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View Poll Results: What best describes your investment strategy?
My investment strategy is primarily my 401k, IRA, or other retirement savings 16 80.00%
I invest in index funds and mutual funds purchased from a firm 5 25.00%
I invest mainly with online brokerages like E*Trade 2 10.00%
I invest mainly in bonds and CDs 2 10.00%
I have a savings account but I don't invest 0 0%
I don't have the finances to invest/manage wealth much 3 15.00%
Multiple Choice Poll. Voters: 20. You may not vote on this poll

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Old 01-25-2013, 08:29 AM  
La literatura La literatura is offline
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Investments & Personal Finance

I was wondering what some of the more popular basic investment plans practiced in here are.

I don't know much about wealth management, so hopefully this leads to a fruitful discussion. I do know that it's best to start early so 'the miracle of compound interest' can take its course.

Other than that, my understanding is investing in index funds are the safe (and typically smartest) route to go for stock investments, and then treasury bonds and company bonds are a low-risk stable investment.

My understanding of a mutual fund is its a basket of selected investments that a company packages together and sells to you.

If you want to make your own basket of selected investments, you do things like E*Trade and ScottTrade, and it's not advisable to do this as your main investment vehicle (though fun to do on the side if you don't mind the trading fees).

If you invest into an index fund, which one do you use? Where did you go to set it up? If you do online brokerages, which company do you use?

Last edited by La literatura; 01-25-2013 at 08:41 AM..
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Old 01-25-2013, 08:33 AM   #2
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The miracle of compound interest is a helluva lot less miraculous now that interest rates are substantially south of 1%. You should look at bank accounts as rainy day funds and not as investments at all, given current interest rates. Even CDs are not offering any kind of significant rate that is worth looking at.
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Old 01-25-2013, 08:39 AM   #3
La literatura La literatura is offline
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Originally Posted by Amnorix View Post
The miracle of compound interest is a helluva lot less miraculous now that interest rates are substantially south of 1%. You should look at bank accounts as rainy day funds and not as investments at all, given current interest rates. Even CDs are not offering any kind of significant rate that is worth looking at.
Just for fun, with an interest rate of 8%, a $10K initial deposit into a savings account would yield $20K in 9 years. But with an interest rate of 1.5%, it would take 48 years to reach that amount.

That is fun to think about, no?

So, what can get me an annual return on my investment of 8%? That's what I want.
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Old 01-25-2013, 08:40 AM   #4
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There are many, many books and websites on this, but good general rules of thumb:

1. index funds are the way to go because the fees are lower. Fees eat away at performance and can add up to very substantial amounts over long periods of time. Managed mutual funds tend, over the very long haul, to UNDERperform the broader market, so you're usually paying more in fees to get less return even before the fees are factored in.

2. Keep a rainy day fund worth of cash in a liquid account. Figure on several months of expenses at least.

3. In investing, diversity is important. You can and should diversify across types of investments (real estate, stocks, stocks versus bonds) and across geography (domestic versus international). Being young, you should be heavy on stocks and you will almost inevitably be heavy on domestic. That's not terrible, but just be mindful that diversity is usually good.

4. You can NEVER time the market. Don't try. Forget the miracle of compound interest and learn the joy of dollar cost averaging, which means steadily contributing the same amount of money to your various mutual funds on a monthly basis over a long period of time so that your money gets invested when the market is low (and the price per share is cheap) as well as high. When it's high, don't stop, because it may yet go higher.

5. You don't lose or make money until you sell. Stay the course. If you're 35 and the market is tanking, who cares? You're not taking the money out for 20+ years. STAY THE COURSE. If your plan is good and consistent, you should be fine in the long run.

6. Your friend's hot tip? It ain't hot and it's not a tip.

7. Do what you can to reduce your tax exposure and increase your income. At a minimum that means making sure you understand your employer's tax advantaged retirement plans, if any, and AT LEAST contributing the amount needed to get the maximum match. If they match $1 for every $2 up to $5,000, then do whatever you can to put in $10,000 and get that free money. After that, consider traditional and Roth IRAs. Keep in mind that that money is out of your pocket until retirement age, so you must balance retirement plan savings with "regular" savings.
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Old 01-25-2013, 08:43 AM   #5
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Quote:
Originally Posted by La literatura View Post
Just for fun, with an interest rate of 8%, a $10K initial deposit into a savings account would yield $20K in 9 years. But with an interest rate of 1.5%, it would take 48 years to reach that amount.

That is fun to think about, no?

So, what can get me a return on my investment of 8%? That's what I want.

Sure, fun, but you're forgetting (as everyone does), that money was tighter then, and inflation higher, and loan rates much higher. The average person could make 5+% on a bank account, and 8+% on a CD, but had to pay 10+% on their mortgage and 12% on their car loan while inflation is going up 5% per year. Your investment returns are subject to the LAW of inflation. If you make 1% on your ultra-conservative CD and inflation goes up 2%, you have LOST purchasing power.

Everything is relative to everything else. A 5% return in a 3% CPI inflationary year is BETTER than an 8% return in a 10% year (God help us).
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Old 01-25-2013, 08:48 AM   #6
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Originally Posted by Amnorix View Post
Sure, fun, but you're forgetting (as everyone does), that money was tighter then, and inflation higher, and loan rates much higher. The average person could make 5+% on a bank account, and 8+% on a CD, but had to pay 10+% on their mortgage and 12% on their car loan while inflation is going up 5% per year. Your investment returns are subject to the LAW of inflation. If you make 1% on your ultra-conservative CD and inflation goes up 2%, you have LOST purchasing power.

Everything is relative to everything else. A 5% return in a 3% CPI inflationary year is BETTER than an 8% return in a 10% year (God help us).
Great point. How has the inflation rate been recently? How quickly does it fluctuate? How predictable is it (and does predictability help an average investor)?
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Old 01-25-2013, 08:48 AM   #7
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401K and AR-15's. Guess which one will make me the most money? I have been offered $2500 for guns I bought for 1K a month ago.
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Old 01-25-2013, 08:49 AM   #8
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My understanding of a mutual fund is its a basket of selected investments that a company packages together and sells to you.

I can't spend forever on basics, but a mutual fund is a group of investments which are "sold" as a bundle, BUT there are different types of mutual funds -- there are managed mutual funds -- in which a guy who is paid alot of money specifically selects the investments that are in the fund -- versus index funds.

Index funds are also mutual funds, but they consist of a basket of investments that are determined by something other than some bright guy reading the WSJ. the Vanguard 500 index fund is a mutual fund which tracks the 500 largest US companies (by market capitalization). The companies that are "in" the 500 change from time to time, but not daily, and the Vanguard 500 simply reflects this.

But it's more than just that -- the Vanguard 500 also contains the same weighting as the market itself.

There are index funds for damn near anything. You can do the Vanguard 500 for teh biggest, or the Russel Small Cap (rules exist about what qualifies), or even "total market" indexes. Real estate via REIT index funds, international via international, etc. There are also bond index funds, so don't think it's just stocks.

Good luck!
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Old 01-25-2013, 08:49 AM   #9
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I have quite a few investments. It starts with my 401K (I make Roth Contributions) and I also have a separate Roth IRA. Like you would expect, I just send my money into them and never look at it. The nice part about having my Roth through a financial adviser is that they will rebalance and give me advice on where to allocate my 401K once a year.

I also have a Schwab account that I use to invest in stocks and ETFs. This is ideally going to be my "retirement" money when I retire early (fingers crossed) before I can start withdrawing from my 401K/Roth IRA. The nice part about this is that if I'm ever in a crunch for cash, I have the ability to sell some of my positions and withdraw from there. I would say I spend about 6 hours a month researching stocks to invest in and looking at the ones I already own. There will always be a lot of opinions out there on where a stock will head, but I just try to think "in the long-term, is this a company that's going to be around." I know, that's not the best advice, but I try not to get caught up in short-term volatility.

As far as picking stocks, a lot of the stocks I own are things I actually use. Apple, Whole Foods Market, TJ Maxx...Some aren't, but they're companies I've researched and like the products they offer (like oil, lol).

Good luck!
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Old 01-25-2013, 08:50 AM   #10
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Quote:
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401K and AR-15's. Guess which one will make me the most money? I have been offered $2500 for guns I bought for 1K a month ago.

I suspect the market for guns in Boston isn't as good as the market in Montana.

Besides, for guys like Lit and myself, the increase in value of the weapon is offset by the risk of medical costs relating to blowing one own's foot off because we barely know which end of a gun points towards the other guy.
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Old 01-25-2013, 08:50 AM   #11
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401K and AR-15's. Guess which one will make me the most money? I have been offered $2500 for guns I bought for 1K a month ago.
Nice. At some point ($3K?) you have to get rid of some.
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Old 01-25-2013, 08:51 AM   #12
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I suspect the market for guns in Boston isn't as good as the market in Montana.
Heh, likely not, but it would surprise you how many people back east want them and what they will pay.
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Old 01-25-2013, 08:52 AM   #13
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I can't spend forever on basics, but a mutual fund is a group of investments which are "sold" as a bundle, BUT there are different types of mutual funds -- there are managed mutual funds -- in which a guy who is paid alot of money specifically selects the investments that are in the fund -- versus index funds.

Index funds are also mutual funds, but they consist of a basket of investments that are determined by something other than some bright guy reading the WSJ. the Vanguard 500 index fund is a mutual fund which tracks the 500 largest US companies (by market capitalization). The companies that are "in" the 500 change from time to time, but not daily, and the Vanguard 500 simply reflects this.

But it's more than just that -- the Vanguard 500 also contains the same weighting as the market itself.

There are index funds for damn near anything. You can do the Vanguard 500 for teh biggest, or the Russel Small Cap (rules exist about what qualifies), or even "total market" indexes. Real estate via REIT index funds, international via international, etc. There are also bond index funds, so don't think it's just stocks.

Good luck!
Interesting. I take it that managed mutual funds are directed then towards consumers who want to have more input in what goes in the basket. But for a person who doesn't have ties to financial and business trends, the index fund is a better way to go, in general.
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Old 01-25-2013, 08:53 AM   #14
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Great point. How has the inflation rate been recently? How quickly does it fluctuate? How predictable is it (and does predictability help an average investor)?

Inflation has been <5% for many years now. The risk is that the value of the dollar is becoming increasingly worthless due to the Fed pumping cash into the system for a long while. There is an overhanging threat of dramatically increased inflation in the long run if this continues.

That is why people like BEP and TJ are so into gold. In theory it's an inflation hedge. There are many other inflation hedges, including the far simpler inflation protection type index funds.

https://personal.vanguard.com/us/fun...FundIntExt=INT
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Old 01-25-2013, 08:53 AM   #15
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