Investments?

spookymuffin

I tried searching, but found nothing helpful. Forgive me if it's been done before.

I'm looking for somewhere to throw my money so I won't have to work when I get old. I hear lots of stuff about IRAs, stocks, bonds, mutual funds, tons of stuff, but it doesn't make sense. Wouldn't you just put all your money into the one thing that makes the most? There are too many options out there. I'm looking at putting about $100-$200 a month into investments. Maybe a few bucks here, a few there, maybe all into one pile. I'm looking for something long term that won't screw me with tons of penalties in case of an emergency. Any information would be great.

Hewn

I'm no expert, but I know where you need to start looking at this point.

First you need to find out if your workplace has a 401k package that includes a company match. If they match any percentage of your investment, this is free money. You simply cannot pass up free money. Invest to the cap of the match, if possible, then proceed to look into a Roth IRA.

So now you've either hit the company match or your company doesn't match. Time to look into a Roth IRA. While at first the 401k looks more appealing due to the money going in tax free, in the long run the Roth IRA is the best bet. The money going into the Roth has been taxed before it got to you to invest, thus when you pull it out later you won't get hit with more. Furthermore, most Roth's can be used as emergency savings or for large ticket down payments like on a house. They offer greater flexibility and more return in the long run. There are different kinds of ways to invest in a Roth, but the most common I'd wager is mutual funds. Mutual funds are basically just a collection of stocks that gives you instant diversification of your investments. For a person investing as much as you are, it's a fantastic way to stretch your money across the spectrum rather than needing to hope 1 or 2 stocks are successful.

So what to do from here? Check around with your friends or coworkers if they know of a financial planning adviser they'd recommend. Sit down, have a nice talk with them about your situation and your goals, and they can point you in the correct direction. Don't be pressured into anything, though, remember you're the one in control, and they are there to help you make the right decision for you.

Food?

Find a financial advisor, they'll have you do exactly what you need to.

If you would rather go it on your own, though, start with opening a Roth IRA. From there, it's usually a safe bet to throw that into one of the big mutual funds like the Fortune 500 or whatever they're called. They have a fairly high (and steady) return rate over the years.

Thanatos

You're going to need to talk to a financial adviser to set up a Roth IRA, anyhow.

Keep in mind that money in an IRA or 401(k) doesn't really meet your "accessible in case of emergency" criteria. It'd be a good idea to start by putting a couple thousand dollars into an ING Direct or Washington Mutual Online Savings Account (pulls about 5% interest) for emergency spending, then starting in on a Roth IRA or 401(k).

whuppins

I just spent all Labor Day weekend speaking with some very wise (and very wealthy) people about retirement and general investing, so I kind of have this stuff on the brain at the moment.

Just so people know, as of January 1, 2006, there is such a thing as a Roth 401(k). So, you can make post-tax contributions (possibly with matching) without having to resort to a traditional IRA. To the OP, keep in mind that a 401(k) of any flavor is only possible if your employer sponsors such a plan. If you don't have benefits, or if your employer doesn't offer a 401(k), or if you don't have a job at all, you can't do a 401(k).

Also, keep in mind that "saving for retirement" and "I need to get to the money without penalties" are pretty much mutually exclusive. Even if you manage to swing a post-tax (AKA Roth) retirement plan, the IRS will take a minimum of 10% off the top if you take disbursement before age 60. Also, if your plan is sponsored by your employer, there's probably a vesting period of at least a few years that applies, so the money isn't even yours until you've worked there for, say, two years. More traditional pension plans will penalize you (for example) a flat 10% for early disbursement, plus an additional 5% for each year shy of age 60 you are -- so if you want to take your money at age 42, you'll zero yourself out and get nothing, and that's not even considering taxes! There are a million other examples which may or may not apply to the account you end up establishing, but the simple fact is that if you have these two distinct needs, you're going to need to put your money in two different places.

For retirement, anything post-tax is a winner, and anything that's someone else's money is a winner, period. When you put money into any type of retirement account, you're basically establishing a managed account (as in, some broker somewhere is investing your money for you and you don't really have any control over what securities are invested in) that picks from the same pool of securities that everyone else picks from. Whereas other people who are just giving their money to a broker might make the same $1,000 as you if the fund you both have your money in has a good day, those gains are 100% yours if it's post-tax, whereas the IRS gets its 15-25% share (too lazy to look up capital gains tax info) off the top for the other guy. The point is, at the end of the day, everybody's money is invested in the same stuff (stocks, bonds, etc.) and a post-tax retirement plan will amplify whatever gains come from those investments.

About using other people's money, just a reminder that some employers offer investment plans as an alternative to the traditional pension plans. Many of these plans don't take any money out of your paycheck; they just dictate that your employer pays a certain amount into a similar retirement fund each month. To clarify, this money is contributed by your employer; it doesn't come out of your paycheck -- but often the employer's contribution will be calculated based on a percentage of your pay. So even if this money is steered into stable, low-risk funds that may only get you 2 or 3 percent returns over 10 years, it's still money being made off of someone else's initial investment! You can't go wrong with investing other people's cash. The point is, find out what types of plans, if any, are available to you through your employer and take advantage of any plans where they're making a contribution.

In my case, I was able to get both of the two examples above: A Roth 401(k) that I've put into some moderate funds (average returns are reported at about 9% over 10 years) and an investment plan where my employer contributes an additional 9% of my monthly salary to a slightly more aggressive fund (11% average return, but with a slightly higher associated risk, of course). Remember, an investment fund (a good one, at least) will be diversified among low-cap, mid-cap, and high-cap stocks, bonds of all types, cash, and any number of other securities, possibly in both foreign and domestic markets. It's not like they're putting your entire nest egg into General Motors and hoping that they're up 10% by the time you retire. Anything can happen, but for the most part, these are safe, diversified funds that will give you modest growth over the course of many years.

So, about investments where you can get to your money, a savings account isn't a terrible idea, though I'd be surprised if you could get a savings account with 5% interest without some possibly restricting, er, restrictions. I mean, 10-year CD's don't even get you 5% these days.

Stocks are an option, but that's kind of a can of worms that would almost require a thread of its own. The stock market is daunting to a lot of people, but as with any other security, there are more stable, long-term growth stocks, and there are more volatile stocks that may make you (or lose you) $1000 overnight. If you want to look for a high-capital, 'safe' investment, you can generally make a decent amount of money as long as you think of it as a long-term investment: the market will fluctuate and there will be days when your initial $10,000 will have lost a quarter of its value, but at some point it will probably bounce back. You have to be patient sometimes, but if you really need to get to your money, you can always just sell off, even if it's at a slight loss.

There are a plethora of other options that you can do with the stock market and it'd be impossible to cover them all here, just as long as you don't try to make fast money by going after a 'hot stock' that you can turn around for quick gains. Plenty of people are able to make money in day trading, but just as many have gotten burned. Even the successful day traders would tell you that it's a roller coaster ride and you shouldn't be messing with savings or retirement money in that arena.

One more thing that I want to mention is municipal bonds. When you buy municipal bonds, you're paid dividends every six months until maturity (which can be anywhere from a few years to 30 and 40 years). They are a very safe investment and are currently paying 5 to 6 percent. Ballpark figures here, of course, but at 5%, after 20 months, you'll have received enough interest to buy another bond of the same type, and now you'll be getting two checks every six months instead of one. I know, putting down $1,000 and getting a check for $50 every six months doesn't sound like much, but keep in mind that this is a super-long-term strategy that can also be used to supplement your income if you so desire. Also, you can sell your bonds just like a stock if you need to get to that money, with a minimum of overhead in fees or penalties.

Above all, talk to a financial planner. Tell them what kind of money you have to work with and what you're trying to accomplish. The good ones make money by making their clients money, and you should be able to get some sound advice there. Some may give you charts and figures showing how great this fund or that mid-cap stock is, but keep in mind that it's their job to make all their company's funds look attractive, and plenty of very successful people don't think that the stock market is anything other than a gamble. This kind of goes back to one of your original questions: There is no one investment that makes the "most money". Anything can happen, there are no guarantees, and the best a lot of people figure you can do is to hedge your bets by diversifying and thinking long-term.

Last but not least, read! Read the financial section of your paper. Find out what the general market trends are, what types of investments are returning more or less than they were 10 years ago. Read the column that the money guy writes every week, and save the articles that you think could help you down the road. You don't have to listen to Jim Cramer and study charts and historical data, just get a general feel for the markets and learn some terms. Honestly, unless you're stupid and put all your eggs into one basket, or take some bad advice from some guy who supposedly has a failsafe plan to make 20% on your investment, it's hard to go wrong if you educate yourself. It's not as big and scary a world out there as it might seem, and you don't have to be some genius hotshot stockbroker to make wise investment choices.

TL;DR: Look for a post-tax (Roth) retirement plan from your work, preferably a 401(k). If none is available, visit a financial institution and set up your own Roth IRA. If your employer will make contributions to a retirement plan that don't come out of your paycheck, sign up, as long as the vesting period isn't ridiculously long. Set some of your income aside and either find a savings account with a high interest rate (if you want to skew toward stability and easy access) or ask a financial planner to help you pick some stable stocks (if you want to skew toward growth). If you like the idea of guaranteed minimum gains paid as dividends that can either be spent or reinvested, with the option of liquidating your holdings at any time, start researching the municipal bond market. Talk to a financial planner, and educate yourself so that you can make your own decisions.

Thanatos

whuppins wrote: »

Remember, an investment fund (a good one, at least) will be diversified among low-cap, mid-cap, and high-cap stocks, bonds of all types, cash, and any number of other securities, possibly in both foreign and domestic markets. It's not like they're putting your entire nest egg into General Motors and hoping that they're up 10% by the time you retire. Anything can happen, but for the most part, these are safe, diversified funds that will give you modest growth over the course of many years.

This is not, in fact, true, especially if you're in your 20s and saving for retirement. The more risk you can afford to take, the more of your money should be in small-cap funds, and when you're in your 20s using money for retirement, pretty much all of your money should be in stocks that deal exclusively in small-capital mutual funds. This isn't to say you buy all of the same stock; mutual funds are well-diversified in their own right. However, over a 20-year period, no well-diversified investment has ever beat the average return on a small-capital portfolio. 14% over the long-term is not an unusual number to be hitting, though it tends to be "20% the first year, -5% the second year, 30% the third year, -15% the fourth, -5% the fifth, 40% the sixth, etc." As you get closer to retirement, you'll want to move the money into more secure, less volatile investments.

So, about investments where you can get to your money, a savings account isn't a terrible idea, though I'd be surprised if you could get a savings account with 5% interest without some possibly restricting, er, restrictions. I mean, 10-year CD's don't even get you 5% these days.

WaMu's online savings account is at 5%. That's not an intro rate, either. Worthwhile CDs will actually return you a bit more than 5% right now; most of the 6-month to 3-year rates I've seen have been 5.25-5.5%, though I don't think the extra interest is worth the lesser flexibility.

whuppins

Thinatos wrote: »

whuppins wrote: »

Remember, an investment fund (a good one, at least) will be diversified among low-cap, mid-cap, and high-cap stocks, bonds of all types, cash, and any number of other securities, possibly in both foreign and domestic markets. It's not like they're putting your entire nest egg into General Motors and hoping that they're up 10% by the time you retire. Anything can happen, but for the most part, these are safe, diversified funds that will give you modest growth over the course of many years.

This is not, in fact, true, especially if you're in your 20s and saving for retirement. The more risk you can afford to take, the more of your money should be in small-cap funds, and when you're in your 20s using money for retirement, pretty much all of your money should be in stocks that deal exclusively in small-capital mutual funds. This isn't to say you buy all of the same stock; mutual funds are well-diversified in their own right. However, over a 20-year period, no well-diversified investment has ever beat the average return on a small-capital portfolio. 14% over the long-term is not an unusual number to be hitting, though it tends to be "20% the first year, -5% the second year, 30% the third year, -15% the fourth, -5% the fifth, 40% the sixth, etc." As you get closer to retirement, you'll want to move the money into more secure, less volatile investments.

You're talking about investing one's own money and what types of investments will give you the most returns. I was talking specifically about the managed accounts that support IRA's/401(k)'s and their stability. I was just explaining to the OP that he shouldn't worry about his employer losing all his retirement money in an IRA, since it's a common concern when people first realize how these accounts work.

Thinatos wrote: »

So, about investments where you can get to your money, a savings account isn't a terrible idea, though I'd be surprised if you could get a savings account with 5% interest without some possibly restricting, er, restrictions. I mean, 10-year CD's don't even get you 5% these days.

WaMu's online savings account is at 5%. That's not an intro rate, either. Worthwhile CDs will actually return you a bit more than 5% right now; most of the 6-month to 3-year rates I've seen have been 5.25-5.5%, though I don't think the extra interest is worth the lesser flexibility.

About the savings account, you have to maintain a minimum daily balance and also open a checking account with them to avoid all applicable fees. It's still a good deal, but as before, I'm just trying to illustrate that there will be some rules and restrictions the OP must be willing to follow if he wants the best rates.

Also, you're quoting the top end of current CD rates. The cream of the crop will get you 5.2 or so, but most of them hover between 4 and 5. I'm not really disagreeing with you; the worthwhile ones will get you over five percent, it's just that the worthwhile ones are getting harder and harder to find these days.

SageinaRage

I just want to jump in here and say that www.fool.com is a good investing resource. Lots and lots of investment advice, analysis, all that jazz. Some of it costs money, but there's a lot of free content.

Gdiguy

whuppins wrote: »

Thinatos wrote: »

whuppins wrote: »

Remember, an investment fund (a good one, at least) will be diversified among low-cap, mid-cap, and high-cap stocks, bonds of all types, cash, and any number of other securities, possibly in both foreign and domestic markets. It's not like they're putting your entire nest egg into General Motors and hoping that they're up 10% by the time you retire. Anything can happen, but for the most part, these are safe, diversified funds that will give you modest growth over the course of many years.

This is not, in fact, true, especially if you're in your 20s and saving for retirement. The more risk you can afford to take, the more of your money should be in small-cap funds, and when you're in your 20s using money for retirement, pretty much all of your money should be in stocks that deal exclusively in small-capital mutual funds. This isn't to say you buy all of the same stock; mutual funds are well-diversified in their own right. However, over a 20-year period, no well-diversified investment has ever beat the average return on a small-capital portfolio. 14% over the long-term is not an unusual number to be hitting, though it tends to be "20% the first year, -5% the second year, 30% the third year, -15% the fourth, -5% the fifth, 40% the sixth, etc." As you get closer to retirement, you'll want to move the money into more secure, less volatile investments.

You're talking about investing one's own money and what types of investments will give you the most returns. I was talking specifically about the managed accounts that support IRA's/401(k)'s and their stability. I was just explaining to the OP that he shouldn't worry about his employer losing all his retirement money in an IRA, since it's a common concern when people first realize how these accounts work.

Thinatos wrote: »

So, about investments where you can get to your money, a savings account isn't a terrible idea, though I'd be surprised if you could get a savings account with 5% interest without some possibly restricting, er, restrictions. I mean, 10-year CD's don't even get you 5% these days.

WaMu's online savings account is at 5%. That's not an intro rate, either. Worthwhile CDs will actually return you a bit more than 5% right now; most of the 6-month to 3-year rates I've seen have been 5.25-5.5%, though I don't think the extra interest is worth the lesser flexibility.

About the savings account, you have to maintain a minimum daily balance and also open a checking account with them to avoid all applicable fees. It's still a good deal, but as before, I'm just trying to illustrate that there will be some rules and restrictions the OP must be willing to follow if he wants the best rates.

Also, you're quoting the top end of current CD rates. The cream of the crop will get you 5.2 or so, but most of them hover between 4 and 5. I'm not really disagreeing with you; the worthwhile ones will get you over five percent, it's just that the worthwhile ones are getting harder and harder to find these days.

The savings account thing is definitely true, I have an HSBC online savings account that's 5% with (as far as I've had) no fees or required other crap. It's all-online, so if you're expecting to walk into a bank and chat with someone you're out of luck, but it's 5% with no restrictions, and I'm pretty sure ING and WaMu's equivalent online ones are the same.

Djeet

Direct Investing - Dividend Reinvestment Programs. these can be used to build share ownership over time. but the basket of stocks you choose to invest in will determine if you are diversified.

if payroll deductions are made into an IRA or 401K then elect into several index funds, perhaps the employee retirement plan has good access to funds (e.g. Fidelity Contra fund would be nice to have, but it's closed to new investors, however an employer-sponsored retirement plan may be able to get access for participants).

if retirement is funded with after tax dollars then consider a roth IRA. funds put into any kind of IRA has restrictions and there are heavy penalties for violation. there are exceptions for a serious medical expense or a first time home purchase. or put it into a "non-tax-advantaged" account with a financial institution that good online usability, or low managment fees.

whuppins

Djeet wrote: »

if retirement is funded with after tax dollars then consider a roth IRA. funds put into any kind of IRA has restrictions and there are heavy penalties for violation. there are exceptions for a serious medical expense or a first time home purchase. or put it into a "non-tax-advantaged" account with a financial institution that good online usability, or low managment fees.

To clarify, a Roth IRA will allow withdrawals for first home purchases, but a Roth 401(k) won't.