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.
October 14th, 2008 — Cash, Economic crisis, Investing, Retirement, Savings
What to make of short term market swings? Don’t let them fool you:
US To Face Poor Economy for 10-15 Years: Robertson
Companies can only prosper when there are customers, and if customers have no cash and their credit is taken away, they can’t buy. Where do corporate profits and growth come from if there are no buyers? (Other than the illusory “productivity increases” – which does not equal “profitability”.)
A friend asked me yesterday what to do: In her retirement account, she’s lost all of her gains over the past 5 years plus lost 15% of her principal (not including fees). She asked, should she sell all her funds and invest only in money market funds?
My question to her: Do you really think the market will perform well enough in the next 2-3 years to not only “win” your 15% back but earn more for you? Do you want to learn enough about stocks and investing to take control of your own money to make that happen, and not to just take your broker’s word about “asset allocation” and what to do with your investment? (It didn’t help that her accounts are with a big-name brokerage making ridiculous fees for buying 6 funds that essentially trade all the same stocks…)
Both of her answers were no. Given that, she decided.
She is selling her funds, and putting them into money market accounts for now, until she can learn more about buying bonds and CDs inside her retirement account, or, until it looks like the market is actually rebounding somehow. She HATES the market, HATES stocks. Not everyone should be in mutual funds in their 401(K). The myths of defined benefit plans is hurting a lot of people. She got in because people told her that “historically the stock market returns 11%” or pick your favorite number. That historical number has NOTHING to do with what anyone can or will earn. It was never a sure thing, as so many are finding out right now.
Remember: I know nothing about investing, I’m not a professional, and have no idea what anyone should do with their money. Ever.
October 11th, 2008 — Cash, Economic crisis, Savings, Sell Stuff
I’m not a finance expert, just a middle-class American watching the financial nightmare unfold in front of my eyes, and I’m deciding to do something about it. Putting more cash aside, taking steps to bring in more cash, and save, save, save is the goal. I don’t have a $$ amount I’m trying to reach – yet – instead, the idea is to make sure that whatever happens, I’m not broke.
This is not about “personal finance’ or what to do with your retirement, or how to get out of debt. This is way more basic: about having money in hand, or tradeable/sellable skills, or whatever is needed, to survive a massive economic blowout – and if the blowout doesn’t happen, I don’t think I’ll complain in that case either!
Here’s what I’m talking about:
- Figuring out how to save as much as possible, by buying less (or nothing), getting deals, and conserving.
- Finding best places to put the cash so it’s relatively sage – that is, the best rates on savings accounts, specific investments, other ideas. (Hint: This means NOT mean paying off credit cards first!)
- Making extra money – the fast kind, not the job kind; I’m not talking about overnight millionaires or anything, just ways to get a couple hundred (or maybe more!) coming in each week?
I think this crash is just the start. Stocks may not come back because the wages and jobs aren’t there that are needed to fund consumption without credit. We won’t have income because as customers we’re too broke to buy. It’s a vicious circle, and without credit no one’s going anywhere.
So, in the mean time, the goal is to keep cash coming in, prevent it from going out, and and do whatever it takes to protect your finances. Inflation is going to be the next bugaboo, but one thing at a time for now! I’m working on a list of ideas I’ll post here.
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