Investing and Personal Finance

[Koyaanisqatsi]

In regards to IRA/401K mutual funds, what is the best strategy as to when to contribute to funds. I read that the best strategy is to make regular contributions over the year up to your maximum

Yes. 401Ks are the best option and different than IRAs, primarily because many companies will match (or partially match) your 401K contributions. You put in $200 they put in $200. So you obviously want to contribute as much as you are able, up to the maximum allowed in any given year, which I believe is now $19,000. So that would be a monthly (pre-tax) contribution of about $1,500, which, if you're in a really good job, they will match, so at the end of your first year you've got at least a total of $38,000 in capital to invest.

So use that calculator I linked to above and just put $38,000 as your initial investment, interest range of 10%, annual contribution of $38,000 (your contribution and your employer's match combined), and 20 years (with interest compounded annually and no inflation). You'd have about $2.6 M. With inflation about $1.8 M.

But the other good thing about 401Ks is that you can borrow up to 1/2 of your market value to use as a downpayment on a mortgage. You basically take a loan out against yourself. You have to pay it back before you retire (or else you're taxed and penalized on the amount you haven't paid back), but other than that it's the best loan option you'll ever have.

I think you can (or could) do something similar with an IRA, but it's less than 1/2 and other restrictions that I don't know off hand.

I have also read that it is best to contribute everything as early as possible also to not worry about the swings in the market. Myself, I tend to contribute when the markets take a down tick and hold off contributing if the market is really in a high.

Well, yes, in general you should never invest anything you can't easily loose. It's a gamble no matter what. But, in general, regarding retirement investing, it's all about the long term. Mutual funds typically have a highly diversified portfolio (even if their particular "sector" is weighted), so they certainly go up and down with the market fluctuations, but over time those bumps even out and you get a longer term accumulated positive interest.

That's why the ten year measure on Morningstar is generally lower than the five or the first and useful for retirement planning, rather than higher return (but riskier) five and one year return percentages.

Iow, if you want to make some quick money, you want to look at the weekly and monthly returns over the course of a year to see whether or not you could jockey the market (sell high, buy low). But if your goal is longer term, then you look at the ten year measure as an indicator for where your investment will be then.

In general, of course, it's always good to buy in when the market is low, but in regard to returns over time, those first day gains may not be as relevant. It's all about what you're going to average over time and then, twenty years from now, what will you invest in? Hopefully not just adult diapers and a day nurse.

ETA: If you're going the "quick money" route, remember that your mutual funds don't trade on an intraday rate, they trade on the end-of-day rate. So it's hard to "play" the market with mutual funds. They're designed to be places where you park your money longer term. You can better do day trading with ETF funds, but it's far better to just park your money and let time provide the returns.

Daytrading can be done, of course, but it's almost exactly like playing the slots in Vegas. Yes, you'll win every once in a while--just enough to keep you plugging in more nickles--but generally speaking, the house is going to beat you every time.

That's precisely why index funds were created; because simply following the market passively over time is the best way to "win" at playing the market.

 

[rousseau]

If I may step in (15 years experience in the high net-worth finance industry in NY, albeit as a Director of Compliance, but it rubs off ), it wouldn't hurt to invest some of your money in riskier mutual funds, so long as (a) you can afford to lose it and (b) you are relatively young (i.e., under, say, 45 or so).

Mutual funds are already low risk, because they bundle together percentages of ownership in a bunch of different companies (thus, if one company goes bankrupt, you don't lose your shirt). So the risk is already mitigated, but if you're talking about a mutual fund that invests in higher risk companies--like an emerging markets index fund--there is a bit higher risk due to those companies generally having a higher failure rate (for a myriad of different reasons: local laws; volatile governments; fluctuating currency; etc).

If you want to risk a portion of your money on higher risk/higher return funds, then do something like 70% in a more stable fund and 30% in the riskier funds.



Agreed. I would encourage all to re-read his/her posts.

I don't know a ton about mutual funds, but everything I've read basically points me to a portfolio diversified with various indexes, and not mutual funds.

Just to clarify, mutual funds are index funds (or, rather, can be). An "index fund" is (typically) a mutual fund (or ETF) that invests in and follows certain indices, like the S&P 500 (i.e., the top 500 companies in the world).

Vanguard is widely considered to be the industry leader, but others (like Fidelity and Schwab) have and/or are catching up, particularly with ETFs, which are essentially the same things as mutual funds, only much lower expense ratios and they trade like stocks.

Mutual funds are more "liquid" (meaning they can be converted into cash quickly) than ETFs. Just like a stock, when you sell an ETF it takes three business days before you get your money. The advantage to ETFs, however, is that you can sell them at any point during the day and get the price you just saw locked in, whereas a mutual fund's price is whatever the market value is at the end of the trading day.

Iow, let's say you invested equally in an ETF Index fund and a Mutual Fund Index fund and the value of both at 10 am was up 20% but by close of trading it was down 20%. If you sold your ETF at 10 am, you'd profit mightily. But even if you sold your mutual fund at 10 am, you wouldn't get the +20%, you'd get the -20% because a mutual fund's sell value ("NAV") isn't calculated until end of day.

Here's a good enough article from Fidelity that goes into more detail.

any actively managed mutual fund that doesn't use indexing has a really tough time beating a well built portfolio made of indexes.

Generally speaking, over time, that's correct, but "indexing" really just means following the top stocks (in the given category). A mutual fund can either be actively managed (i.e., a manager decides that today he or she is going to sell out of X) or just passively follow the S&P 500 (i.e., whatever happens in the market happens to the fund).

Ideally you also adjust the weights of your portfolio too, but that's next level investing.

And depends on many factors, but yes. The simplest thing for most investors--especially if we're talking about IRA investing (i.e., long term, "set it and forget it" investing for retirement), investing in something like the Vanguard S&P 500 Index Fund (mutual fund) and setting your account for dividend reinvest (which is the key to compounding interest), you'll basically be set twenty/thirty years from now.

Yes, you should contribute as much as you can (and ALWAYS contribute the maximum amount to your 401K, especially if your company matches your contributions in any percentage, as that's literally "free" money), but even if you just set your initial investment for dividend reinvest and then forget about it, it will grow exponentially.

Here's a nice mutual fund returns calculator for anyone. It allows you to punch in various scenarios to see how your investment could grow. For example, I did an initial investment of $10,000 with $1,000 added annually into a fund that gives a 10% return (with 0 taxes as I'm thinking of it in an IRA). After 20 years, (i.e., $30,000 capital) that would be worth over $125,000. Doing the same calculation with $12,000 added annually (i.e., $1,000 per month) would yield over $800,000 in 20 years.

So if that's my goal, I need to research mutual funds or ETFs that could reliably yield a 10% return over 20 years. As ETFs are newer to the game, that might be more difficult to find, but I could reasonably extrapolate a 10 year analysis.

And, yes, part of that return needs to factor in fees, so be sure you're looking at returns net of fees.

Morningstar.com is one of the best sites for all such information. And if you're looking for definitions or more information, Investopedia.com is a great resource. As the name suggests, it's an encyclopedia for investing, so it has all the terms and strategies spelled out in layman's terms (more or less).

Thanks for the post, this is all pretty much in line with the research I've been doing.

The problem that's irking me right now is that based on that same research most funds are currently valued quite high, and likely to regress to the mean over the short to medium-term. Initially I had the impression that you could enter the market at any given time, make regular contributions over the long-term, and come out ahead, while now I realize that this greatly depends on the time-frame that you're investing within. And from what I can tell rates of return are expected to be quite bad in the upcoming period.

And yet the above is at odds with the advice of not timing the market.

So this results in the question of: should I just enter the market now, and regardless I can't do better than that over a 30 year period, should I actually time the market, or do something else completely with my money?

 

[Koyaanisqatsi]

The problem that's irking me right now is that based on that same research most funds are currently valued quite high, and likely to regress to the mean over the short to medium-term. Initially I had the impression that you could enter the market at any given time, make regular contributions over the long-term, and come out ahead, while now I realize that this greatly depends on the time-frame that you're investing within.

No, actually, when you're looking at long term investing, you can pretty much ignore the market. The fluctuations are normal and average out over time, such that, any particular low periods are compensated for by high periods. As that corkscrews, the overall effect is a positive return, such that, when you are ready to liquidate for retirement (or for whatever reason), by the end of ten years your market value will have gone up significantly in spite of any interim down markets.

Yes, if you sold when the market was way down, you might lose any gains you made over the years on that particular position (whatever it may be), but in general (absent calamity, which does happen), you come out ahead in the long term. That's the magic of compound interest/dividend reinvest.

It's endlessly ironic, but the whole Occupy Wall Street and Sanders fake zeitgeist about the "1%" and the idiotic "wealth inequality" nonsense taking such vehement fervor these days (is there such a thing as wealth equality?) is that it's based almost entirely on the fact that my generation--Generation X--born in the sixties and coming of age in the eighties was the punk generation and a lot of us were saying "eat the rich" (or "fuck the rich" or "kill the rich") and basically eschewing anything that our parents' generation did, like investing, while another part dove right into investing like it was a hooker with blow on her tits (basically the poster child for "junk bonds" in the 80s and 90s).

To put that into perspective, if, starting in, say, 1980, every year we--every US citizen above the poverty line--had put $100 in the same S&P 500 index fund (I'm talking about just $8 per month) and set it for dividend reinvest, we would be talking about the 10% homeless problem, not the 10% wealth problem, because anyone who did so would be worth about a million dollars today.

All from just $8 a month. Even if you were only making $12K per year, that would be $1,000 per month. Out of that, $8/month into your retirement would have been all it took to be worth almost a million today. I literally kick myself every fucking day for not doing anything like this until I was in my forties and even then I hesitated and didn't take full advantage of my company's 401K.

And it's not difficult. There is no secret, arcane knowledge involved. Just set it up (dividend reinvest) and add to it every year/paycheck as much as you can or are allowed and just let it ride and you're set for life. Yes, of course, absent a major collapse, but here is a great piece on the history of market fluctuation: Here’s How Long the Stock Market has Historically Taken to Recover from Drops.

They note that in 7 out of the 11 drops charted (from 1950 - 2018) it only took a year for the market to get back up to its previous high:

The longest period so far was the 2000 recession (brought on by the dot.com bubble), but even that was only 8 years. That's why you think in terms of ten years at the very least.

And from what I can tell rates of return are expected to be quite bad in the upcoming period.

What do you mean by "upcoming period"? Do you mean the next quarter or the next two years or the next decade? Again, there are different strategies for investing shorter term than for longer term, but if you do think, say, climate change is going to be the dominant issue over the next decade,and/or there will be a coming zombie apocalypse, then you might want to invest in mutual funds that in turn invest in "green" companies while at the same time invest in a mutual fund that invests in food and water (and oxygen) or the like. It won't stop the zombies, but you'll profit off the escalating panic and mayhem, so that's fun.

But any portfolio should have a large percentage (imo) invested in an index tracking fund like VFIAX (though that has a higher minimum buy in, but as an example, look at the "maximum" returns over time and you'll see why you look at longer term, rather than shorter term).

And yet the above is at odds with the advice of not timing the market.

Again, that's because you can't "time the market" and even if you could the way compound interest works in a mutual fund that simply tracks the top positions isn't a matter of timing the market (i.e., buying low, selling high). That's a strategy for day trading, basically, and that's almost exclusively stocks (and riskier ones at that), because they rise and fall and so you watch them during the day or week to bet on, essentially.

You can't do that with mutual funds, nor should you. You can do that with ETFs, but shouldn't.

High volume equity (stock) trading is something not even the pros excell at. Sometimes you get lucky--and that luck can last for several years--but then you lose it and make a bad call and lose your portfolio.

If you want to do something like that, then the smart strategy is to park the majority of your money in mutual funds/etfs, some in low return, but rock solid CDs and then like 10% for high risk/high volume trading.

CDs are FDIC backed and while illiquid, they are guaranteed (up to $250K per individual). They typically have very low yields (2% or so), but you can't lose your money even if the market collapses. If the government collapses, yes, but not the market. So that's a good place to park a chunk of cash for the long term as a safety net (like 10%-20% of your portfolio).

So this results in the question of: should I just enter the market now, and regardless I can't do better than that over a 30 year period, should I actually time the market, or do something else completely with my money?

Well, again, it doesn't matter when you "enter" the market when it comes to index funds. In general, sure, it's great to buy low, but what does that actually mean to you? How will you know? If anyone could reliably "time the market" they'd be the King of Kings. At best, some people can get lucky, but almost ALL money managers have a diversification strategy at play.

Index funds (the passive ones) are precisely the opposite of all of that nonsense and that's why they do the best over time. They're not prone to money managers trying to predict the future.

I think someone noted this in the thread earlier, but why do you think somebody like Warren Buffett is strongly recommending that you just park your money in an S&P 500 index tracking fund (dividend reinvest) and let it go on its own as the best way to build wealth? It's precisely because it isn't susceptible to human failure.

Here, parenthetically, is an excellent piece from Investopedia explaining diversification and what steps you should follow: Portfolio Diversification Done Right

My own personal preference is 60% equity mutual funds/etfs (and then I break that down into four or five funds across various industries, like a tech-based fund; a healthcare-based fund, etc., but with the majority in an S&P 500 index tracker), 20% bond funds (mutual funds as well, but with bonds as the bundled investment) 10% in long term CDs (I like five year CDs because every five years is a good time to evaluate one's portfolio); and 10% cash/speculative (i.e., higher risk stocks that might interest me, such as with the new marijuana market).

I really don't need to keep any cash (as mutual funds are now the world's money market funds, basically, and they're next day liquid), but it's a hard habit to break.

But I'm 53 and am prepping for retirement, so I probably have different concerns than you do.

Regardless, what you're talking about (timing the market) only applies to short term investment strategies that are trying to predict where the market will go in terms of weeks or months or quarters, not really longer term. I leave out years, because if you're trying to predict what the market is going to do in terms of one or two or five years--and basing your investment decisions on that type of strategy--then you'd better be very rich indeed in order to weather the many loses that will generate.

Again, that's why long-term investing results in overall positive returns; it smoothes out those year-to-year fluctuations from people thinking they can predict the future.

 

[ideologyhunter]

After 30 years at it, I agree overall with the post above. This is what investment managers spend 60% of their time saying to jittery clients. (Fall/winter 2008/9 was a bitch, though. I lost sleep and weight. Good thing I'd already had my feet wet for 20 years at that point. I imagine that anyone who was a newbie and started an investment account in, say, summer '08, got out of the market and stayed out.)

 

[Koyaanisqatsi]

After 30 years at it, I agree overall with the post above. This is what investment managers spend 60% of their time saying to jittery clients. (Fall/winter 2008/9 was a bitch, though. I lost sleep and weight. Good thing I'd already had my feet wet for 20 years at that point. I imagine that anyone who was a newbie and started an investment account in, say, summer '08, got out of the market and stayed out.)

Well, that was actually the real panic that collapsed the market. Generally what happens is everyone watches the top dogs. If they sell, then their suckerfishes sell and once that happens a general panic ensues and the shockwaves escalate precisely because the lower-tiered investment managers are progressively less intelligent and the whole house of cards can collapse.

They don't know why the top dogs are selling, so they just panic sell in lockstep.

In 2008, rich people had their cash components invested in mortgage-backed money market funds. That was just the basic interest bearing savings account, in essence. Those vehicles generally had a 4%-5% return, so you parked your cash into them for the month before making the larger investment into a private equity fund or the like, so your cash is still earning a return.

Those are the assets that became worthless (the mortgaged-backed money-market funds), so everyone got out of those and into treasuries instead (which had like a 2% return).

That should have been the end of it, but some top dog clients decided to get out of certain equity positions just to be safe and/or to raise capital to offset the loss, the lower-tier saw this (not why, just that it was happening) and followed suit and suddenly the equity market shit the bed.

The changeover from mortgage-backed money markets to treasuries was a same day process for most custodian banks and wouldn't have gone beyond that, but, if you're talking about hundreds of millions/billions of dollars losing 2%-3% in a day, you're still talking about a huge pile of money, hence the equity debacle.

And had the ratings agencies properly assessed the mortgage-backed securities (i.e., simply did their job) there would never have been a problem to begin with, but that's a whole different discussion.

 

[Koyaanisqatsi]

I should clarify (or, rather, let Investopedia clarify) dividend reinvesting for ETFs. It’s not as simple as it is for mutual funds, so definitely read the linked article before considering buying an ETF.

When it comes to long term, set it and forget it investing (i.e., for an IRA), mutual funds are the way to go. If you have done some homework on the ETFs and/or don’t mind manually purchasing new shares whenever you get a dividend, then ETFs are the way to go.

And, of course, you can go with a combination of the two. That would allow you to have lower fees overall and offer the opportunity of jockeying the market a bit here and there and perhaps go with ETFs that are a bit riskier accordingly, but give a higher return.

Though, again, if you don’t know what you’re doing, I would avoid that.

 

[Tammuz]

I have some index funds of various sorts, and some individual stocks, mainly because I like dividends. I have though of selling off my stocks and put that money in index funds. But I am unsure. Are there any good reason to keep the stocks?

(For clarification, with the account type that I have, receiving a dividend is not a taxable event.)

Also, how should one optimally portion up it in the index funds? How much should be in global, emerging markets, etc?

A lot of Swedish investment sites suggest that one should also invest a part in Sweden (index) funds. Is that really a good idea? Isn't that essentially a bet that one single small country that historically has performed well will continue to do so? It seems to me to go against the crucial notion of index investing that one can't predict the market, except for that the world economy will grow? I can see that (index) investing in emerging markets can make sense, as it is very likely that these countries will become more developed and affluent over time.

 

[Koyaanisqatsi]

I have some index funds of various sorts, and some individual stocks, mainly because I like dividends. I have though of selling off my stocks and put that money in index funds. But I am unsure. Are there any good reason to keep the stocks?

It depends on the stocks (what companies?) and when you purchased them (i.e., for capital gains tax purposes). The advantage to holding individual stocks is they can go way up in value and you can decide to sell whenever they hit a particular value, etc. The downside is that if that company goes bust, you've lost a significant part of your portfolio.

As opposed to mutual funds that may also have investments in the particular stocks that you own, but in smaller percentages and in combination with a ten or twenty other positions.

Let's say you have $10K invested in Coca Cola. If it goes belly up, you lose the full $10K.

If, otoh, you have $10K invested in an index fund that also invests in Coke, if Coke goes belly up you'd only lose the percentage that was invested in Coke. Let's say it's 10%, so you'd only lose $1,000 and still have $9,000.

(For clarification, with the account type that I have, receiving a dividend is not a taxable event.)

Everything is a "taxable event" eventually. I think what you mean to say is that you hold these stocks in an IRA or 401K, is that correct?

Also, how should one optimally portion up it in the index funds? How much should be in global, emerging markets, etc?

Well, that depends on many variables, number one of which is how old you are and whether or not your investments are held in an IRA/401K or just a regular brokerage account.

The reason your age matters is tied into the goal of your investment portfolio. If you are in your thirties, for example, then retirement is a good thirty years from now, so you'd probably want to put most of your portfolio (like 70-80%) into a basic S&P 500 index fund and keep 20% or so for investing in higher risk/higher return funds. The reason being that since you're relatively young, you can afford to take higher risks.

Here's a good article by Kiplinger on the 6 best Vanguard Index Funds for 2019 and beyond.

Again, the reason being that, over that long of a time span (and with dividends set to reinvest), you'll average a large return. Here's VFIAX's returns since 1976:

A lot of Swedish investment sites suggest that one should also invest a part in Sweden (index) funds. Is that really a good idea?

Well, again, it depends on what your goal is. Imo, the PRIMARY goal for any investor should be their retirement. So, always have a significant portion of your portfolio dedicated to that end and that end alone. But, again, if you're younger than, say, 35, I'd also have a portion of my portfolio used for riskier investments because if they go belly up, you're still in your prime earning years and can recoup your losses.

Do you think that Swedish companies are going to grow significantly over the next ten, twenty, thirty years? If so, then you might want to invest some of your portfolio in them, but as a general rule, something like that would be a small portion of your overrall approach. Better to invest in an International index tracking fund (Vanguard has those as well, as does Schwab and Fidelity and many others). I.e., a fund that includes Swedish-based countries, but will include others as well.

Unless, again, you're young enough and/or wealthy enough to risk concentrating your money is just one sector like that. Take a look at various Swedish-based index funds and see how they have performed over the past five years at the very least, unless you are thinking of shorter term investing, in which case you want to look at the one year and then decide if you want to risk investing for the next year, but then you're not really taking advantage of the benefits of index funds and have to watch the market over the next year and then try to predict what is generally unpredictable.

Isn't that essentially a bet that one single small country that historically has performed well will continue to do so?

Yes, but, again, it's ALL a bet. That's precisely what investing is; legalized gambling. The key is how risky is the investment and how young you are--and wealthy you are--to weather any such risks? That's why Warren Buffet so strongly recommends parking the majority of your portfolio in something like VFIAX (with dividends reinvested) and just letting that ride for at least ten to twenty years.

If you are trying to make money in the short term (say, under five years), then you may want to risk more of your portfolio, but no matter what, I would still humbly recommend that you keep at least half of your portfolio in something like a basic index fund while you're gambling in higher risk poker with the other half. Really, though, I wouldn't go below 70% no matter what, but I'm in my early fifties and need to make sure I have "safer" investments (i.e., less risk, but more of a guarantee comparatively speaking that the money will both grow and still be there when I need it in fifteen years, which, with the way things are going is not a definite, so I may be moving a good chunk into FDIC insured Certificates of Deposit ("CDs").

It seems to me to go against the crucial notion of index investing that one can't predict the market, except for that the world economy will grow?

Well, take a look at the Kiplinger piece, as you may want to put a certain percentage in an International index fund as well. The point is that because no one can predict the market, the smartest money (again, once you've made the decision to invest in the first place, and therefore enter into the overall gamble that is investing) has been in index funds and that only over a long enough time span.

MOST down markets have corrected themselves within a year, but we've just gone through two back to back (2000 and 2008) that were whoppers. Granted they were the results of unique problems that have since been addressed (sort of), but that's the nature of gambling. It's a risk. And it's also why thinking of the market in ten year terms (at least) is the best option.

I can see that (index) investing in emerging markets can make sense, as it is very likely that these countries will become more developed and affluent over time.

True, but it all depends on the stability of the respective governments. Look at Iran in the 70s. It was still oppressive in many respects, but it was also economically expanding and as cosmopolitan and rich and "modern" as New York City then WHAM.