Problem #5 - Investments
If you have been following me on this blog lately, you might think that I'm against the idea of 401(k) plans. Not so! Let me state this clearly. I LOVE 401(k) plans as a source of saving for retirement. EVERYONE should be participating in a 401(k).
However, there are many potential hazards that you must be aware of in your 401(k) plans.
So my purpose here has been acting as a 'caddy' and letting you know where the bunkers & water hazards are at so we can avoid them. And I certainly want you all to finish the 'course'.
Today, we will look at the problem which most investors find it easiest to point fingers at -
Investments.
How many investment choices are offered in your plan? And how do you choose which ones are right for you? How long do you stay with invesments in your plan before you look for
"greener grass"?
A survey done by Watson Wyatt in January 2008, (Watson Wyatt is the trusted business partner to the world’s leading organizations on people and financial issues)
http://www.watsonwyatt.com/us/pubs/insider/showarticle.asp?ArticleID=18489
gives us this information.
* 30% of all participants have NO equity (stock mutual funds) in their plans.
* 20% of investors at least 45 and older have stopped contributing.
* Too many people are invested heavily in their company stock, some who have at least
50% or more of their plans in company stock.
(Company stock is an issue I will look at in further detail in my next article.)
Dave Ramsey likes to ask this question - If you were CFO of your own finances, would you fire you? Well, the reality is that YES YOU ARE the CFO of your finances & retirement savings!
"Investors Behaving Badly: An Analysis of Investor Trading Patterns in Mutual Funds" is a 2001 article that shows people are holding their funds for shorter and shorter time periods, as short as 2.9 years, and probably even less time these days after all of the challenges recently.
http://spwfe.fpanet.org:10005/public/Unclassified%20Records/FPA%20Journal%20November%202001%20-%20Investors%20Behaving%20Badly_%20An%20Analysis%20of%20Investor%20Trading%20Patt.pdf
This is like moving your boat all around the pond in search of the 'perfect' fishing spot. It usually just scares the fish! This also explains why people finally give up and put everything into "safe" money market funds, because as one gentleman puts it. "At least I'm not losing nothing."
Wayne Gretzky said (during his playing days), "I skate to where the puck is going, not where it has been." How do we know where the 'puck' is going? We don't. That would mean market timing, and as Warren Buffett would say, "I'm not smart enough for that."
How many funds should an employer's plan offer? Anywhere from about 12 - 20 is a good range. Your personal plan should meet these objectives.
* Look for funds which have 10 year (or longer) histories. Established funds give a much
clearer long term picture of what to expect.
* Pay attention to fund expenses. The higher the expenses, the more it can hurt your return.
* Treat the plan as if you are at a "buffet". The plan offers a menu of choices, and it is best to
have somthing from all of the food groups. Just as you wouldn't eat only the fried chicken,
you also need fixed income, dividend paying funds (large companies), medium sized
companies, small companies, and international.
* Meet with an advisor to help you find the mix you should have and how much to put in.
Many good advisors (including myself) offer to do this at no charge to you. Let him or her
help you put a roadmap together which will help you get to (and through) retirement
safely.
Next we will examine the issue of company stock in 401(k) plans. For more information or to contact me, please visit http://www.helpmy401k.us/. You can also follow me on Twitter at
http://twitter.com/DeanVoelker
Showing posts with label yield. Show all posts
Showing posts with label yield. Show all posts
Monday, June 1, 2009
Wednesday, May 13, 2009
Where You Put Your Money Does Matter
According to Dave Ramsey (www.daveramsey.com), "A Simple one-time investment of $1000 could make a huge difference at retirement...if you know how and where to invest it.
Did you know that 84% of teens have some money saved, with the average being $1044. (I remember being in this position once as a high school student, working & saving. Boy, do I wish someone had shared this with me at that time! $1000 was worth more in 1982 than today!)
Dave Ramsey has a simple chart with some interesting facts.
http://www.daveramsey.com/school/media/pdf/sample_chapter.pdf (Page 9)
He points out on his chart that he learned from a Charles Schwab survey that 81% of teens say that it is important to have a lot of money in their lives. However only 22% say they know how to invest money to make it grow. And only 24% believe that since they are you, saving money now is not that important.
The chart shows what can happen to $1000 over a 40 year period (Age 25 -65) at different rates of return 6%, 12%, and 18% (with no new money added). Because of the compounding effect of interest, a snowball effect is created.
At 6%, $1000 will grow to $10,285 in 40 years.
At 12%, $1000 will grow to $93,050 in 40 years.
At 18%, $1000 will grow to $750,378 in 40 years.
There are some well-established mutual funds which have averaged 12%per year over a 40 year or longer time period. That does NOT mean that the fund will perform at 12% every year. 12% is merely an average.
As Dave often reminds us, saving & building wealth requires discipline and it is a marathon, not a sprint. Plant the seed and let it grow.
Are there any funds which average 18%? None that I can think of which have consistently perform at that level long term - However, think of your credit card lenders, and other forms of revolving credit. Can you see how they make money?
Remember the compound snowball is either working FOR you or AGAINST you. With all of the recent news about credit card lenders gouging, http://njmg.typepad.com/moneyblog/2009/05/credit-card-gouging.html
isn't this a great time to cut up the cards and begin to take control of your finances again?
Do you know a teen who has saved some money?
For more information, please contact me at www.deanvoelker.com.
Did you know that 84% of teens have some money saved, with the average being $1044. (I remember being in this position once as a high school student, working & saving. Boy, do I wish someone had shared this with me at that time! $1000 was worth more in 1982 than today!)
Dave Ramsey has a simple chart with some interesting facts.
http://www.daveramsey.com/school/media/pdf/sample_chapter.pdf (Page 9)
He points out on his chart that he learned from a Charles Schwab survey that 81% of teens say that it is important to have a lot of money in their lives. However only 22% say they know how to invest money to make it grow. And only 24% believe that since they are you, saving money now is not that important.
The chart shows what can happen to $1000 over a 40 year period (Age 25 -65) at different rates of return 6%, 12%, and 18% (with no new money added). Because of the compounding effect of interest, a snowball effect is created.
At 6%, $1000 will grow to $10,285 in 40 years.
At 12%, $1000 will grow to $93,050 in 40 years.
At 18%, $1000 will grow to $750,378 in 40 years.
There are some well-established mutual funds which have averaged 12%per year over a 40 year or longer time period. That does NOT mean that the fund will perform at 12% every year. 12% is merely an average.
As Dave often reminds us, saving & building wealth requires discipline and it is a marathon, not a sprint. Plant the seed and let it grow.
Are there any funds which average 18%? None that I can think of which have consistently perform at that level long term - However, think of your credit card lenders, and other forms of revolving credit. Can you see how they make money?
Remember the compound snowball is either working FOR you or AGAINST you. With all of the recent news about credit card lenders gouging, http://njmg.typepad.com/moneyblog/2009/05/credit-card-gouging.html
isn't this a great time to cut up the cards and begin to take control of your finances again?
Do you know a teen who has saved some money?
For more information, please contact me at www.deanvoelker.com.
Wednesday, April 15, 2009
What Else Do You Know About Munis?
Over the past few days, I have been promoting the value of municipal bonds. Right now, they offer a better bargain for your long term savings than CDs.
One of the things I dislike about CDs is that they are really just a holding place for your money.
Money falls into 2 main categories -
*Liquid Money - Money that can be used now or held in an emergency fund (about $10,000
or 3 -6 months of expenses).
*Invested Money - Money that is invested that you don't have an immediate need for.
Looking at those two groups, CDs are kind of a "tweener" - your money seems tied up, so you
can't get to it. Also, the rates are so low currently that it really isn't invested either. Talk about being caught between a "rock" and a "hard place"!
CD yields are so poor, that you may even consider the idea of early withdrawal to take advantage of better (and tax FREE) yields with munis. The penalty usually is forfeiting some interest (WHAT interest??), as much as 6 months.
If you had $10000 in a CD, paying 2% ($200/year, taxable), you would lose $100 to the bank. If you re-invested it in a 5% muni bond, you would earn $500 on the same amount, and not pay federal taxes (perhaps even no state or local taxes) on the interest.
You do the math.
Here are a couple of other articles which support the idea of using muni bonds.
MARKET WATCH - "Muni Yields Aren't Puny"
http://www.marketwatch.com/news/story/bargains-abound-tax-free-muni-bonds/story.aspx?guid=%7B2A55A5F2-2F94-4181-A51A-7FFA12E1A9D2%7D
KIPLINGERS - "Steals In Tax-Free Bonds"
http://www.kiplinger.com/magazine/archives/2008/05/kinnel.html
Warren Buffett likes munis too, and you could do a lot worse than listening to Mr. Buffett!
For more information on municipal bonds, or any other savings ideas, please contact me at
www.deanvoelker.com .
One of the things I dislike about CDs is that they are really just a holding place for your money.
Money falls into 2 main categories -
*Liquid Money - Money that can be used now or held in an emergency fund (about $10,000
or 3 -6 months of expenses).
*Invested Money - Money that is invested that you don't have an immediate need for.
Looking at those two groups, CDs are kind of a "tweener" - your money seems tied up, so you
can't get to it. Also, the rates are so low currently that it really isn't invested either. Talk about being caught between a "rock" and a "hard place"!
CD yields are so poor, that you may even consider the idea of early withdrawal to take advantage of better (and tax FREE) yields with munis. The penalty usually is forfeiting some interest (WHAT interest??), as much as 6 months.
If you had $10000 in a CD, paying 2% ($200/year, taxable), you would lose $100 to the bank. If you re-invested it in a 5% muni bond, you would earn $500 on the same amount, and not pay federal taxes (perhaps even no state or local taxes) on the interest.
You do the math.
Here are a couple of other articles which support the idea of using muni bonds.
MARKET WATCH - "Muni Yields Aren't Puny"
http://www.marketwatch.com/news/story/bargains-abound-tax-free-muni-bonds/story.aspx?guid=%7B2A55A5F2-2F94-4181-A51A-7FFA12E1A9D2%7D
KIPLINGERS - "Steals In Tax-Free Bonds"
http://www.kiplinger.com/magazine/archives/2008/05/kinnel.html
Warren Buffett likes munis too, and you could do a lot worse than listening to Mr. Buffett!
For more information on municipal bonds, or any other savings ideas, please contact me at
www.deanvoelker.com .
Tuesday, April 14, 2009
Single Bonds or Mutual Funds?
What's the best way to buy municipal bonds? Should I buy single bonds or mutual funds?
Like most decisions, there are pros & cons with both methods. You should talk with you advisor about which method is right for you - possibly a mix of both.
One of the advantages of owning a single bond is that you have a fixed rate of return - you know exactly what you are getting. For example, on a $100,000 muni bond paying a 5% coupon, you will get $5000 per year in interest income. Because you don't have to pay federal taxes and you may not need to pay state taxes, that may be similar to getting 7% or more, depending on your tax bracket.
Interest from a single bond is usually paid ever; 6 months, so you would get $2500 with each installment. You may also ask your advisor to structure your bonds in such a way that you are able to receive income every month.
Another advantage it that while your advisor does get paid, his or her commission is built into the price of the bond when you buy it. This is a common question I am asked.
Think of buying soup at your local grocery store. The grocer buys soup in large bulk quantities, with all brand names & flavors. Because they buy so much soup at once, they can buy at a wholesale price. When a customer buys soup, they pay a retail price and may only buy 1 can, or a few cans at a time.
Bonds work the same way. If you buy a bond worth $10000, you will get $10000 when it comes due. Along the way, you have gotten a great tax free rate of return every 6 months. If you are fortunate enough to be working with a great advisor, you may have even been able to buy the bond at a discount, so that when it does come due, you even had a small gain. (Woo-Hoo!)
Its great when everyone wins!
One more thing about a single bond - You know exactly which project you are supporting.
(Example - St. Joseph Regional Medical Center Bond)
A big disadvantage is that a single bond is not diversified. This is where mutual funds are better. Going back to the "soup" example, a mutual fund allows you to carry all the "flavors" in one investment, which is managed by professionals at a mutual fund family.
Most bond mutual funds also pay interest monthly, because they own hundreds of bonds. This can be helpful if you are counting on monthly income from your investments, and a huge advantage over CDs.
Also, it is much easier to invest a smaller amount. For those who don't have the 5000 or 10000 minimums required by many single bonds, you can establish a mutual fund for as little as 1000.
Once you have a fund, you can add to it or even withdraw money easily.
Sales charges on bond funds purchased through your advisor may be as high as 4.25%, although you may qualify for volume discounts, also known as "breakpoints" if you are able to invest large amounts of money.
For more information on municipal bonds or other investing, please contact me at www.deanvoelker.com
Like most decisions, there are pros & cons with both methods. You should talk with you advisor about which method is right for you - possibly a mix of both.
One of the advantages of owning a single bond is that you have a fixed rate of return - you know exactly what you are getting. For example, on a $100,000 muni bond paying a 5% coupon, you will get $5000 per year in interest income. Because you don't have to pay federal taxes and you may not need to pay state taxes, that may be similar to getting 7% or more, depending on your tax bracket.
Interest from a single bond is usually paid ever; 6 months, so you would get $2500 with each installment. You may also ask your advisor to structure your bonds in such a way that you are able to receive income every month.
Another advantage it that while your advisor does get paid, his or her commission is built into the price of the bond when you buy it. This is a common question I am asked.
Think of buying soup at your local grocery store. The grocer buys soup in large bulk quantities, with all brand names & flavors. Because they buy so much soup at once, they can buy at a wholesale price. When a customer buys soup, they pay a retail price and may only buy 1 can, or a few cans at a time.
Bonds work the same way. If you buy a bond worth $10000, you will get $10000 when it comes due. Along the way, you have gotten a great tax free rate of return every 6 months. If you are fortunate enough to be working with a great advisor, you may have even been able to buy the bond at a discount, so that when it does come due, you even had a small gain. (Woo-Hoo!)
Its great when everyone wins!
One more thing about a single bond - You know exactly which project you are supporting.
(Example - St. Joseph Regional Medical Center Bond)
A big disadvantage is that a single bond is not diversified. This is where mutual funds are better. Going back to the "soup" example, a mutual fund allows you to carry all the "flavors" in one investment, which is managed by professionals at a mutual fund family.
Most bond mutual funds also pay interest monthly, because they own hundreds of bonds. This can be helpful if you are counting on monthly income from your investments, and a huge advantage over CDs.
Also, it is much easier to invest a smaller amount. For those who don't have the 5000 or 10000 minimums required by many single bonds, you can establish a mutual fund for as little as 1000.
Once you have a fund, you can add to it or even withdraw money easily.
Sales charges on bond funds purchased through your advisor may be as high as 4.25%, although you may qualify for volume discounts, also known as "breakpoints" if you are able to invest large amounts of money.
For more information on municipal bonds or other investing, please contact me at www.deanvoelker.com
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