Entries Tagged 'Retirement' ↓
March 4th, 2009 — 401k rollover, Cash, Economic crisis, ETFs, Investing, Money market, Mutual Funds, Retirement, Savings, Self Directed IRA, stocks
I can’t believe I’m still hearing it: Someone on CNBC just this morning said, Oh, don’t take your money out now, you’ve lost too much!! Yeah, great, wait for Dow 5000. There are still plenty of financial experts saying that’s possible before it’s all over.
Guess what? The tee vee “experts” were saying that in November ’08 too, so if you listened - to CNN or CNBC or FOX or XYZ - tell me, where are you now?
I’ll say it again: in a volatile market, why not get out of mutual funds, at least with part of your money, and put it somewhere you can make a little, and wait for things to turn? I would rather make 2% in a savings account for a year than lose another 10% in a stock fund.
Some ideas:
- For investment accounts: Get out of the dang index funds – they include too many companies that are at risk. If you aren’t willing to learn to invest stock so that you can confidently buy individual stocks or ETFs, then put your money in a CD. If your financial adviser is still losing you money, don’t be afraid to move your account. Anyone advising you to stay put is going to lose you more money. IMHO.
- For a retirement account: If you get a company match, meet it with your 401(K) contributions, but NO MORE. Then take that money and invest in insured money market funds or “inflation fighter” funds – avoid the index funds! They are for later, probably not this year, but maybe next, not until you are confident the market is again moving in the right direction.
- If you have a 401(K) right now, you are likely down 30-40%. But don’t take it all out of your retirement account – you’ll get slammed yet again with fees and penalties. Reallocate within your 401k to whatever funds are closest to cash, Treasuries or A rated bonds – ask your plan administrator. (NOTE: This is not 100% safe either however in a credit freeze.)
- If you lose or leave your job, immediatly switch your retirement account to a 401k rollover – as well as funds you haven’t rolled over from previous jobs – roll them into self directed IRA accounts, using a discount brokerage. DO NOT ROLL OVER TO YOUR NEW COMPANY – or your investment options will be severely limited to mostly stock index funds! In a self-directed fund, you can invest in ETFs for commodities, metals, shorts, and a wide variety of other funds. We like Scottrade as well as TradeKing for to discount brokers. (Not affiliate links! We just like them!)
- For non investment money, get your hands on as much cash as you can, and put it into an insured money market fund. Hold off doing anything until you (1) spend time to learn to invest stock so that “what to do” is not a crap shoot, (2) understand why your 401K was so risky to begin with, and (3) find good ideas about where to look for solid returns, including experts who have a track record you can believe.
Now you’ll have to start to learn to invest money. There are places to make money, maybe not in a 401k but if you also open a Roth IRA or other account, you can make up for that outside your job. And if you get laid off, you can roll the money into your self-directed account.
There are places to be making money now, but you have to feel comfortable you know what you’re doing, and be comfortable with a degree of risk that we haven’t been trained to accept. But the rewards in this market, and for the next few years, will only come with more risks. If you aren’t comfortable with that, then you need to stay safe in cash or similar vehicles.
February 27th, 2009 — Bonds, Cash, Economic crisis, ETFs, Investing, Money market, Mutual Funds, Retirement, stocks
Since I’m not a financial advisor, you can take or leave what I’m about to say. But my answer since February of last year to the questions of friends and family, “Should I get out of mutual funds?” has been a huge YES! (If they had done so, they could have kept their losses under 5%… or even made money!) Now, lots of people are thinking of getting out of mutual funds in bad times – and that’s not a bad idea. But keep in mind we are talking about stock mutual funds – funds that invest in stock indices, or other combinations of stocks. There are other options for investing in mutual funds where your money is in cash or bonds, read on for more.
Here are just some of the problem with mutual funds:
1. You have no control over what they pick to invest in. All those 401(K)s in the S&P 500 Index Funds? Well, how many people who socked their retirement money into these every paycheck realized how heavily weighted they are toward financials? Yeah, that’s what I thought.
2. Many of the investment options you’re presented with in a 401(K) invest in the same types/sizes of companies. everyone touted the S&P 500 Index as a great way to diversify – but a huge portion of that index was in financials. As so many have found out too late. You have to drill down into each fund, and see what they invest in, and you’ll find in many cases, what you’re offered is a menu with different dishes made of the same ingredients.
3. The funds recommended to you are mainly made up of stocks. Your 401(K) advisors have acted like they are “protecting” you by not letting you invest in commodities like oil or gold, or a wider variety of bonds, or other vehicles like ETFs (on which they wouldn’t make any money). They are “helping” you when they advise bond investments or inflation-indexed funds only as you near retirement. The lie for decades now has been that you didn’t have to learn anything, just keep putting the money away, they made it “easy” for you. Now you’re learning the hard way that NO ONE know what they are doing, and that if you invest in the market you MUST be educated about it, or you stand to lose. And Lose.
4. Mutual funds make money on fees. Unlike ETFs, which are baskets of stocks that rarely change, mutual funds can change their holdings frequently, causing fees to eat up a lot of your investment. It depends on the fund company, however the percentage losses you’re suffering may not include the fees your principal is also paying.
I’ve been listening to the talking heads on tee vee telling people since last October, saying “Don’t get out now you will only lock in your losses.”
Uh, they never explain what the heck that means. You only “lock in losses” if you don’t move the money to something that is earning a return. Keeping your money in a losing investment will for sure lock in losses, and even make them bigger. The whole buy-and-hold mentality, don’t sell no matter what, keep dollar cost averaging – DOES NOT WORK IN A DEPRESSION, in a market that is going down and staying down for years at a time.
Example: Your portfolio is down 40%. You move 2/3 of it to a cash vehicle that is paying you 3%. The stock market contiunes down another 10%. Which one has truly “locked in” the losses? You are technically up 13% over where you could have been! When the market starts to rise again, you move from the cash vehicle to take advantage of rising prices. Where is the “lock”? Ridiculous. Get out of stock mutual funds and into cash. It can’t hurt.
So what do you do? Bonds? Cash? And what is a “cash vehicle”?
First off, mutual funds can purchase stocks or cash or debt in the form of bonds. You have to learn what the funds are investing in before you purchase shares. If your money is in a retirement account, taking money out of one kind of mutual fund to move it to another is totally permitted within your 401(K). We’re talking about moving the money inside your 401(K) from say stock mutual funds to bond mutual funds – not taking money out of your 401(K) altogether. All you would do is change your allocation of invested funds from stock funds into something safer and less volatile.
For example, you can usually put your money in cash by moving your 401(K) investments into a money market fund, or an inflation-indexed fund (which are usually government Treasury notes or bonds); usually you’ll have some option to invest in cash. You may also have some bond funds to choose from, corporate bonds or government bonds.
As for bonds, however, even they can be troublesome, since they are only as good as the corporation backing them. For government backed bonds, the Treasury repays those, so you would at least be in as good of shape as the Chinese.
Some Treasury bonds are inflation indexed, and funds investing in those can also be a good way to protect your money – these bonds change in value as the rate follows the inflation rate – which, I would guess in about 5 years, might not be a bad place to have some cash.
Just remember, that getting out of mutual funds in bad times does not mean you can’t invest in your retirement account. You DON’T have to take the money out of your 401(K)! In fact, if you did that, you would be hit with penalties. But you CAN move your holdings into something besides stock mutual funds. Don’t let them scare you by saying “Well you’re trying to time the market!” Your response: HELL YES I AM! You can always put your money back into stock funds when the time is right. My guess is, that would be a few years off, so why lose money today?
This lack of control over your funds is one of the reasons so many people believe that the 401(K) is not all it’s been cracked up to be. So, if you get a match from your employer, then invest an amount sufficient to get that company extra. But beyond the match amount, open a self-directed IRA, or a ROTH, or start a business and sock all the money you can into a SEP-IRA for business owners or other self-employed retirement vehicle. That way, you and you alone can decide where to put your money.
Then start learning. You must, if you want to recoup anything before you retire. The days when you could just send the investment company a check and believe it was all taken care are gone, hopefully for good. If you don’t like that, you really should get out of mutual funds - there are always CDs, or, of course, the mattress. Getting out of mutual funds in bad times leaves you with something left when the good times come back.
November 20th, 2008 — Bonds, ETFs, Investing, Retirement, Savings, stocks
Image by scottwills via Flickr
I wanted to go back on something I posted a few posts ago. You probably SHOULD keep investing in a 401(K) or other retirement plan, at least up to the company match, if you are lucky enough to get one. The danger is in continuing to put your hard earned dollars into this market through some kind of standard index mutual fund.
My co-worker argues with me: Oh, it’s dollar cost averaging! We’re buying on sale! It’s OK to lose, because I have a 20 year time horizon!! What a bunch of Bull! Why should you lose two years or more worth of increases of any kind, and actually take a loss?Then, take the next two years after that, or longer God forbid, to get back to where your balances equal just your inital investment?
Dollar cost averaging is for dupes! It’s to make you believe it’s EASY to manage your own retirement, so that your employer doesn’t have to feel guilty about not offering any kind of fixed retirement plan any more. Meanwhile, you will LOSE 4 years of any return at all, plus principal, if you are just following the “conventional wisdom”.
Investments experts are not “dollar cost averaging”. They are sitting on the sidelines with their cash. The are investing in short ETFs, currencies, and corporate bonds, all of which you likely have NO access to in your 401K. Only the dupes keep “buying” stocks at these crappy levels, because they haven’t taken the time to learn something and stop their contribution from going into the same old index fund. OF COURSE Wall Street is telling you to keep contributing, so they have someone to SELL TO.
So, put your $$ into your retirement fund, up to the company match, to keep saving, but keep it in the government bond fund or the savings account fund. What the heck, why not EARN 3% instead of LOSING 20%. Then in 2 years when the market slowly creeps back, THEN switch your allocations. For everything you want to save beyond your company match, set up a self-directed ROTH. Put as much as you can in there. And LEARN how to invest, find other vehicles that are actually making money (they are out there). Otherwise, you’re just throwing it away.
November 17th, 2008 — Budgeting, Cash, Economic crisis, Investing, Retirement, Savings
I like Dave Ramsey. It was because of his book, Total Money Makeover, that I started using the envelope system, and actually now save some money each month. I think he’s being proven correct right now 
about being debt-free – and I’m working to get there myself.
But he’s still telling people to put their money in “quality index funds” so you can earn “14% over time” – WHAT?? There is NO truth to the 14% number (actually that’s the highest I’ve ever seen – 10%, 12% is the usual number). In this market, telling people to do this is a complete misrepresentation of what their specific, actual results may or may not be.
The simple fact is that any money put into index mutual funds 10 years ago are back where they were then. There has been NO increase in the last ten eyars – let alone 14%!! How many people will blindly do this based on his suggestion alone?
He is good with the “get out of debt” idea. But he should just plain stop telling people where to put their investment money. The whole “stick it in an index fund and sit back and enjoy the winnings” method is out the window. It never really was true, and today even less so, that this is the best way to invest.
Bottom line: If you don’t know anything about investing, stay out of the market. Don’t get your advice from people on tee vee. If you want to hire somone, you better know what the heck they are talking about, or you’ll get screwed, either intentionally or accidentally. If you don’t know and don’t want to know, then buy CDs. Anyone who invested in a 6% CD ten years ago would right now be far far ahead of anyone who had their $$ in the market.
October 15th, 2008 — Cash, Economic crisis, Investing, Retirement, Save Gas, Savings
Image via Wikipedia
The first time I read about the problems inherent in 401(K)s, it was reading Rich Dad’s Guide To Investing by Robert Kiyosaki. Whatever else you think of him, his discussions of how the tax laws were written and rewritten to benefit the rich and not the middle or lower classes are invaluable, as well as his concern over why 401(k)s don’t work for the vast majority of people. (Pick it up for a couple bucks used, and while you’re at it read Rich Dad’s Prophecy too for a real hair raiser…)
Here is an article today in the Washington Post saying the same thing, (although where were these articles five, six ten years ago…)
Jim Cramer too has ALWAYS said to only put into your retirement account what your employer matches. Beyond that, use a ROTH or some other self-managed vehicle where you can invest in individual stocks, bonds, CDs or investmetns that YOU control, not the ubiquitous index fund or “diversified” global funds.
You may argue with some of the recommendations of these writters, but the underlying logic makes sense, and is borne out by the results in the real world for the vast majority of people. It’s worth taking a step back and looking at the big picture.
I have some links and ideas I’m in the process of compiling, from financial types who recommend where to invest now, if at all. Also some additional ideas for finding cash. Here’s one for today:
- Get rid of gas cards, which have extremely high interest rates. Pay cash, and start carpooling once a week or more. Just be sure to bank the savings. Sounds trivial like most of htese savings tips, but they add up, and in changing your lifestyle you’ll become more financially sound.
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