I took Calculus instead of Econ 101

[Erin]

So what do I do with my 401K?
Is everyone changing their portfolio?
Is that going to have a negative reaction?

Do I be a good American and leave it where it is? Am I gonna 'lose my ass' like my Dad did (and everyone else in 87)?

Some say now's the time for investing in foreign currencies. That doesn't sound like it will help matters but will it help me?

 

[Independent Gal]

Starset, unless you are 50 and will need that money STAT (in which case it should be somewhere safe-ish anyway) or unless you are just switching funds, you just leave that money right where it is and ride the waves, girl.

The. Single. Dumbest. Thing. that people do is buy high and sell low. Don't do it! If anything, you should be increasing your contributions while the market is down. Hopefully, you're sufficiently well diversified in terms of geography, industry, small cap / large cap, stocks and bonds, etc. that you're hit, but not that hard . People who lost their ass in '87 were either too concentrated, or they sold WHILE the market was down. Others just rode it out and were fine.

If you are diversified. Don't. Touch. Seriously.

Oh, and unless your a serious expert (and even then), I wouldn't start playing with foreign currencies in a big way. For one thing, talk about buying high.

 

[Erin]

Thanks IG. I''m an artist hippie at heart and never did pay much attention to anything financially centered. Just did what my Dad told me to do.
I go to all these dinners around people who either have money or think they have money (I can''t tell) and they talk about their vacations and summer homes and their latest stock tips... I gloss over. I don''t have a portfolio. I don''t have a broker. I don''t have a financial advisor. I don''t have an accountant or a lawyer. I know I should be more of an adult and educate myself but there''s so much to learn in order to understand enough to make my own judgements. What''s wrong with a savings account? Maybe that''s a cop out... But anyway, Thanks!

 

[Regular Guy]

Good question.

Though I'm slow at following my own advice (maybe I'll get this mess in order tonight?), I tend to believe to let your age guide you in your diversification...unless...you do have some other wisdom.

Young...more heavily invested in stocks; older...less in stocks vs bonds and cash oriented vehicles.

I personally need to throttle down on the stocks a bit. Maybe I'll organize myself tonight. It's just IRAs but it's also all I've got (with our investment in our home).

Regards,

P.S. Plus what IG said about diversification. Total stock funds and bond funds from low cost providers like Vanguard are what have made the most sense to me.

 

[Independent Gal]

What Ira says is right: it''s often recommended that you invest more heavily in stocks than bonds when you''re younger, because stocks are much more volatile and risky, and because you''re young, you have time to lose the value of your portfolio and regain it a few times before you actually need that money. Usually, the higher the risk, the higher the potential return, so you stand to get richer over the long haul with a stock heavy portfolio. But the older you get, the less time you have until retirement, the more safe your money should be since you may not have time to ride out another market downturn. It''s for that reason that it''s recommended that you have a portfolio that''s increasingly bond heavy as you grow older. Bonds are very safe. But you don''t make much money from them.

Starset: go to your bank and ask to speak to someone to get some advice. You will never be able to ''save'' enough in your savings account to retire, unless you have a separate pension from an employer, so investing is the only chance in heck that any of us have to someday not have to work.

 

[Ellen]

I agree, you need to invest, and you need a really good stock broker. I'd start listening to all those people at those dinners. If you think they're approachable, just ask them who they're with, are they happy with them? That is how many find the good, trustworthy brokers, by word of mouth.

 

[Regular Guy]

Date: 1/30/2008 8:01:11 PM
Author: Ellen
I agree, you need to invest, and you need a really good stock broker. I''d start listening to all those people at those dinners. If you think they''re approachable, just ask them who they''re with, are they happy with them? That is how many find the good, trustworthy brokers, by word of mouth.

Hey, Ellen, I think Stockbrokers and Pricescope''s brand of encouraging self-education don''t mix very well. Research doesn''t leave much room to give an edge to smart managers vs index funds.

Of course...if you''ve beat this thinking...more power to you.

 

[MichelleCarmen]

I''m not too familiar with investments, but did watch a bit of Suze Orman (sp?) and she had a show that talked specifically about 401Ks saying NEVER take your $ out of there because the first thing you do is end up getting taxed on it. Possibly read up on her views a bit and FOR SURE talk to a professional!

 

[chiefneil]

Date: 1/30/2008 5:21:22 PM
Author:Starset Princess
So what do I do with my 401K?

Is everyone changing their portfolio?

Is that going to have a negative reaction?


Do I be a good American and leave it where it is? Am I gonna ''lose my ass'' like my Dad did (and everyone else in 87)?


Some say now''s the time for investing in foreign currencies. That doesn''t sound like it will help matters but will it help me?

You should have a look at the asset class balance in your portfolio. If you''re young (e.g. under 50), then you should probably have about 80% stocks, 20% bonds. Your stocks should further be a mix of domestic and foreign funds, and mix of large/medium/small cap stocks.

For a novice investor I would respectfully disagree with the advice to talk to a stock broker about anything other than general asset class advice. The easiest and safest types of funds to invest in are generally no-load index funds. Pick a few of those and one or two bond funds, and you''re good to go.

If you believe we''re headed into a bear market, you can take a more defensive position, i.e. increase the proportion of bonds to stocks in your portfolio, say 30 or 40% instead of 20%. But be aware that attempts to time the market are almost always doomed to failure.

 

[chiefneil]

I should clarify that I don''t support stockbrokers when it comes to taking their advice about purchasing individual stocks, or even their favorite funds. Brokers very rarely beat the market indexes with individual picks. I do support reviewing your portfolio, goals, and retirement plan with a financial adviser.

 

[Haven]

Get a good financial adviser. Everyone has opinions about these things, but I would never take advice about my financial portfolio from anyone other than my financial adviser. Plain and simple.

Ask around, I''m sure you have acquaintances who are very happy with their FAs.

 

[Ellen]

Date: 1/30/2008 9:18:53 PM
Author: Regular Guy

Hey, Ellen, I thinkStockbrokers and Pricescope''s brand of encouraging self-education don''t mix very well. Research doesn''t leave much room to give an edge to smart managers vs index funds.

Of course...if you''ve beat this thinking...more power to you.

While I would never discourage self-education, I personally think the two can, and should go hand in hand. I find totally dismissing brokers, curious. Maybe it''s just us, but I know of no one (save one) who has built up a large amount of investments totally on their own. Truly learning all the ropes of investing is daunting, and learning just a little can be dangerous, imo. The only person I''ve personally known that learned investing the way I feel one should, to do it entirely on their own, was my uncle. He loved it, got it, made a living at it. He became a self made millionaire. I''m sure there are others out there too, but I know he''s not the norm...


As for us, here''s a story. You tell me, honestly, if this is beating your thinking.

It starts with my dad. (who was not with my mom) He had never invested in the stock market. All his savings was basically in the bank. He didn''t trust brokers, and I guess he felt it was too risky to try investing himself, not really sure of the reason, I never asked him. And he was a very smart guy. At the age of 67, he met up with a younger guy he had known from a hunting club many, many years before. This guy was/is a broker. They must have got to talking about the fact that dad had all his money in the bank. Broker guy I''m sure said, you need to do something, you''re never going to get anywhere at that rate. So, dad gave him a chunk of money to invest. I asked him if he picked the stocks himself. Nope. Broker guy picked every one, and there were many. In 9 years time, when my dad died, his original investment had tripled.

He had set his account up as a TOD (transfer on death), so that we kids received our inheritance in the form of stocks. At that point (which was absolutely lousy as far as the market was concerned), broker guy said to us, we need to sell off several of the stocks, they''re too conservative for you at this point. So we did. Hubby likes learning about investing, and knows a bit (but not enough to think he can do it all on his own). He researched, and came up with several stocks to consider. Broker guy went over them with us and said of a few, I wouldn''t recommend, and here''s why. The others he said yes, those are good, and we bought. See, we worked in conjunction... In 6 years time, with a market that has been far from stellar, that initial inheritance has doubled. Now, we''re certainly pleased, but honestly, if you''ve done/could do better, more power to you ! And please, do share your secrets.


We know a lot of people, smart people, with money, and they all have brokers. I just don''t get why they seem taboo to you and Cheif, but maybe I''m missing something?


But to Starset, who in her own words said, "I don''t have a portfolio. I don''t have a broker. I don''t have a financial advisor. I don''t have an accountant or a lawyer", my advice still stands. Telling her to just "do it herself" seems, almost irresponsible, imho.


Starset, find someone good, someone you trust, and get going on that nest egg!

 

[Erin]

Date: 1/31/2008 10:10:03 AM
Author: Ellen
Truly learning all the ropes of investing is daunting, and learning just a little can be dangerous, imo.

This is exactly how I feel.
I don''t even know enough to know that I don''t know.

I do have a 401K through my employer, managed by MFS, and I contribute the max amount and my employer matches 6%. I''ve been doing this for years.
Problem is, I don''t adjust it, don''t look at the results, I don''t educate myself on options...
I know my Dad is a huge believer in the 401K because SS will be gone. But back in 87 he was 35 and heavy in stocks. Granted he stuck with it and he recuperated at the pace the rest of the nation did, but I remember at the time it was really discouraging for him to watch the loss.

I just didn''t know if, in times like these, when the bear market seems looming, people make adjustments. My current investment is very aggressive and top heavy with stocks. I guess in my VERY simplistic understanding of things, it makes sense to me that people would protect from losing previous stock gains now by changing their ratios for a while and then jumping back in once the market seems to have found its landing spot.

Or I just leave it alone knowing that the market will adjust and reciprocate and any meddling I do is probably counterproductive.

 

[Ellen]

Date: 1/31/2008 11:23:03 AM
Author: Starset Princess

Date: 1/31/2008 10:10:03 AM
Author: Ellen
Truly learning all the ropes of investing is daunting, and learning just a little can be dangerous, imo.

This is exactly how I feel.
I don''t even know enough to know that I don''t know.

I do have a 401K through my employer, managed by MFS, and I contribute the max amount and my employer matches 6%. I''ve been doing this for years.
Problem is, I don''t adjust it, don''t look at the results, I don''t educate myself on options...
I know my Dad is a huge believer in the 401K because SS will be gone. But back in 87 he was 35 and heavy in stocks. Granted he stuck with it and he recuperated at the pace the rest of the nation did, but I remember at the time it was really discouraging for him to watch the loss.

I just didn''t know if, in times like these, when the bear market seems looming, people make adjustments. My current investment is very aggressive and top heavy with stocks. I guess in my VERY simplistic understanding of things, it makes sense to me that people would protect from losing previous stock gains now by changing their ratios for a while and then jumping back in once the market seems to have found its landing spot.

Or I just leave it alone knowing that the market will adjust and reciprocate and any meddling I do is probably counterproductive.

I understand, totally. I tried getting books, learning the ropes, as the thought/challenge/satisfaction of doing it appealed to me. Talk about eyes glazing over.

I''ll let hubby and broker guy take care of that.

Now to answer your initial question, which I forgot to in all my ramblings. All my uncle ever told us, and broker guy, and my moms broker guy, and everyone else is, yes, sit it out. If you''re in it for the long haul, just hang tight, it should recoup. Is it fun watching your retirement behave as if it''s on a trampoline? No, but God willing, things will turn out alright in the end.

 

[Independent Gal]

Yes. Sit. It. Out.

Don''t sell low.

A company that has real value will come back up, and if you''re in funds, the fund manager is the person who will shift assets around when s/he thinks fit.

In some ways, it''s probably best that you''re not paying too much attention.

But meeting once a year or so with a financial adviser to talk things over might be smart.

But you''ll get into trouble if you try to gauge the market''s ups and downs on your own and you definitely shouldn''t sell right when the market tanks.

 

[shel]

Investing is not that hard. Learn to take charge of your finances, because no one is going to care for your money as much as you. You do NOT need a stockbroker. They get paid whether you buy or sell stocks, and if your portfolio happens to suffer, well at least you''ve sent their children to college.

Read this for motivation:

http://www.diehards.org/forum/viewtopic.php?t=6716

It''s the 12 pillars of wisdom for investing and was written by the Vanguard founder, John Bogle.

The basic strategy is to buy-and-hold and diversify by buying into index funds that track 1) the total US market and 2) international stocks. The split is up to you, but I advocate 70% US, 30% international. (The more sophisticated investors will also invest in TIPS, bond funds, etc.)

If you want to read an informative, entertaining, and easy-to-digest book about money, I highly recommend Suze Orman''s Women & Money.

 

[Regular Guy]

Shel, Ellen, IG, all,

Shel, I'm a relative Boglehead. With exception. I used to think it was worth trying to sweep more into the analysis, and did make efforts to read the annual "Best Buys" from Forbes. As a result, for example, I did include like Dodge & Cox, and am happy for it. But...I've gotten a little irresponsible over the years, I think Forbes has realized their 10 year tracking isn't all that...and I do more or less think that...unless you've got a better idea....which I'll always allow, including Ellen, and that she DOES have a wunderkind...I think you need to start with science first.

I'll try to read the 12 points more closely soon. Vanguard really is a particularly unique institution. As the markets came together, I think we're particularly lucky for its existence. You know, I think it's member owned, to boot. For those in education, you can likewise make similar headway with TIAA - CREF.

Yesterday, I did go to Vanguard.com, and tried to look for a helpful article...but I think you've as well nailed it, Shel. Am I worried. Well, sure. And unfortunately...

Date: 1/30/2008 5:45:20 PM
Author: Independent Gal
Starset, unless you are 50 ...

...actually, I am that guy. I do need to reduce my penetration in stocks. But...based on a recent read, and the expecation of 90s being not so wacky to plan for...I'm not feeling I'm just way too late.

Consider investing ideas a triangle...like the old food pyramid. Review the basic science of indexing, as you reviewed nicely in your piece Shel. Beyond that...I'd say...it's reasonable to look for exceptions on top of that. That is...I don't begrudge someone that does understand they do have information that can see beyond what others can. But...I'd like to know they know what I know about the basics of the science of investing, first.

This guy years ago, Entin was his name...tried to talk out of both sides of his mouth. He taught the basics of investing as a community education course. He was a broker. He taught...that you cannot beat the market. That a managed fund was not, scientifically worth the management fees. Also, however, he allowed that there may be reasons you would want to work with him anyway. You were allowed to make your own conclusions. Note...brokers will either work exclusively with managed funds, from which they get their commission...or they are fee only...and may be the advisers discussed here. These investment advisors (look up no load financial advisor for the association of them) may indeed end up working through Vanguard alone, etc. but just charge you a fee for your work with them. If the latter...make sure it is an hourly fee, and not by the dollar amount.

 

[shel]

Nice to meet a fellow Boglehead, Ira.

I try to beat the market too and buy individual stocks, but it''s just a game and I make it a point to play the market with dispensable funds. (My core investments are in index funds.)

Paradoxically, good companies often make for bad stocks and bad companies make for good stocks. Why? The bad companies that do survive see their stock prices skyrocket. In the meantime, the good companies do well (as expected) and their stock prices increase modestly. So one way to beat the stock market is to pick the down-on-their-luck, risky companies that eventually prosper--buy low, sell high. Therein lies the problem with this strategy. No one, and certainly not the stockbrokers, can prognosticate a company''s future on a consistent basis. And if they could see the future, why would they share their secret with you? Why not just stay silent and make a killing in the market? Witness that 80% of mutual fund managers underperform the market indices, and the 20% that do beat the index are often the ones that get trounced by the market in the following period. In other words, those managers were lucky, no skill involved. As Niels Bohr once said, "Prediction is very difficult, especially about the future."

That said, there is a way to diversify into high-risk companies: buy into an index fund that follows the so-called "value" stocks (ironically, value equates with risky companies that most investors shun). It has been shown that value stocks, given enough time, usually produce a higher rate of return than the high-quality "growth" stocks. (Don''t get me wrong. I''m not saying that value stocks should make up the core of your portfolio.)

I leave you with this principle: stocks in general are high-risk, but for assuming all that risk, you are rewarded with high returns. One great truth in the world of finance is: without risk, there are no returns. If a financial advisor tells you that he can guarantee high returns for little risk, run the other way. There is no such thing. The good news is that the risk of the stock market is mitigated over time. It''s been shown that stocks usually outperform other investment vehicles like bonds, CD''s, high-interest savings, and real estate. Just buy and hold your low-cost index funds and let them work their compounding magic over 20+ years.

 

[Independent Gal]

Shel that''s not quite true. You can get returns with no risk. It''s called a savings account. It''s just that the returns are low. I think my Orange acct. is under 4% at this point. Phooey. But everyone needs a little liquid in their portfolio, and I like my liquid a nice juicy orange.

 

[shel]

Date: 1/31/2008 7:31:49 PM
Author: Independent Gal
Shel that's not quite true. You can get returns with no risk. It's called a savings account. It's just that the returns are low. I think my Orange acct. is under 4% at this point. Phooey. But everyone needs a little liquid in their portfolio, and I like my liquid a nice juicy orange.

Agreed. But in a way, the ING Direct savings accounts offer no return after inflation is figured in. And inflation is right around 3-4%... With the Fed rate cuts of late, that 4% interest will go lower.

Savings are important, of course. You do need liquidity in case of emergency (illness, get laid off, etc.), and it's a good idea to keep enough money in savings to last you about 6 months, preferably more.

 

[Octavia]

When I was working, I managed my retirement funds myself. When I left my job to go back to school, I decided that I didn''t want to deal with it and put it into a Vanguard Target Fund. I was doing a lot better for myself, but that was also when the market was better...and it''s nice not to have to worry about it myself. I''m young, and hopeful that the market will go back up in the next couple years. Either way, I''m glad that my money is in a professionally-managed account right now, because I don''t have the time or the know-how to manage a portfolio long-term. But if I was still managing my own money, I don''t think I''d change things too much from how I invested before because it was pretty diversified. Can you talk to someone at the company where you''re invested right now, and see if they have any tips? Our people were always good about meeting with us when we had questions.

 

[Independent Gal]

Shel Inflation averaged over 2007 was 2.85%, and I earned about 4.5% on my savings. So, not much of a return, but better than nothing!

It's stupid to leave more money in a savings account like that than you have to, but it's stupider not to have emergency funds in case, well, of an emergency! I've always thought 6 months was a little much. I have what I need to get along for 3 months. I have full confidence that I could find a way to earn SOMETHING before that ran out - and then there's all the equity in my home if worse really came to worse, so the lost returns / risk ratio on 6 months salary doesn't play out for me. But everyone has to decide that for their own paritcular circumstances of course. Good to have some liquid on hand.

 

[shel]

Date: 1/31/2008 8:47:13 PM
Author: Independent Gal
Shel Inflation averaged over 2007 was 2.85%, and I earned about 4.5% on my savings. So, not much of a return, but better than nothing!


It''s stupid to leave more money in a savings account like that than you have to, but it''s stupider not to have emergency funds in case, well, of an emergency! I''ve always thought 6 months was a little much. I have what I need to get along for 3 months. I have full confidence that I could find a way to earn SOMETHING before that ran out - and then there''s all the equity in my home if worse really came to worse, so the lost returns / risk ratio on 6 months salary doesn''t play out for me. But everyone has to decide that for their own paritcular circumstances of course. Good to have some liquid on hand.

Don''t know how accurate MSNBC is, but this article says that inflation in 2007 was 4.1%, "up by largest amount in 17 years." (Gotta love MSNBC''s hype sometimes)

http://www.msnbc.msn.com/id/22681319/

So the ING savings would have generated a little bit of return. Not bad considering that it''s no risk at all (provided you''re not over the FDIC limit).

Yes, to each his/her own regarding how many month''s savings you want to stash away for emergencies. I like 6 months and supplement it with disability insurance.

 

[Independent Gal]

Hi Shel: From that article:
"Outside of food and energy, inflation rose a more moderate 0.2 percent in December. This measure of core inflation rose by 2.4 percent for all of 2007, down slightly from a 2.6 percent increase in 2006."

It was only the consumer price index that rose by 4.1%, which is not a complete measure of inflation.

The 2.85% statistic comes from the US Bureau of Labor Statistics.