Entries Tagged 'Investing' ↓

When you have a 401k plan at work, and you leave your job for any reason, you can choose between taking a 401k rollover into another brokerage account, or leaving your funds with your employer’s plan.  For a variety of reasons, it’s nearly always best to roll over your 401k.

With so many people saving more today, and also facing an increased possibility of being laid off and changing jobs, using the 401k rollover option is a way to maintain some control oer your retirement security.  Unfortunately, the roll over is not very well explained or understood by most investors.  It’s something we advocate very strongly – to get your money out of the hands of mutual fund managers who do not have your best interests at heart!  It might mean you need to take the time to learn to invest money beyond your current knowledge, but that is FAR better – and more profitable – than sitting idly and helplessly watching your retirement nest egg vanish without any comment from your plan administrator or your company’s mutual fund managers…

When you have a retirement plan set up by your employer, the investment options are always very limited. They don’t want to pay a lot of money in admin fees, nor take a lot of risk, by offering a wide selection of investment vehicles to their employees. The management headaches are too great.  And, their plan consultants are probably telling them all the same conventional crap about perpetual growth, stock market returns, etc etc. 

However, once you set up a self direct IRA using your 401k rollover, you can start investing in all types of vehicles for retirement that were previously unavailable.  Now, you can start taking control over your money,and not leaving it to the mercy of conservative – or worse, convention – mutual fund managers.

To roll over your 401k account, you first open a new, self-directed IRA account with your new broker of choice.  As you complete the paperwork, you’ll se that they ask if this is a rollover account.  If so, they will give you all the appropriate paperwork to have everything transferred from your employer’s plan.  As long as you aren’t taking any withdrawals from your retirement account, there are no penalties or taxes required. 

You have four main options when you leave your employer, as to what to do with your 401k rollover.  They are, in order of preference:

1) Cash in your account. BEWARE: if you cash out your account prior to your statutory allowance, you will pay taxes and penalties!
2) Stay with the retirement plan from your previous employer. This is where you could stay if you really just don’t care about what happens to your money. 
3) Transfer the balance of your prior retirement account into the retirement plan offered by your new employer. At least here you can keep an eye on it.
4) Open a Self Directed 401k Rollover IRA account with another broker or mutual fund of your choice, and transfer all retirement funds into that account.

We don’t recommend you ever do #1 unless you are in serous, dire financial difficulty.  You will lose roughly 40% of your account in fees and penalties.  As for options #2 and #3, these are both  conservative, hands off type decisions.  If you just don’t want to think about making your money work for you, or even think about it at all, then leave them in the hands of the mutual funds your employers have chosen for you.  But don’t complain when you lose money! 

Only by choosing #4 will you have a new chance to really build up your account balances for retirement.  With this account you will learn more about investing,  and have the option of buying and selling whatever investments you choose that fit your personal financial plan.  It’s not for everyone, but by learning a little about investing, you can gain a lot more secure retirement.

The biggest problem with employer retirement plans offered to employees is that they include a very limited number of investment choices. Of the ones offered, many overlap in the types of stocks and bonds they invest in. A study from Columbia University found that the median number of mutual funds made available to employees was just 13. And this included all funds, even money market funds, fixed income funds, and balanced funds, as well as stocks.

Since you have fewer investment choices within your 401k, your employer-sponsored plan hampers your ability to profit during different market trends and to reposition your retirement balance into accounts with stocks, bonds, mutual funds and ETFs that offer higher risk-reward profiles.

The best thing you can do is to set up a 401k Rollover account with a brokerage that will give you access to all the types of investments available in the market.  (We use TradeKing for all of our accounts, since they have great educational materials and really low fees.)  By opening up a 401k roll over IRA at another company, you can break out of the limits of your employer-sponsored plan and thereby increase exponentially the number of mutual funds, stocks, bonds, ETFs, money markets and more that you have available for investing. Choose a broker that has great resources for investors to learn, such as large investor discussion groups, materials about how to invest, training videos and so on. There’s always something to learn to grow your retirement account to its fullest potential.

It’s easy to see how you might improve our retirement account returns.  If you transfer $50,000 out of your 401k plan, and move it to the Rollover IRA, having a wider range of investment choices can mean that your annual return increases from 8% in the old 401k, to 12% in the Rollover IRA. After 20 years, your roll over IRA will be worth $482,315, more than twice the $233,048 that you would have had if you’d kept your funds in the employer-sponsored plan – and that assumes you haven’t added any deposits to your Rollover IRA.

So how do you set up a 401k rollover account?  There are two ways you can do it.  You can start by opening a Rollover IRA account with your new broker (also known as a self directed IRA, because now you call the shots!)  After that account is set up, you can contact your plan administrator from your former employer and ask to transfer your assets into the new account.

After that your two choices are to have the money sent directly from your previous 401k plan, into the rollover IRA account. This is known as a direct rollover. The second alternative is the indirect rollover, where you you take a distribution of the funds from the retirement plan, then deposit them yourself into your new roll over account.  Other than in the event some exception applies, you are given 60 days to get that distribution into the new account and avoid any taxes or penalties for a withdrawal.  Check with your old and new plan administrators to see which is right for you.

Now that you have set up your 401k rollover account, you can continually leverage that account each time you switch jobs, by moving any accumulated 401k investments into the rollover account.  You just have to instruct your employer’s retirement plan administrator to transfer your assets to the new IRA account.

There is also an option for your to continue to deposit funds to your new IRA, however check to see whether you are subject to limits regarding annual contribution amounts.

The bottom line is, why leave your retirement funds to sit in an account where they are not going to work as hard for you as possible?  Opening up your own self-directed IRA by transferring to a 401k rollover is your best option for growing your future retirement nest egg.   Your new 401k rollover, now opened up as a self-directed IRA, will give you much more control over growing your retirement savings.

One of the reasons people have lost so much money in the stock market recently, whether in their 401(K) accounts or otherwise, is that many of us never took the time to really learn to invest money. We were often “sold” the idea that mutual funds were safe, easy and didn’t require much in the way attention, because “over time” the stock market always goes up and stocks offer the best returns compared to bonds or other vehicles.

Well, that was pretty much not true. (Statistically, it’s only true if you are VERY selective in how you read historical data, and do not discount for inflation.) No matter what, all investors need to learn to invest stock, learn to invest money, and understand the stock market and how the cycles of the market work. In addition, it’s been pretty clear that the market was affected by unique financial instruments as well as a real estate bubble which continues to this day and may continue for the next few years.

So as you try to learn how to invest safely, whether it’s invest in stock, invest in bonds, or even invest in real estate, you have to realize you will never stop learning, because the market is dynamic and changing.

You will also find that there is no way to calculate returns, that is, promise returns of a certain percent, because “that’s what the market has returned historically”. the problem with that statement is that there is no historical measure that will match the exact years in which you are invested in the market. For example, if you started investing in the early 1990′s, after several crashed and discounting for inflation, you are pretty much back to where you started. Plus, historical returns do not mean that you will continue to get those in the future, as there are events that can occur – terrorism, bubbles and so on – that you can’t predict, and can affect your returns and investments dramatically.

There really isn’t any easy way to invest, because whatever else you do, you will have to put in the time to learn to invest according to your goals and risk tolerance, and it’s the time that few people have. You can’t simply rely on the market returns any more to just go up and up, so that you have a lot of cash when it’s time to retire. That does not mean there are not ways to invest money that will bring profits. It simply means that in order to make money in the market, you need to learn more, and also manage your accounts more actively than simply reassessing your holding once a year and that’s it.

To learn to invest money, the best way is to start with whatever services your broker offers. Many online brokers have a variety of educational materials, so that’s a good place to start. sites like Yahoo! Finance also offer many education materials and discussion groups for you to take advantage of. All of the major investing magazines, like Smart Money, Kiplinger’s and so on, have websites as well. That’s not to say that you should take their word for what to invest in, far from it. instead, use that information as a starting point. From there, you should also investigate good books about investing, from your local library, to learn to invest money in the right strategy for you.

A lot of folks are looking for “safe” ways to invest 401(K) in cash, thinking that it has to be safer than stocks, right? Well, not necessarily. Let me explain and then show you ways to invest in cash or cash-like vehicles.

If you don’t know how to invest, ANY form of investment is risky for you! The bottom line is, if you don’t learn to invest money whether in stocks, bonds or cash, you are taking chances you aren’t aware of. So, before buying investing in cash in your 401(K), let’s talk a bit about what they are.

Moving to a cash investment is a way to be safer, because various investments are insured, or are invested with the US Government. Remember though, to get a safe investment, you are usually losing the high returns that only come with risk. Returns like 8% and up are not easy to find, in safe vehicles, although what you believe is “safe” will differ with every person. So let’s look at a couple “safe” cash-like investments.

First, there really isn’t any investment that is as safe as having cold hard cash in hand. It’s ready when you need it, you don’t have to worry about being able to get your money in an emergency. However, as inflation rises, the value of your money also goes down. If there is an inflation rate of 5%, and you don’t keep your money somewhere it can earn at least that 5%, your money is suddenly only worth 95% of what it used to be. So, cash is safe, meaning you won’t lose the bills themselves, but you will start to lose value.

Where can you put money to earn a good rate of return, that’s as safe as cash? A savings account, insured by the FDIC, meaning the US Government, is an account that is insured up to $250,000. This just means that if the bank holding the account fails, the Federal government will make sure you are repaid. Right now, though, the interest rate being paid is very low, between 0.25% and 1.5%, unless you have $5,000 to invest. Even then, you won’t see rates much over 3%. Remember – You are getting SAFETY so you are not getting HIGH RETURNS.

Most 401(K) plans offer some kind of savings account option, usually intended for employees who are nearing retirement and want to play it safe, but anyone can choose these as an investment.

Beyond savings accounts, there are money markets funds. some of these funds are covered by FDIC insurance, or other types of federal insurance, but not all of them are. In addition, not all 401(K) plans offer this option. A money market account usually pays slightly higher than savings accounts, but minimum balances may be required. Compare this type of account to the savings option, and be sure to ask whether the deposits are insured.

The next type of cash-like investment is bonds. Bonds are a little confusing. Basically, though, a bond is like a loan, where your a lending money to a federal, state or local entity or a corporation. Bonds have ratings, which are supposed to tell you how safe they are, however recently we’ve learned that not all ratings are to be believed. Triple “A” rated bonds, “AAA”, are the safest, with pluses, and minuses, down to “C” rated bonds, which are the lowest, and called “junk” bonds. While these may be junk, they also pay the highest returns.

So which bonds, if any, are safe? It’s often thought that Treasury bonds are safest, since they are backed by the US Treasury. China thinks so; it’s how they lend us all that money. however again, really safe means really low return. Right now, returns on treasury bonds are under 3%. how about other savings bonds?

There are also mutual funds and ETFs that let you invest in what are called inflation indexed bonds. These are bonds issued by the US Government and the return changes as inflation rises. These can be bought individually from the Treasury, however by buying a mutual fund or ETF which invests in these bonds, you are more easily able to buy and sell without owning the bond itself. Remember that if you own the bond, it has the backing of the US Treasury, and you are insured from loss, however a fund or ETF investing in those bonds does not pass along that insurance to you. This adds a little additional risk there.

Returns for these types of bonds are, as of this writing, around 5.5%, and the funds trading in these bonds are currently returning anywhere from 4% to 6% interest. This is a better way to have your money in relatively safe vehicles, while getting a better return and additional liquidity for your investment.

There are many other bond options, which are very detailed, and too long to go into here, but here is a list of some of the kinds of bonds you can explore and ask about:

- Federal Agency bonds
- Municipal (state and local government) bonds
- Utilities (raising money for public utilities)
- Corporate bonds (corporations raise money from private investors – bondholder)

The bond ratings will determine the rate of return. Risky, or low-rated bonds will pay you a higher return, even as much as 14-15%, however there is a greater risk that the entity will default and you can lose your money. Buying these inside a bond mutual fund or ETF means you are buying a more diversified basket of bonds, so th risk may be lower. Generally, within a 401(K) account however, it is unlikely that you will see either ETFs being offered (they don’t collect enough fees for the broker) or higher interest, high risk bond funds (too risky for your employer, since they don’t want to be blamed if you lose money).

Since the stock market crash in 2008, many brokers including discount brokers are making a lot more information available about bonds. We like TradeKing and use it ourselves, for all the discussion forums, and educational materials teaching you how to invest. Many brokers have educational materials, easy screens to help you find and purchase the right bonds for you, with acceptable risk for your risk tolerance level. If you have any question about details of a bond purchase, including ratings, fees, minimum investments, or whether something is covered by federal deposit insurance, do not hesitate to ask your broker or get more information before investing.

This is just a beginning as you learn to invest money, and where to invest your 401(K) in cash, to have a bit more safety than all stocks.

So say we do have a depression, or a real bad recession. History shows that only through massive government spending – in the 1930′s it was WWII coming along, gov’t spending for the war – can we get out of the trough. It’s pretty clear the Prez is spending like crazy. But keep in mind, that some of the expenditures are also investments. Investments in a big way. Investments we’d be wise to mirror in our own portfolios.

Not only that – but the idea is, these investments will spur the kind of re-growth that builds our economy back up, but without the war and bloodshed. What exactly are our options here?

First – the green economy – green tech, green jobs – anything and everything green. Like it or not, industry new and old will have to be green. Believe in global warming or not, there is nothing wrong with making the world a cleaner place. In fact, it will make many, many people rich. And hopefully provide a planet on which to enjoy this new wealth. Will you be in on it, is the question?

Many people argue that green investment and things like cap and trade is in reality a tax on consumers of electricity. But that misses some major points. For example, we do not account for the “externals”, that is, we are not paying for the destruction we commit when we burn coal and create other greenhouse gases. We must begin to pay, because we can’t ignore the cost any longer. But also, with new green technology, the need to use dirty fuel will begin to lessen, so your costs as a consumer can go down thorugh conservation and adopting green alternatives. You won’t pay a consumption tax on something you don’t consume!

And keep in mind – the horse and buggy industry collapsed when cars came along. The mass transit revolution was trashed by government pushing cars and roads. So, here we are in another phase, where newer, better technologies are going to push out old dirty ones, and some companies will take a hit. But not for long, as alternatives come in like gangbusters into the marketplace.

Next there’s health care. Through technology there are major cost reductions to be had. The money is already flowing as part of the stimulus package.

A third investment the government is making is the auto industry. While it’s pretty volatile now, there’s a big committment to making sure we don’t lose all three automakers. which one or ones are left standing will grow into the future. (Could the Feds be unwiling to let GM go due to the release of the Volt next year? That works both for a green play and an auto play..)

Fourth, infrastructure and “shovel ready” future investments. A lot of increase has probably been built into companies short term already, but considering that there are a lot of bridges to be recuilt and schools and roads and so on, related industries re worth a look.

Ask yourself: What companies are on that bandwagon? What ETFs? What mutual funds? Look to invest in these in your 401(K), or start a self-directed IRA if you can’t invest in them through your workplace. Keep your eyes and ears open. Learn about the varity of investemtns out there. Don’t just save, but also conserve, put themoney aside into investments that make sense ina depression scenario. Don’t be a victim of it, ride the wave instead.

You know, it’s hard to know whether to invest in mutual funds right now, with this crazy, volatile market. While I’m happy to muse here, I always am careful to say, I am just another person out there and no expert on investing or anything. Yet I know BS when I hear it, from television talking heads, and I know I’m more right than they are, because I did pretty well in the downturn since early 2008. So take what I say as just some ideas, something to think about, that might be different form what you’re hearing generally out there, the “conventional wisdom” if you will, which wasn’t so wise for the past ten months.

The biggest question I’m asked by friends and folks who know me and my track record is, when is it good to get back into mutual funds, or should I be in mutual funds or cash? There’s a big misconception here that has to be cleared up first, and that has to do with what is a mutual fund, and how do mutual funds work.

A mutual fund is a specifically designated account, in which investors invest money, allowing the fund manager to select different stocks or bonds to invest in for the investors. There is usually some kind of guideline as to the objective of the fund – such as, growth or income or both. It’s set up so that the dividends are split among the investors, as are the costs, and as an investor in a mutual fund, you are also an owner in the underlying investments.

Mutual funds became big because many people wanted to diversify without buying individual stocks, or just didn’t want to learn to invest in stocks. Retirement funds, 401(K)s and others, also made mutual funds more attractive, because employers could just give employees a list of mutual funds and employees didn’t have to learn anything about investing in the market (or at least that was the theory). You just buy mutual funds and hold forever until you’re rich – simple! Well, not so simple.

Without really knowing what was in the underlying mutual funds, and just blindly buying whatever color you were told to on the “allocation recommendation” chart from your employer’s fund manager, you kind of got screwed. As for other investors, they put money into mutual funds as though they were individual stocks, again, without knowing what was in the underlying fund.

A mutual fund, by the way, can hold bonds, or cash, or stocks. By getting out of mutual funds, you aren’t necessarily doing yourself a favor. There might be some mutual funds – like government bond funds – that have actually held up OK, better than a savings or money market option perhaps. So, you need to understand what is a mutual fund, and then choose accordingly.

Now, that said, you get BS from people like Dave Ramsey, or Carmen Wong Ulrich on CNN, who continue to tell the lie about 12% or 14% returns on “good growth stock mutual funds”. HELLO PEOPLE – if you’re looking for annual averages like those, they don’t exist any more, if they ever did! (Note the dates they cite from – usually something like “if you invested from 1984 to present” or “since the Great Depression” – completely unrelated to YOUR investment timeline…) This kind of poor advice makes only one person profit -the broker! They don’t want you to take your money out of the fee-generating funds, but the people getting screwed here are the ones listening to myths about “locking in losses” or “missing the upturn”. Ignore them. Learn to invest. Look at your balances and tell me if their advice is any good?

Or, just take a look at your favorite fund company’s prospectus for any given fund. Show me one that has earned 12% for the past ten years, or even since inception. Good luck with that. In fact, stock funds are down where they were ten years ago. It’s time to learn about mutual funds and not just blindly listen to someone who has no idea what they’re talking about when it comes to investing.

So, knowing all of that, what do you do? It’s hard to reinvest in index funds, because for example, the S&P is heavily weighted with volatile financial stocks. But you can’t really pick and choose stocks if you want to, or if you have to put your money in mutual funds as in a retirement account. Until you leave or lose your job and roll over into a self directed brokerage account – we recommend TradeKing.

You can also open self-directed Roth IRA accounts, Traditional IRAs and other accounts to take investing matters into your own hands. And while the indices have been climbing slowly back the past month, professionals in the markets are suggesting that this is a temporary bull market, that the underlying fundamentals – consumer spending, credit markets, etc. – are just not there to sustain high numbers going forward. Probably better to wait or start small for now.

The best thing you can do is to test the waters with some of your money – put a small percentage back in, and average up, as the market climbs put a little in again at a time. But pay attention, and don’t worry about small bumps down, but DO keep your eyes and ears open to see what the market’s doing, and know what your fallback is, whether it’s government bond funds or cash. It is not a bad idea to sit and wait for sustained upturns int he market, if mutual fund investing – as opposed to buying stocks, options and shorts – is your only choice right now. (PS – we recommend that if you get it on your cable channel, watch Bloomberg TV instead of CNBC or CNN. Less BS, more facts.)