect a correction. Over the next few years, do you think that the large cap/small cap performance will get back to normal? We’ve been seeing incredible smallcap gains over the last year and underperforming large caps, I’d love to dump a bunch into an S&P 400 index (small/med cap index) but I think it might be better to go for the larges on the assumption that the main gains have already been made.
Index funds. 25% in small, medium, and large cap domestic funds, and the final 25% in a foreign index fund. Boring but it’s been working great for me. Took a hit during the crash and has now hit new heights since I continued to invest through the crash and the recovery.
I think the absolute key to investing is to realize that your number one problem is going to be costs and fees.
The salesmen and financiers peddling most investment vehicles are making an unbelievable amount of money off retail investors in fees and the absolute best bet is to take index funds and ETFs with low low costs and fees.
So look for things with low costs and stay diversified.
Investing as a concept has changed a lot over the last few years. The fact is that unless you are a genius who identifies an unknown or hidden weakness in the current markets AND you time it right AND you get lucky, it’s basically impossible to outperform the “markets” as a whole over any significant period of time. The people that made a killing shorting the housing market and the various MBSs and CDOs will likely never repeat that performance. And the wise old fund managers always end up losing in the end as their luck finally turns.
Everyone should keep in mind that what passes for an “investment” today is often nothing like the investments of the past.
A Certificate of Deposit is an investment. A government bond is an investment. Maybe some bond in extremely stable companies are investments. Shares in stable companies is an investment, especially if they pay a dividend.
Beyond that we’re all basically gambling and participating in the essential pyramid nature of the financial markets through the vehicle of stock ownership.
Index funds qualify, as they are comprised of many different stable companies, provided you’re using reputable indexes. The various Vanguard funds are essentially bets on the entire US economy at various cap levels. That’s where my long money is kept, in VFINX and VNR.
Even if I did a zillion hours of research, near as I can tell you can beat index funds by:
Getting lucky.
Out-betting the big insider trading and wall street houses.
Out-betting the “dumb” noise traders.
Having some sort of special insight about a certain industry or company.
Having enough financial assets that you can take very long-term non-trendy blatantly-obvious bets (the housing bubble) and outlast the market’s irrationality.
This is why I just put it in the S&P at Fidelity; the overhead is comically low. Investing when it isn’t your job is a mug’s game.
This will be the first year that I try my hand at picking individual stocks. Previously I only invested in certain vanguard funds: s&p500, wellington, and their short term federal bonds fund.
The Fool’s Mechanical Investing Board have built a number of screens that look pretty sound to me and I intend to give them a try with a portion of my investment moneys.
I’ve been buying oil/gas sector stocks (production, pipeline, tanker stocks, etc) on the bet that gas prices will rise once the economy gets going again.
If I’m wrong, I get stuck with stocks that have fantastic dividends, and fill my car up cheap.
If I’m right, I can spend the fortune I make… filling my car up expensively.
I’m paying 1% to a guy at Merrill Lynch to actively manage my IRA, I have my Roth IRA in BRK.B, and have my 401k invested primarily in a mix of domestic stock funds.
In 2010,
S&P 500 gained 12.7%
BRK.B gained 21%
my 401k mix gained 19.5%
my Merril Lynch guy gained 15.7% - 1% = 14.7%
Index-based investing is fine for your core strategy, but don’t gloss over what any individual index is. For example, many people place a big chunk into an S&P500 index thinking they’re covering their bases, but really the S&P500 is an index of mature, large cap US companies and not the US economy overall. During those times when all the big guys are sucking wind and the little guys are doing well, you will only partake in the former. I like indices based on, for example, the Russell 3000 and so reflecting a much broader view of the economy.
I am also still a huge advocate of 60/40 or 70/30 mixes of stocks with bonds. It softens long-term volatility while producing the same long-term returns. This is the idea of the efficient frontier and diversification/correlation. It also means you should mix up your stock holdings a bit (some domestic, some foreign, maybe even a bit in emerging markets) and your bond holdings a bit (some domestic corporate, some foreign government, etc).
Also, get as much free money as possible. If your employer has a retirement plan of some kind like a 401k with matching, take as full advantage of it as possible. The part they contribute in the match is free money to you. Even if your investment stays flat during some given year, for example, whatever they put in is part of your whole portfolio’s return. And if their 401k platform only offers expensive investment options, then as soon as the money matches, yank it out and rollover the funds into an IRA somewhere. You got the free money match and now can pay lower fees, all with no tax consequences.
Finally, fees are the big killer of returns as has been said above. It’s obvious you don’t want to spend an extra 0.5% for the investment that has a 0.3% higher return. So check into the expenses and fees carefully no matter what you invest in. Especially keep an eye on footnotes and “voluntary waivers” where the prospectus allows for a higher fee than you are currently paying; the board can bump it back to normal when the waiver expires without further notice.
This is not investment advice, you are not my client, I am not licensed, go see your financial advisor.
That’s possibly true, I don’t have the data in front of me. But total return isn’t the only thing that matters otherwise everyone would invest in emerging markets all the time. Risk profile, correlation, and intentions are important.
For example would you prefer a 10% return on one stock or on a basket of stocks? The latter carries less risk over time by diversification. Same return, less sleepless nights.
Or consider the possibility of a future event that disproportionately affects large cap stocks.
And consider the investor’s intention. Is the goal to invest in the US economy as a whole? Or just large cap stocks? There are important and subtle differences.
Good advice, but a bit too rigid. You should gradually increase the percentage of bonds you hold as you approach retirement. I’m on the wrong side of 45, and my portfolio has been heavily weighted towards stocks for too long. I’ve been allocating new funds to bonds and other lower-risk investments like utility stocks to correct this, and it’s working nicely.
Finally, fees are the big killer of returns as has been said above. It’s obvious you don’t want to spend an extra 0.5% for the investment that has a 0.3% higher return. So check into the expenses and fees carefully no matter what you invest in.
Even index funds (of which I’m a big proponent) offer varying fees for essentially the same product, so this is very good advice. Another way to avoid fees altogether is to buy bonds and stocks outright. If you buy a bond and hold it to maturity, only the intial purchase will be charged a commission and you’ll have none of the annual fees that bond funds charge (and none of the tax consequences they generate when they trade securities, either). I’ve been investing in utilities and fairly short-term corporate and municipals bonds this way–short-term because the current low interest rates are unlikely to continue for too much longer.
After some discussion on a related topic in behavioral finance last semester, I did something likewise unintuitive and took a massive loan out of my 401(k). The money all went directly into paying off credit cards and other debts, which had an average rate of perhaps 9%. The 401(k) loan has a rate of 4.25% so I’m still paying interest, but with three important differences.
First, the loan payments come directly out of my paychecks (fixed amounts and dates for a known period of time) so they can’t be missed or underpaid or anything else and personal financial planning is easy. Second, the 4.25% interest rate is much lower. Third and most important, the interest goes back into my 401(k). Meaning that I’m paying myself 4.25% instead of paying corporate usurers 9% plus whatever fees and other nonsense. (There was only a single $50 fee or something for taking the 401(k) loan).
In addition, the 401(k) loan does not show up on credit reports or anything, so now my already very good credit looks even better. And finally, if something happens with my job and the 401(k) loan “defaults”, then it is considered nothing more than an early withdrawal from retirement funds to be taxed normally plus the 10% penalty. No credit report effect.
That last bit is even more interesting and counter-intuitive. Straightforward math shows that it makes sense to get your 401(k) match and free money, then yank it all out and pay a 10% IRS penalty if you’re paying off those 24.99% credit cards.
The strategy really only works if you are disciplined to: 1) pay off much higher interest rate debt with the entire amount of the loan/early withdrawal, and 2) not start accruing new debt by using the CCs again. So if someone does this, get out the scissors afterwards.
This is not investment advice, you are not my client, I am not licensed, go see your financial advisor.
(I can’t wait to get a job somewhere else so I don’t have to be a disclaimer douche in every finance thread.)
That’s always been the classic advice (a slide into heavy bond holding as you reach retirement), but I’ve read a lot of conflicting stuff over the last few years. People are living longer and retiring earlier, which means they need more money if they expect it to last and bonds just won’t do it. The new thinking is that you’ll need the growth potential of stocks to make it happen for the full retirement term.
With respect to some of the 401(k) modifications being discussed, I think you need to look at the provisions of your particular plan. As far as I know, plans don’t have to allow loans or rollovers during current employment. For example, our 403(b) plan (the non-profit version of 401[k]s) allows loans, but you can’t rollover any deposited contributions until you terminate employment with the university. Thankfully we have access to low-cost funds, but some folks may be stuck with crappy expensive funds.
I’ve seen this as well. Whether you backtest with historical data or run Monte Carlo simulations with reasonable parameters, portfolios tend to last a little longer and/or generate higher terminal values with a constant fixed allocation like 60 equity/40 fixed-income, versus a sliding allocation of 100/110/120 - current age in equity, remainder in fixed-income. It’s not a huge difference either way though, so if you’d have anxiety with the variability of a constant allocation, stick with a sliding formula that lets you sleep at night.
FWIW, I manage my father-in-law’s very modest retirement portfolio, & I’m gradually moving him to a 40 equity/60 fixed-income mix over 5 years, where I’ll stop & keep him constant from then on.
Yeah, part of the thing people forget is that while most are able to live with fixed costs in retirement (for which a fixed income is adequate), the last five years or so can have skyrocketing medical costs. I seem to remember reading many times that the last few years of life are the most expensive, in health care terms.
This has broad implications for all kinds of policy positions, but in terms of personal retirement decisions you almost certainly don’t want a flat portfolio value for your last 30. Rather, you should want some growth, even if a modest 5% over inflation, in case of this relatively common scenario. And you don’t want that growth to hinge on sudden lowering of interest rates so that your bond prices jump up right when needed. Best to keep a good mix all the way to the end.
I think 401k loans may be underutilized as a financial tool. But don’t forget the opportunity costs though. By taking out a loan not only are you paying interest (albeit to yourself), you no longer have that money producing value. So if you are getting a 12% return on your money, it may not be a good idea to take out a loan to pay off 9% debt.
Having said that I did something similar a few years ago as the stock market was just beginning to tank. Moved my 401k to bonds, MM and capital preservation funds and also took out a loan to pay off a car loan & HELOC.
The credit report and “default” aspects are good points.
