Portfolio 101

[OnyxCougar]

The website = broke. It gives an internal error every time I try to find a local rep.

[Beestie]

The most important thing you need in order to be a good investor is an understanding of your own risk tolerance and secondly, how each instrument relates to your tolerance. Thirdly, you need to know your investment horizon -which, for this discussion, is the time till your retirement.

First of all, what's a stock and what's a bond. Simply, a stock is a "peice of the company." if the company has 100 shares and is worth 100 dollars, each share costs and is worth one dollar. If you buy one share and the company becomes worth 200 dollars, your stock is now worth 2 dollars. Conversely, if the company goes under, your stock is worth zero. The sum of all the stock in a company equals 100% of the ownership of the company. As a stockholder, you ARE an owner of your respective share of the company.

What's a bond? A bond is a loan by you to the company or government entity. Nevada issues $100 dollars of bonds and you buy $1 of the issue. The bond pays 12% interest and matures in 20 years. So, you get 12 cents a year for 20 years and then you get your dollar back. Bonds are so fucking complicated, however, that you wouldn't believe it. The rules governing payout and what happens if the bond defaults and who gets paid first, second and third would make Einstein run for the hills.

Since most investors either don't understand or don't care to get that involved in individual stocks or bonds, funds exist that invest FOR you in a wide specturm of stocks or bonds. These are mutual funds (stocks) or bond funds. These funds iron out the irregularity of investing directly by spreading out the investment across a very specific category of stocks or bonds.

Bond funds are extremely safe but are low-return instruments. You ain't gonna get rich investing in bonds. I would invest no more than 10% in bonds.

Stocks are best invested in by buying mutual funds. This is basically giving 100 dollars to a smart guy/gal who eats and breathes stocks. He takes your money along with mine and "goes shopping" - buying and selling as (s)he sees fit to maximize the value of the "portfolio. Investing in a stock fund is a simple matter of choosing what type of fund suits you. A high-tech fund is high risk but potentially high reward. A S&P index fund mirrors the entire stock market and is essentially like investing in every stock in the entire market. More stable than a specialty fund and therefore has less upside/downside potential. If one company in the fund tanks, you won't even feel it. If you bought that company's stock directly, however, say bye to your money. A mutual fund typically has no more than 5% in any single company and usually not that much.

Vanguard is an excellent company. Call your rep - descibe your risk tolerance and choose a couple different stock funds. You can always change your future allocations if you change your mind.

Hope that helps.

[lookout123]

thanks to the IT guys for another great first impression. just this morning we had the drop down menu for states, so they must just be upgrading it rightnow.

[OnyxCougar]

*LMAO @ first impression* You're a mind reader today, lookout.

[OnyxCougar]

I wanna retire at 60, so I have a bit over 25 years to go. What kind of term is that for planning?

[lookout123]

that is long term. for most people that would mean you have the ability to withstand more market risk in your portfolio. BUT that really has to be a judgement call by you. if you are the type that is going to pull up your account every day/ week/ or even month then you should play a little more conservative. the thing to keep in mind that this is retirement money, not going on vacation, or buying a house, or buying a lot of beer money. if you can trust yourself to only give your 401k a solid review every 6 months and refuse to pull your money out when your gut tells you to, you will be just fine.

the problem is that people have too much access to financial info without the discipline to do the right thing. that is because the right thing in investing is usually scary and uncomfortable. i think it was LJ who said it earlier - when the tech stocks crashed a lot of people pulled there money out and put it into bonds - the people who REALLY invest well are the ones who put more money into stocks.

there are 2 concepts to stick to religiously in investing
1) Buy. now. buy more. buy - only sell when there is a fundamental change in the reason you bought the stock. price going down is not a reason to sell, it is a reason to buy more.
2) time IN the market will ALWAYS beat TIMING the market.

[OnyxCougar]

Tell the truth, I set up the stock ticker quote thing on my yahoo homepage and I glance at it, but if I see red numbers there, I'm like, oh, pretty red. I'm not freakin. If I didn't have it in front of me like that, I prolly wouldn't even look it up, and as a matter of fact, I was thinking about logging on to vanguard, but I don't remember my username and password, and I don't have the number here.

I guess this is the kind of investor you love to hear from....

[lookout123]

Originally posted by OnyxCougar

I guess this is the kind of investor you love to hear from....

i love having an investor who trusts my professional advice. one who is willing to ride out the bumps and do the thing that feels wrong. one who is willing to look at the big players and realize that if it works for them it will work for me.
i hate dealing with the daytrader mentality. 1st thing i tell new clients is that they have to close their online accts or at the most look at them the same way i look at a roulette wheel - something fun to throw limited amounts of money at with the chance of winning some, but a higher likelihood of losing all.

*steps off soapbox*

[lookout123]

just so you know - i don't even have a stock ticker on in my office. it is just a distraction that can cause paralysis. (the guys who need it in front of them all the time are at a much higher level)

[richlevy]

Sometimes it is hard to find out through a company 401K, but expense ratios are very important for mutual funds. Vanguard has one of the lowest in the industry.

If your company matches any amount, even if its only a percentage, like %50 of what you put in up to %x of your salary, you are throwing money away by not putting it in.

One set of priorities for investing is:

1) Whatever amount company matches. This is free money. It may take a while for vesting, but after you have been with the company 5-7 years, it can be a %50-100 gain on top of the funds performance.
2) Pay off credit card debt. Removing a %15-22 deficit is more important than any gains from investments.
3)Company 401K or Roth IRA using after-tax income. I have heard opinions that funding a Roth is better than a 401K. One advantage to 401K is that some plans let you borrow money from your 401K and pay yourself interest instead of borrowing from a bank. When investments are not performing, paying yourself the %7 interest is better than paying it to a bank.
4)Traditional IRA

This is just opinion. An accountant I know told me that he couldn't believe that Congress gave so much away on Roth IRAs.

[lookout123]

if the company matches at all on 401k jump all over it. then move onto a roth because after 59 1/2, withdrawals are 100% tax free. Awesome. again, there are pros and cons to each, tax bracket now and expected at retirement are important considerations.

[farfromhome]

My 2 cents.
All the advice I've seen here is sound. But the most important analysis just isn't discussed much.Ten years ago I thought I had the world by the balls.I had been working for the same people since I was 18. Through SEPs,401ks and a company pension I thought things were looking great.I contributed a lot.Not the maximum,but a good amount.I had what I thought was a good marriage.I had a humble (but cheap) home in the country.Two beautiful children.It was about this time that I shifted most of my money into the tech secter.Trying to heed the advice of professionals I held on as the money went away.Then my wife left me.She moved 2,500 miles away.I bear my share of blame for letting this happen.I trusted her and I should not have.But...
I need to be a father.Thats all I ever really wanted to be.I didn't see that earlier in my life.
I had to quit my good paying union job after 24 years.It was financial suicide.I knew that.(As an aside...Oregon is not leading the country in unemployment for the first time in quite a while.whopee!).
Its amazing how quickly you can burn through your saving.I was days away from heading back home when I finally found a job here. I'm making almost exactly half of what of what I made in NY.As a consequence I had to pull money out of my IRAs. I had no choice.
I'm sorry for rambling. Heres my point: Financial advisers will give their advice based on what you tell them. But nothing is more important than the circumstances of your life.I look at my own experiences and wish I had been more conservative.

[TheLorax]

I recommend putting in the maximum amount that your company will match. It depends on how your company’s plan is set up, but here we get 50% of our contributions up to 6% of our salary. If you think about it, you’re getting an automatic 50% gain on your earnings and no fund manager can beat those kind of returns.

As for the individual funds, there should be some sort of guide that you can read about the different options your company offers.

I went with an Index fund for my 401(k) because fund managers are all a bunch of crocked, greedy bastards.

This is a pretty good site for basic information in laymen’s terms: http://www.fool.com.

I stay away from their investment “advice”. These guys garnished a reputation for working miracles back in the 90’s and truth is, a blind monkey with a dart could pick a winner in the 90’s. They do a really good job of breaking things down so that you can understand them.

[jaguar]

While I kind of deal on a different scale to I'm guessing your average 401k, remember there are plenty of investments outside of the stockmarket and outside financial instruments full stop. Commodities, private equity, cash, there and many other markets that can act as a hedge and if well managed have better returns. All depends on style really.I do however know absolutely fuck all about 401ks.

[OnyxCougar]

OK, I found my vanguard stuff. I have 10% in the Federal Money Market Fund (VMFXX) and 50% in the Dodge & Cox Income Fund (DODIX) and 40% in the Cox stock fund which is listed an overall risk, but has thus far outperformed the s&p500 until 2000. (I also have stock options through the company employee purchase plan, I put in a set amount each paycheck ($28.14, which is what one share was worth when I started) and then June 30 they take all that money and buy shares with it. Right now the Cox stock is at $31.37, so I wont get 1 share per check like I had expected, but it's good if it continues to go up.)


So. since I have the EPP through the company, I should move this 40% from the stock fund and put it in an index fund? They have an index fund, the Vanguard Total Stock Market Index Fund, (VTSMX). They also have some Growth Funds, but that looks aggressive.

OK, my company matches .50 to every dollar, UPTO 6%. But not till I've been there a year, which means starting on the January 1 paycheck. I'm currently contributing 5%. I should go up to 6%?