401k's and investing for complete idiots

[Argonne69]

 

Open a savings account, and set aside $100 a month. In 10 months you'll have your $1000 minimum.

 

Are you looking to set up a retirement account, or simply start saving/investing for a rainy day? Retirement funds have the benefit of tax savings now, but you'll be penalized if you pull the money out before retirement (with a small number of exceptions).

 

If you're simply looking to start saving for a "rainy day", there are plenty of low cost mutual funds with low minimums. I got started with TIAA-CREF many years ago. If you sign up for the Automatic Investment Plan, the minimum initial investment is only $100.

 

Really looking for something I can start throwing money I won't miss in now so maybe when I'm older and I can have some wealth accrued. Not really retirement I guess but just a way to ensure I have something for myself later in life

 

Then I'd look at a low cost mutual fund (index fund) with an automatic investment plan. TIAA-CREF is decent, but I'm sure the other funds have similar rules for AIP vs. minimum. I started this way, and have built a decent nest egg over the past 20+ years. Each year I bump up my contribution a bit, and the combination of compounding and increasing deposits builds quickly.

 

As many others have noted, the trick is dollar cost averaging. When the market tanks, don't panic and pull out the funds. The market has always recovered.

[CommerceTiger]

 

Open a savings account, and set aside $100 a month. In 10 months you'll have your $1000 minimum.

 

Are you looking to set up a retirement account, or simply start saving/investing for a rainy day? Retirement funds have the benefit of tax savings now, but you'll be penalized if you pull the money out before retirement (with a small number of exceptions).

 

If you're simply looking to start saving for a "rainy day", there are plenty of low cost mutual funds with low minimums. I got started with TIAA-CREF many years ago. If you sign up for the Automatic Investment Plan, the minimum initial investment is only $100.

 

Really looking for something I can start throwing money I won't miss in now so maybe when I'm older and I can have some wealth accrued. Not really retirement I guess but just a way to ensure I have something for myself later in life

 

Then I'd look at a low cost mutual fund (index fund) with an automatic investment plan. TIAA-CREF is decent, but I'm sure the other funds have similar rules for AIP vs. minimum. I started this way, and have built a decent nest egg over the past 20+ years. Each year I bump up my contribution a bit, and the combination of compounding and increasing deposits builds quickly.

 

As many others have noted, the trick is dollar cost averaging. When the market tanks, don't panic and pull out the funds. The market has always recovered.

 

Awesome. Thank you so much for your time!

[PixlPutterman]

Love the advice here, thanks gents.

[Lord Helmet]

Great thread. Fascinating stuff. Wife and I both are in the PERS retirement plan, so we have a bit of a head start. We also contribute $$ to a pair of 457 plans (401k without the employer match) large cap fund and small cap fund. Own a few grand in shares of 4 different individual companies. Having said that, I'm trying to teach myself about analyzing stocks and the technical aspects of good buy/selling signals. Want to learn more about this stuff.

[Bob Cat]

Near HS graduation, my dad showed me the graph that compares compounding interest over a long time vs a shorter period.

Can someone post this graph to impress its importance upon the new guys?

[Argonne69]

Near HS graduation, my dad showed me the graph that compares compounding interest over a long time vs a shorter period.

Can someone post this graph to impress its importance upon the new guys?

 

Years ago I read a short piece that said that a person who started saving at age 24, and quit at age 35, would have more money for retirement than someone who started saving at 35 and continued until retirement. That's the power of compounding in those early years.

 

For example, investing $100 a month at 6% interest for 11 years yields $18,545. Without additional contributions, the amount grows to $106,513 at age 65. The person who invests $100 a month at 6% interest starting at age 35 and continues to age 65 will have $97,926.

[Lord Helmet]

Each of my 3 kids were given Mutual Fund shares at birth, placed into a custodial acct. My oldest is 21 now, college grad and working FT, so we rolled that to a Roth IRA and she is making regular contributions. I sat down with her and showed her the magic of compounding interest and what she could be sitting on at age 65. She was speechless. Its hard to think that far ahead when you are so young, I get it. But it really is amazballs when you stop and think. And since she is working FT and has a 401k, we sat down and planned for that already.

[somaplr]

If you are 31, expect to work another 35 years. If you do, I recommend you invest aggressively until you are within 5 years of retirement, then reconsider. If you want the greatest gains, invest in individual securities. However, if you want to invest aggressively, you need the stomach to watch your portfolio decrease by up to 50% without you jumping out a 60th floor window. You also need the fortitude to leave things alone. One of the biggest mistakes people make in a market downturn is pulling money out. Once you sell off, you have lost that money. You haven't lost any money until you sell something below your cost. Then you've lost it for good. Time is on your side in the market. It always bounces back. You might put a little aside in your 401(k) to buy and sell individual securities. Start small until you get a feel for it. Then, depending on your risk tolerance, you may choose to go deeper. Just take your time and do a little research into stocks you might want to buy. Diversity in investments is important. Don't put all your money in the same place. Good Luck.

 

"greatest gains in individual securities..."

 

This couldn't be further from the truth - just buy index funds man, wake up in 20 years.

[Lord Helmet]

If you are 31, expect to work another 35 years. If you do, I recommend you invest aggressively until you are within 5 years of retirement, then reconsider. If you want the greatest gains, invest in individual securities. However, if you want to invest aggressively, you need the stomach to watch your portfolio decrease by up to 50% without you jumping out a 60th floor window. You also need the fortitude to leave things alone. One of the biggest mistakes people make in a market downturn is pulling money out. Once you sell off, you have lost that money. You haven't lost any money until you sell something below your cost. Then you've lost it for good. Time is on your side in the market. It always bounces back. You might put a little aside in your 401(k) to buy and sell individual securities. Start small until you get a feel for it. Then, depending on your risk tolerance, you may choose to go deeper. Just take your time and do a little research into stocks you might want to buy. Diversity in investments is important. Don't put all your money in the same place. Good Luck.

 

"greatest gains in individual securities..."

 

This couldn't be further from the truth - just buy index funds man, wake up in 20 years.

 

Speaking in regards to long term investing I assume?

[somaplr]

If you are 31, expect to work another 35 years. If you do, I recommend you invest aggressively until you are within 5 years of retirement, then reconsider. If you want the greatest gains, invest in individual securities. However, if you want to invest aggressively, you need the stomach to watch your portfolio decrease by up to 50% without you jumping out a 60th floor window. You also need the fortitude to leave things alone. One of the biggest mistakes people make in a market downturn is pulling money out. Once you sell off, you have lost that money. You haven't lost any money until you sell something below your cost. Then you've lost it for good. Time is on your side in the market. It always bounces back. You might put a little aside in your 401(k) to buy and sell individual securities. Start small until you get a feel for it. Then, depending on your risk tolerance, you may choose to go deeper. Just take your time and do a little research into stocks you might want to buy. Diversity in investments is important. Don't put all your money in the same place. Good Luck.

 

"greatest gains in individual securities..."

 

This couldn't be further from the truth - just buy index funds man, wake up in 20 years.

 

Speaking in regards to long term investing I assume?

 

Both short and long term

 

Retail stock pickers massively underperform their indices, especially over time

[Argonne69]

Near HS graduation, my dad showed me the graph that compares compounding interest over a long time vs a shorter period.

Can someone post this graph to impress its importance upon the new guys?

 

Google "Compound Interest Graph". 'Plenty of interesting results. This result is one of the most startling. A ten year head start in saving for retirement can double your savings.

 

[cdnglf]

Near HS graduation, my dad showed me the graph that compares compounding interest over a long time vs a shorter period.

Can someone post this graph to impress its importance upon the new guys?

 

Google "Compound Interest Graph". 'Plenty of interesting results. This result is one of the most startling. A ten year head start in saving for retirement can double your savings.

 

 

If you assume an annual rate of return of 7%.

I believe its called the "Rule of 72".

[somaplr]

There is a lot of truth to that graph but it's quite misleading - all things being equal - but it isn't as impactful as it may appear starting really young just FYI (although Im extremely for starting ASAP). If you are saving 10% of your income consistently throughout, that gap narrows by quite a big margin as you age you generally make a lot more money over time and from a percentage basis, that gap would narrow pretty fast. If you're saving the same dollars at 55 that you are at 25 you're most likely in big trouble. That graph is assuming you save the same exact money from day 1 till date X.

[Lord Helmet]

There is a lot of truth to that graph but it's quite misleading - all things being equal - but it isn't as impactful as it may appear starting really young just FYI (although Im extremely for starting ASAP). If you are saving 10% of your income consistently throughout, that gap narrows by quite a big margin as you age you generally make a lot more money over time and from a percentage basis, that gap would narrow pretty fast. If you're saving the same dollars at 55 that you are at 25 you're most likely in big trouble. That graph is assuming you save the same exact money from day 1 till date X.

 

Mind diving into that a bit more? If both parties save the same amount of money over the course of the 40 years, but one starts at 25 and the other at 35, wont the gap between the lines be the same? I do not follow how it could narrow if they are both saving the same dollars.

[Argonne69]

The graph appears to be roughly based on a monthly savings of $150, and a 7% rate of return. Yes, if you contribute more as you age the gap will shrink, but it will never close. The S&P 500 has returned an average of 10% since its inception in 1928, so a 7% annual return is not outside the realm of possibilities.

 

The rule of 72 is a quick way to determine the time it will take for an investment to double with no additional deposits. By dividing 72 by the annual rate of return you'll get a rough estimate in years. For example, a $1000 investment at 7% interest will take roughly 10 years to double.

[Argonne69]

There is a lot of truth to that graph but it's quite misleading - all things being equal - but it isn't as impactful as it may appear starting really young just FYI (although Im extremely for starting ASAP). If you are saving 10% of your income consistently throughout, that gap narrows by quite a big margin as you age you generally make a lot more money over time and from a percentage basis, that gap would narrow pretty fast. If you're saving the same dollars at 55 that you are at 25 you're most likely in big trouble. That graph is assuming you save the same exact money from day 1 till date X.

 

Mind diving into that a bit more? If both parties save the same amount of money over the course of the 40 years, but one starts at 25 and the other at 35, wont the gap between the lines be the same? I do not follow how it could narrow if they are both saving the same dollars.

 

somaplr is saying that one generally sets aside a percentage of their income each month for retirement, rather than a fixed dollar amount. As your pay increases through your career, you generally put more aside each year. The lower set aside per month in the early years loses a bit of its advantage in this scenario. I'll try to see if I can find a graph that includes an annual increase in savings.

 

Edit: a person who saves $150 a month at 7% for 40 years, and increases the amount by 2% annually will have $476,837 at age 65. If the person waits until they are 35, and puts aside $182 a month at 7% for 30 years, with an increase of 2% a year, will have $262,891 at age 65.

 

Thus, the gap actually increases, not decreases. In the non-adjusted scenario the gap is $200,00 at age 65. In the adjusted scenario, the gap is $213,946.

 

Increase your savings by 3% each year, and the totals are $546,841 vs. 293,724 (or a $253,117 difference).

 

Now, if you remove the annual increase, but start at 35 years old with a higher amount per month to adjust for salary increase, i.e. $182, or 2% annual raise, then the gap does shrink: $372k vs. 215k ($157k difference).

 

In summary, start saving early, and increase your monthly/annual set aside by a small percentage each year, and you'll grow a decent nest egg. I've had small cost of living raises each year, so the fixed percentage I set aside each paycheck increases with each raise. On top of that, I've increased my percentage slowing over the years, from the minimum necessary to receive full employer 401k matching when I got my first job, to 20% today.

[cdnglf]

There is a lot of truth to that graph but it's quite misleading - all things being equal - but it isn't as impactful as it may appear starting really young just FYI (although Im extremely for starting ASAP). If you are saving 10% of your income consistently throughout, that gap narrows by quite a big margin as you age you generally make a lot more money over time and from a percentage basis, that gap would narrow pretty fast. If you're saving the same dollars at 55 that you are at 25 you're most likely in big trouble. That graph is assuming you save the same exact money from day 1 till date X.

 

Mind diving into that a bit more? If both parties save the same amount of money over the course of the 40 years, but one starts at 25 and the other at 35, wont the gap between the lines be the same? I do not follow how it could narrow if they are both saving the same dollars.

 

somaplr is saying that one generally sets aside a percentage of their income each month for retirement, rather than a fixed dollar amount. As your pay increases through your career, you generally put more aside each year. The lower set aside per month in the early years loses a bit of its advantage in this scenario. I'll try to see if I can find a graph that includes an annual increase in savings.

 

I think this is it. Plus there's also inflation to consider.

[somaplr]

Sorry I typed that on my phone - basically starting early your getting the net benefit of the $40,000 compounded until retirement in the example starting earlier rather than late (using a linear math model on a financial calculator - real life returns are usually quite different due to the matter of sequence of returns. You can average 7% in two different decades each starting with $100,000 but you'll end of with different money amounts, etc). All things being equal, you would end up if both increased annually starting at both as the gap being relatively about what it shows. But it's real life, and national savings average into Qualified accounts increase dramatically late in life and isn't constant. The monetary amount doesn't narrow, but the graph does if that makes sense. In it's most simple form, 25 yr olds don't save 10% of their income and increase it - that happens in a much later stage in life. But yeah in a controlled vacuum it works. But yes, save early.

[Bob Cat]

Near HS graduation, my dad showed me the graph that compares compounding interest over a long time vs a shorter period.

Can someone post this graph to impress its importance upon the new guys?

 

Google "Compound Interest Graph". 'Plenty of interesting results. This result is one of the most startling. A ten year head start in saving for retirement can double your savings.

 

Thanks for posting that, Argonne.

 

Young people...

1) Start saving ASAP (I'm not going to tell you where to put it - I'm not a fiduciary).

2) If your employer offers a 401k, find a way to invest the MAX percentage they will match. Beans and rice, baby!

3) Setup electronically and automatically, you will soon forget about and learn to live w/o these funds.

[LouieLouie]

My wife and I are trying to save up for a down payment on a new house. We have a small nest egg in savings but obviously <1% interest rates aren't helping. Is there a better place to save up for the next 3 years that isn't a complete gamble in the stock market?

So far I have my eye on just putting the money in SPY once it drops from it's super high right now, but i don't really have any better ideas.

[scomac2002]

My wife and I are trying to save up for a down payment on a new house. We have a small nest egg in savings but obviously <1% interest rates aren't helping. Is there a better place to save up for the next 3 years that isn't a complete gamble in the stock market?

So far I have my eye on just putting the money in SPY once it drops from it's super high right now, but i don't really have any better ideas.

 

The thing is that they don't ring a bell to tell you when to put your money in. Once you're in there's no guarantee that it will quit going down before you need to take the money out for the house purchase. That's why they tell you that unless your investment horizon is ten years, don't take the risk of putting your money in equity markets.

 

Your savings rate is what's going to make the biggest difference to reaching your goal of saving for a down payment, not reaching for a few extra points of yield. For this time frame, return of capital is far more important that return on capital!

[hebron1427]

I have been with my company for coming on 3 years, and will be fully invested in my 401k with them. I have JUST started to poke around in my 401k and opened a BrokerageLink account with Fidelity (also who my employer uses for the 401k).

 

I am not at all looking to become a day or even a week trader. How ever I do want to understand what is going on with my money and be able to look at it a time or two a month and know if I am headed in the right direction.

 

I was planing on putting half of my 401k into an S&P 500 fund and the other half in ONEq, how ever that is just based off of advice from a friend who is doing well with his 401k.

 

Can anyone recommend either a path/plan or maybe some foundational reading?

 

Again just want to be able to just understand at a macro level what is happening with my retirement every few weeks or once a month.

 

Thanks

i read the first 6 answers in this thread and became very troubled by the state of the advice you're getting here.

 

the source for most everything i'm about to say is bogleheads.com . it's the website of people who follow the founder of Vanguard and famous investor John Bogle. Bogle's big shtick was that the cost of investing is what kills portfolios....and he's exactly right.

 

here's what you need to know for your 401k:

 

-INVESTMENT, NOT TRADING: your 401k is not a trading account. daily, weekly, even yearly trading is NOT what it's there for. it's there to put your money in THE RIGHT investment and wait over time.

-DIVERSIFICATION: diversification is key to managing risk. it means investing in "a lot" of stuff, but you can get it by investing in just one fund. more on this in a bit.

-FEES: pay as little as you can.

-COMPOUNDING: compound interest is like magic. i'll get to this in a second. but this is the reason why you keep your money in one place

-EMPLOYER MATCH: it's free money. Maximize it, even if you feel like you really need the money. the employer match is basically the same thing as you being paid more. there's no reason you wouldn't do it.

 

those are the basic principles that you need to know. I'll go into them in more detail below and how you address them.

 

INVESTMENT, NOT TRADING: here's the basic idea of a 401k: the idea is that you're putting money away that will be there when you retire. you won't recognize security in your retirement unless you consistently put away money today. that might be as little as $20 every paycheck, but it makes a HUGE difference over time, especially if you're young. i'll get to that in the compounding phase, but you need to understand that the goal here is to save, not to gamble. IF you want to gamble, your 401k is not for that. neither is your 401k a piggy bank that you'll use when you run low on funds somewhere else. this is basically you buying away the last years of your career. wanna retire at 57 instead of 66? you can do it with a 401k, and it's not as hard as you might think. it just requires absolute dedication to investing, not to trading. Why? trading is risky. look at big stocks, like, say, TSLA. you might lose 15% of the value of hte stock in a day. and while you could have bet on TSLA 5 years ago and made a bunch, past performance is not an indication of future success. TSLA may turn into a dog tomorrow for any of a ridiculous amount of reasons. e.g., everyone was thrilled to invest in ENRON and WorldCom....until it came out that these companies were engaging in massive fraud. if you had bet on that, you could have lost everything. and while it can be fun to play a stock on the way up, it sucks on the way down, and it's baiscally gambling. not only that, but you have to pay for the privilege--in terms of a fee to perform trades on both ends of the transaction. that leads you to basically always being on the losing side of the deal. even if you do what statistically you should do and go 50-50 on your trades, you'll still end up paying for the privilege.

 

DIVERSIFICATION: if you have all your money in one thing, you might knock it out of the park, but chances are you wont. there are many studies out there about active trading...and by far the majority of the active traders on the market fail to outperform the value gains of the S&P500 index. not only that, but active management requires you to pay a manager fees, and so the performance that you're not getting you also have to pay for, which reduces your gains. so this begs the quesiton: why wouldn't you just invest in the s&p 500? someone a long time ago got this idea and went "oh, darn, that would mean that i would have to invest in 500 different stocks. that would be a lot of tracking and management and be basically a full-time job. i wonder if there's a way to do it without all the hassle." turns out, there is. it's called an "index fund." an S&P 500 index fund (for example, SPY) is a fund that contains about the same stocks of hte s&p500 index in about the same proporation as they are represented to the index by the market capitalization (The value of the company, as related to the value of the S&P500 index). as such, by buying 1 share of SPY, you own a little bit of each company in the s&p500 index. This is GREAT, because if one company tanks, it wont kill your portfolio. Instead, you'll recognize the gains of the s&p500 index as if you owned every stock in it. and you don't have to pay a huge percentage to an active manager.

 

FEES: this goes along with the diversification discussion, but fees are something that John Bogle championed in his work--basically, bringing the fees charged to investors down so that they could realize the value of their gains. Let's look at this one with an example: let's say you have your money with an active manager. that active manager manages to gain your money 8% in the year. in the same year, the s&p500 index rises at 7.25%. You would think that having your money with the active manager would be the better bet, right? he gained 8% when the S&P only gained 7.25%, right? wrong. the active manager charges you 1.15% of the total amount you have invested with him. As a result, you're only gaining in net dollars an amount of 6.85% (8% - 1.15%), meaning you would be better investing in the S&P index fund by 40 basis points (0.40%). plus, you would get the benefit of being diversified, which would be better than active management. "but what about mutual funds? i've heard some great things about those." well, mutual funds have all kinds of tricks...including dishonest marketing, hidden fees, and pricing problems. However, your 401k is likely to have mutual funds as options, so you need to be able to compare them to other funds.

 

How are mutual funds different from index funds? mutual funds are actively managed, and, thus, require payment of a fee load. as compared to the management of index funds, mutual funds are RIDICULOUSLY expensive. here's an example: look up VTSMX - this is vanguard's "total stock market index fund." It's basically a little piece of each stock in the entire US stock market. if you look at the "expense ratio," it is 16 basis points (0.16%). That means that if the fund grows (as the stock market does) at 8% this year, you make 7.84%, which is really, really good. now look up MALVX, which is blackrock's large cap fund--it accomplishes much of the same results as VTSMX. the expense ratio is 92 basis points. Now, that's still not terrible (i've seen as high as 4% in some 401ks), but it's still 6 TIMES THE COST of the VTSMX fund for basically the same performance. So if you own VTSMX and your friend owns MALVX, and you each have $100,000 invested, you'll make $7840 and your friend will make $7018 this year. Why? because of the fees. and that's enough to make a huge difference in the long run (see compounding, below).

 

one of the biggest things you can do in your 401k is figure out what the funds offered have as far as expense ratios and shoot, generally, for hte lowest one that still gets you a good bit of diversification. IMO, you shouldn't be investing 401k money into anything that has an expense ratio higher than 40 basis points (0.40%). sometimes it's unavoidable, but you should always shoot for the lowest fees possible.

 

COMPOUNDING: this is like magic, and it's the biggest reason that the wealthy are wealthy and the poor are not. if you can delay gratification, money grows on its own (well, INVESTED money grows on its own). that means that the more you invest now, the more you can have later, and the more you can chip away at how long you have to pay the man with your time. compounding basically works like this: let's say you invest $1,000 this year. you make 10% gains on your investments. at the end of the year, you now have $100 more, or $1,100. Now, you just leave it there. Now, lets say you make another 10% the following year. What happens is that your original $1000 makes 10%, but the 10% you already made ALSO makes 10%, so you get $110 the second year. Now you have $1,210. Let's say it continues for the third year, now you make $121 extra, so you now have $1,331. Let's keep it going for a 4th year, and now it's $133, or $1,465. 5th year? $146 added, so you get to $1,611. and so on and so forth. this happens in such a way that the math guys on wall street came up with something called the "rule of 72." it means you can divide the number 72 by the annual rate of return, and that tells you have long your money will take to double. so, in our example, it would take a little over 7 years at 10%. Now, let's say the market returns about 7%--you'd be doubled on your money in 10 years. but wait, every 10 years after, your money doubles again. so here's how it looks: let's say you're 25 right now. you put in $5,000. even if you did nothing else (Which, as we said earlier, you should be continuously putting money in, but, let's just say) then in 10 years you'd have 10k. in 20 years, you'd have 20k. in 30 years, you'd have 40k. and by the time you'd be ready to retire, you'd have $80,000. All that just for putting $5,000 in when you're 25 and NEVER doing anything else...and with a pretty reasonable rate of return at 7%. now, let's change it up and, rather than $5k today and nothing else, let's just say you put away $20 per week until retirement. You'd have about $300,000 by the time you retired, and all by skipping lunch once a week. https://www.fool.com/retirement/2016/08/13/heres-how-much-money-you-could-retire-with-by-savi.aspx. at $100 per week, it would be over $1.5 million.

 

it might sound too good to be true, but it's just math. and it is a BIT harder than it sounds. finding money can many times be painful, and it's hard to put away when you don't see the return immediately. but, as i said, this is what differentiates people who are wealthy from those who aren't.

 

EMPLOYER MATCH: no matter what happens, even if you ignore everything else i said, PLEASE understand this part. the employer match is essentially you r employer giving you more money for doing something that is in your best interest anyway. Most employer match terms look something like "half of your 401k contributions up to 6% of your salary," or something like that. that means that the employer is going to give you, at most 3% of your salary. BUT THINK ABOUT THAT! it's basically your employer giving you a 3% raise over what you're already being paid. so, if you're making $50k per year, it's basically your employer saying "i'll give you $51,500 annually if you'll promise you put 6% of your salary into savings that will make you wealthy when you retire." isn't that crazy? i've heard of people saying "oh no, i just need that money...i need all of my paycheck or i can't pay my bills." if you work in a job that gives you the option of a 401k, you are stupid not to use it. it is 100% free money. even if you had to take a cheap vacation instead of the one you were planning, or buy a cz for your girlfriend instead of a diamond, it will make such a difference in your life if you just do it. remember, $5k at 25 becomes $80k at retirement...so that $1.5k that your employer would be giving you for free would be $24,000 at retirement. DO NOT LET IT GO BY!

 

that's about all i can think of now. i haven't been on this site for a few years. i kind of quit looking at it as i got interested in finance. i spent a lot of time learning about things like the above, which now just are logged in my brain the way some here know ball flight laws. the above is the kind of thing that can absolutely change your life for the better if you understand it.

 

lmk if you have questions. hopefully i'm around to answer them.

[PixlPutterman]

Next question. I want to take my tax return and toss it into "savings" for a year or so.

 

Should I just toss it into my Fidelity acct and put it all in a mutual fund, or put it in a "savings" acct at my credit union.

 

This will be going towards a house in a year or so.

[Argonne69]

Next question. I want to take my tax return and toss it into "savings" for a year or so.

 

Should I just toss it into my Fidelity acct and put it all in a mutual fund, or put it in a "savings" acct at my credit union.

 

This will be going towards a house in a year or so.

 

Since you need the money in the short term, I'd put it in a "safe" total market bond fund.

 

The bigger question is why are you getting a tax return? Your money should be working for you, not Uncle Sam. You're basically giving the government an interest free loan. One should adjust their withholding so that they write a small check to the IRS every year.

[Lord Helmet]

Next question. I want to take my tax return and toss it into "savings" for a year or so.

 

Should I just toss it into my Fidelity acct and put it all in a mutual fund, or put it in a "savings" acct at my credit union.

 

This will be going towards a house in a year or so.

 

Since you need the money in the short term, I'd put it in a "safe" total market bond fund.

 

The bigger question is why are you getting a tax return? Your money should be working for you, not Uncle Sam. You're basically giving the government an interest free loan. One should adjust their withholding so that they write a small check to the IRS every year.

 

Agreed. You are letting the gov't use your money interest free for a whole year.

[PixlPutterman]

Next question. I want to take my tax return and toss it into "savings" for a year or so.

 

Should I just toss it into my Fidelity acct and put it all in a mutual fund, or put it in a "savings" acct at my credit union.

 

This will be going towards a house in a year or so.

 

Since you need the money in the short term, I'd put it in a "safe" total market bond fund.

 

The bigger question is why are you getting a tax return? Your money should be working for you, not Uncle Sam. You're basically giving the government an interest free loan. One should adjust their withholding so that they write a small check to the IRS every year.

Next question. I want to take my tax return and toss it into "savings" for a year or so.

 

Should I just toss it into my Fidelity acct and put it all in a mutual fund, or put it in a "savings" acct at my credit union.

 

This will be going towards a house in a year or so.

 

Since you need the money in the short term, I'd put it in a "safe" total market bond fund.

 

The bigger question is why are you getting a tax return? Your money should be working for you, not Uncle Sam. You're basically giving the government an interest free loan. One should adjust their withholding so that they write a small check to the IRS every year.

 

Agreed. You are letting the gov't use your money interest free for a whole year.

 

Return isnt the best word I assume. I dont make enough to net a tax liability. The return is comprised of EIC and other credits, I claimed exempt this past year.

[SilverBullets]

I have been with my company for coming on 3 years, and will be fully invested in my 401k with them. I have JUST started to poke around in my 401k and opened a BrokerageLink account with Fidelity (also who my employer uses for the 401k).

 

I am not at all looking to become a day or even a week trader. How ever I do want to understand what is going on with my money and be able to look at it a time or two a month and know if I am headed in the right direction.

 

I was planing on putting half of my 401k into an S&P 500 fund and the other half in ONEq, how ever that is just based off of advice from a friend who is doing well with his 401k.

 

Can anyone recommend either a path/plan or maybe some foundational reading?

 

Again just want to be able to just understand at a macro level what is happening with my retirement every few weeks or once a month.

 

Thanks

i read the first 6 answers in this thread and became very troubled by the state of the advice you're getting here.

 

the source for most everything i'm about to say is bogleheads.com . it's the website of people who follow the founder of Vanguard and famous investor John Bogle. Bogle's big shtick was that the cost of investing is what kills portfolios....and he's exactly right.

 

here's what you need to know for your 401k:

 

-INVESTMENT, NOT TRADING: your 401k is not a trading account. daily, weekly, even yearly trading is NOT what it's there for. it's there to put your money in THE RIGHT investment and wait over time.

-DIVERSIFICATION: diversification is key to managing risk. it means investing in "a lot" of stuff, but you can get it by investing in just one fund. more on this in a bit.

-FEES: pay as little as you can.

-COMPOUNDING: compound interest is like magic. i'll get to this in a second. but this is the reason why you keep your money in one place

-EMPLOYER MATCH: it's free money. Maximize it, even if you feel like you really need the money. the employer match is basically the same thing as you being paid more. there's no reason you wouldn't do it.

 

those are the basic principles that you need to know. I'll go into them in more detail below and how you address them.

 

INVESTMENT, NOT TRADING: here's the basic idea of a 401k: the idea is that you're putting money away that will be there when you retire. you won't recognize security in your retirement unless you consistently put away money today. that might be as little as $20 every paycheck, but it makes a HUGE difference over time, especially if you're young. i'll get to that in the compounding phase, but you need to understand that the goal here is to save, not to gamble. IF you want to gamble, your 401k is not for that. neither is your 401k a piggy bank that you'll use when you run low on funds somewhere else. this is basically you buying away the last years of your career. wanna retire at 57 instead of 66? you can do it with a 401k, and it's not as hard as you might think. it just requires absolute dedication to investing, not to trading. Why? trading is risky. look at big stocks, like, say, TSLA. you might lose 15% of the value of hte stock in a day. and while you could have bet on TSLA 5 years ago and made a bunch, past performance is not an indication of future success. TSLA may turn into a dog tomorrow for any of a ridiculous amount of reasons. e.g., everyone was thrilled to invest in ENRON and WorldCom....until it came out that these companies were engaging in massive fraud. if you had bet on that, you could have lost everything. and while it can be fun to play a stock on the way up, it sucks on the way down, and it's baiscally gambling. not only that, but you have to pay for the privilege--in terms of a fee to perform trades on both ends of the transaction. that leads you to basically always being on the losing side of the deal. even if you do what statistically you should do and go 50-50 on your trades, you'll still end up paying for the privilege.

 

DIVERSIFICATION: if you have all your money in one thing, you might knock it out of the park, but chances are you wont. there are many studies out there about active trading...and by far the majority of the active traders on the market fail to outperform the value gains of the S&P500 index. not only that, but active management requires you to pay a manager fees, and so the performance that you're not getting you also have to pay for, which reduces your gains. so this begs the quesiton: why wouldn't you just invest in the s&p 500? someone a long time ago got this idea and went "oh, darn, that would mean that i would have to invest in 500 different stocks. that would be a lot of tracking and management and be basically a full-time job. i wonder if there's a way to do it without all the hassle." turns out, there is. it's called an "index fund." an S&P 500 index fund (for example, SPY) is a fund that contains about the same stocks of hte s&p500 index in about the same proporation as they are represented to the index by the market capitalization (The value of the company, as related to the value of the S&P500 index). as such, by buying 1 share of SPY, you own a little bit of each company in the s&p500 index. This is GREAT, because if one company tanks, it wont kill your portfolio. Instead, you'll recognize the gains of the s&p500 index as if you owned every stock in it. and you don't have to pay a huge percentage to an active manager.

 

FEES: this goes along with the diversification discussion, but fees are something that John Bogle championed in his work--basically, bringing the fees charged to investors down so that they could realize the value of their gains. Let's look at this one with an example: let's say you have your money with an active manager. that active manager manages to gain your money 8% in the year. in the same year, the s&p500 index rises at 7.25%. You would think that having your money with the active manager would be the better bet, right? he gained 8% when the S&P only gained 7.25%, right? wrong. the active manager charges you 1.15% of the total amount you have invested with him. As a result, you're only gaining in net dollars an amount of 6.85% (8% - 1.15%), meaning you would be better investing in the S&P index fund by 40 basis points (0.40%). plus, you would get the benefit of being diversified, which would be better than active management. "but what about mutual funds? i've heard some great things about those." well, mutual funds have all kinds of tricks...including dishonest marketing, hidden fees, and pricing problems. However, your 401k is likely to have mutual funds as options, so you need to be able to compare them to other funds.

 

How are mutual funds different from index funds? mutual funds are actively managed, and, thus, require payment of a fee load. as compared to the management of index funds, mutual funds are RIDICULOUSLY expensive. here's an example: look up VTSMX - this is vanguard's "total stock market index fund." It's basically a little piece of each stock in the entire US stock market. if you look at the "expense ratio," it is 16 basis points (0.16%). That means that if the fund grows (as the stock market does) at 8% this year, you make 7.84%, which is really, really good. now look up MALVX, which is blackrock's large cap fund--it accomplishes much of the same results as VTSMX. the expense ratio is 92 basis points. Now, that's still not terrible (i've seen as high as 4% in some 401ks), but it's still 6 TIMES THE COST of the VTSMX fund for basically the same performance. So if you own VTSMX and your friend owns MALVX, and you each have $100,000 invested, you'll make $7840 and your friend will make $7018 this year. Why? because of the fees. and that's enough to make a huge difference in the long run (see compounding, below).

 

one of the biggest things you can do in your 401k is figure out what the funds offered have as far as expense ratios and shoot, generally, for hte lowest one that still gets you a good bit of diversification. IMO, you shouldn't be investing 401k money into anything that has an expense ratio higher than 40 basis points (0.40%). sometimes it's unavoidable, but you should always shoot for the lowest fees possible.

 

COMPOUNDING: this is like magic, and it's the biggest reason that the wealthy are wealthy and the poor are not. if you can delay gratification, money grows on its own (well, INVESTED money grows on its own). that means that the more you invest now, the more you can have later, and the more you can chip away at how long you have to pay the man with your time. compounding basically works like this: let's say you invest $1,000 this year. you make 10% gains on your investments. at the end of the year, you now have $100 more, or $1,100. Now, you just leave it there. Now, lets say you make another 10% the following year. What happens is that your original $1000 makes 10%, but the 10% you already made ALSO makes 10%, so you get $110 the second year. Now you have $1,210. Let's say it continues for the third year, now you make $121 extra, so you now have $1,331. Let's keep it going for a 4th year, and now it's $133, or $1,465. 5th year? $146 added, so you get to $1,611. and so on and so forth. this happens in such a way that the math guys on wall street came up with something called the "rule of 72." it means you can divide the number 72 by the annual rate of return, and that tells you have long your money will take to double. so, in our example, it would take a little over 7 years at 10%. Now, let's say the market returns about 7%--you'd be doubled on your money in 10 years. but wait, every 10 years after, your money doubles again. so here's how it looks: let's say you're 25 right now. you put in $5,000. even if you did nothing else (Which, as we said earlier, you should be continuously putting money in, but, let's just say) then in 10 years you'd have 10k. in 20 years, you'd have 20k. in 30 years, you'd have 40k. and by the time you'd be ready to retire, you'd have $80,000. All that just for putting $5,000 in when you're 25 and NEVER doing anything else...and with a pretty reasonable rate of return at 7%. now, let's change it up and, rather than $5k today and nothing else, let's just say you put away $20 per week until retirement. You'd have about $300,000 by the time you retired, and all by skipping lunch once a week. https://www.fool.com...h-by-savi.aspx. at $100 per week, it would be over $1.5 million.

 

it might sound too good to be true, but it's just math. and it is a BIT harder than it sounds. finding money can many times be painful, and it's hard to put away when you don't see the return immediately. but, as i said, this is what differentiates people who are wealthy from those who aren't.

 

EMPLOYER MATCH: no matter what happens, even if you ignore everything else i said, PLEASE understand this part. the employer match is essentially you r employer giving you more money for doing something that is in your best interest anyway. Most employer match terms look something like "half of your 401k contributions up to 6% of your salary," or something like that. that means that the employer is going to give you, at most 3% of your salary. BUT THINK ABOUT THAT! it's basically your employer giving you a 3% raise over what you're already being paid. so, if you're making $50k per year, it's basically your employer saying "i'll give you $51,500 annually if you'll promise you put 6% of your salary into savings that will make you wealthy when you retire." isn't that crazy? i've heard of people saying "oh no, i just need that money...i need all of my paycheck or i can't pay my bills." if you work in a job that gives you the option of a 401k, you are stupid not to use it. it is 100% free money. even if you had to take a cheap vacation instead of the one you were planning, or buy a cz for your girlfriend instead of a diamond, it will make such a difference in your life if you just do it. remember, $5k at 25 becomes $80k at retirement...so that $1.5k that your employer would be giving you for free would be $24,000 at retirement. DO NOT LET IT GO BY!

 

that's about all i can think of now. i haven't been on this site for a few years. i kind of quit looking at it as i got interested in finance. i spent a lot of time learning about things like the above, which now just are logged in my brain the way some here know ball flight laws. the above is the kind of thing that can absolutely change your life for the better if you understand it.

 

lmk if you have questions. hopefully i'm around to answer them.

 

Really sound fundamental advice here.

[Argonne69]

"The stock market is a device for transferring money from the impatient to the patient" - Warren Buffet

 

"Don't do something, just stand there!" - John C. Bogle

[PixlPutterman]

Anyone use RobinHood for trading?

[1puttTUT]

Has anyone borrowed against their 401k to buy a house? My dad has always given me sound financial advice, and recommended it saying he has done it multiple times.