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[Smiley90]

I can still for the live of me NOT figure out how Google Finance (Or Morningstar, for that matter) calculate their overall/total return numbers. They're so off the gains and it's not because of dividends are secondary buys/sells. I'm so damn confused and google isn't helping. I can give specific examples if necessary, but e.g. on google the overall return number for individual stocks/ETF's is correct, but the overall portfolio return number is lower than my gains percentage, without additional cash deposits/withdrawals. On morningstar, the total return YTD is higher than my gains %, even without any dividends in the ETF.

I do not understand.

 

[Chris R]

Your fund option may differ, but in my 401K, the target date funds have some fairly high expenses and fees, which is somewhat alarming since you'd think those funds should only have to gradually alter their holdings. They should have more turnover than a straight index fund, but you'd think expenses would still be quite low.

Both funds have a sub 1% expense ratio (.73 and .18) and very low fees. If I live until 2050 I should be well off, and if not my brother shouldn't need to work another day (assuming he isn't dead by then either).

 

[Randolph Freelander]

Both funds have a sub 1% expense ratio (.73 and .18) and very low fees. If I live until 2050 I should be well off, and if not my brother shouldn't need to work another day (assuming he isn't dead by then either).

That's worse than the expenses on those same funds in my plan (0.62% for the Target 2050 fund) and is shaving nearly 3/4 of a percent off your earnings. Over the course of time, that adds up.

Invest $10,000 at 8% today, and in 36 years (2050), that's $159,682. Shave 0.73% off that return, compounded annually, and it only grows to $125,089.

Present Value	Return	Years	Future Value
 (10,000.00)	8.00%	36	$159,681.72 
 (10,000.00)	7.27%	36	$125,088.71

I don't know what other people's plans are offering, but (as an example) the S&P 500 Index Fund in mine has a gross operating expense ratio of 0.02%. If your plan offers one, I'd encourage you to take a look at it.

 

[Gaz_RB]

Bitcoins are a good retirement investment, right?

 

[Randolph Freelander]

Bitcoins are a good retirement investment, right?

For the guy you'd buy them from, probably.

 

[Gannd]

I can still for the live of me NOT figure out how Google Finance (Or Morningstar, for that matter) calculate their overall/total return numbers. They're so off the gains and it's not because of dividends are secondary buys/sells. I'm so damn confused and google isn't helping. I can give specific examples if necessary, but e.g. on google the overall return number for individual stocks/ETF's is correct, but the overall portfolio return number is lower than my gains percentage, without additional cash deposits/withdrawals. On morningstar, the total return YTD is higher than my gains %, even without any dividends in the ETF.

I do not understand.

Are you checking as of dates?

 

[RumblingRosco]

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[Gannd]

I have a very hard time deciding how much money is enough for retirement, especially considering we don't know how much $1.00 will be worth when I expect to retire in 40 years (~2054). Inflation averages 3% a year, right? So if I had $3,000,000 in my retirement account by the day I retire and push it all into some sort of bond or CD that earns me 3% a year (perhaps wishful thinking, who knows what rates will be in 2050), I'd earn $90,000 a year. That seems like way more than enough money to retire on without having to take anything out of the principal balance... but, if 3%/yr inflation holds true, it'd only be worth $25800 in purchasing power. That's certainly livable, but isn't an extremely posh lifestyle either.

So, am I missing something? It seems like inflation would destroy any real chance of having a great retirement even if I had $3 million banked. I suppose the point would be to live off of the principal, not the income made from said principal via bond/CD-generated interest... but even then, $3,000,000 in 2054 money would feel more like $860,000; assuming I could earn 3% a year on it and have that come out to a net 0% gain (3% gain from interest, 3% loss from inflation) I'd still only have $29,000/yr if my fiancee and I lived for 30 years into retirement. That's actually not horrific by any means, but again, it'd require us to have $3,000,000 as a principal balance. Drop that down to $1,000,000 and we're talking about having barely $10,000/yr.

Can anyone point out a hole in my logic? The good news for me and my fiancee is that we're well-educated and have both been saving since we're teenagers, so even though we're only 25, we have savings more akin to people in their 40s... and I'm such a rampant save-a-holic, we should be saving at a much steeper rate than the average couple.

Well, first, just because you retire doesn't mean you move into bonds/CDs. Generally, and this is changing, we assume a 4% withdrawal rate from retirement accounts. Realistically, you want to assume a 6% withdrawal rate. That would include any income as well as principle. There are studies showing that you can keep your monies 100% in the S&P 500, withdrawal 6% per year, and you'll still have more money than you'll need. Now, people are going to think that's way too risky, and I agree. But, the studies are there.

You also have to assume that you'll have social security and you're looking to fill the gap. The gap is the difference between your desirable lifestyle and what social security and any pensions (which given your age you really won't have) will provide. 3% of income is a really low rate. There are high quality preferred stocks that yield 5%. If you follow my screen that I posted above, it has a yield of 2.7% and that's 100% equities. I think the hole in your logic is that you think that when you retire you need to move 100% into CDs and bonds, which you don't and you shouldn't. We also don't know what rates will be in 40 or 50 years. I don't think we should assume we'll continue to be in a low-rate environment. It wasn't that long ago you could get CDs and money markets paying 6-9%.

 

[Husker86]

Well, first, just because you retire doesn't mean you move into bonds/CDs. Generally, and this is changing, we assume a 4% withdrawal rate from retirement accounts. Realistically, you want to assume a 6% withdrawal rate. That would include any income as well as principle. There are studies showing that you can keep your monies 100% in the S&P 500, withdrawal 6% per year, and you'll still have more money than you'll need. Now, people are going to think that's way too risky, and I agree. But, the studies are there.

You also have to assume that you'll have social security and you're looking to fill the gap. The gap is the difference between your desirable lifestyle and what social security and any pensions (which given your age you really won't have) will provide. 3% of income is a really low rate. There are high quality preferred stocks that yield 5%. If you follow my screen that I posted above, it has a yield of 2.7% and that's 100% equities. I think the hole in your logic is that you think that when you retire you need to move 100% into CDs and bonds, which you don't and you shouldn't. We also don't know what rates will be in 40 or 50 years. I don't think we should assume we'll continue to be in a low-rate environment. It wasn't that long ago you could get CDs and money markets paying 6-9%.

Hell, PayPal used to give something like 3-5% on what was in your PayPal wallet at the time; I think you had to agree to the Money Market account terms, but that was nice. Looking back on that now...

 

[Cyan]

Well, first, just because you retire doesn't mean you move into bonds/CDs. Generally, and this is changing, we assume a 4% withdrawal rate from retirement accounts. Realistically, you want to assume a 6% withdrawal rate. That would include any income as well as principle. There are studies showing that you can keep your monies 100% in the S&P 500, withdrawal 6% per year, and you'll still have more money than you'll need. Now, people are going to think that's way too risky, and I agree. But, the studies are there.

I'd like to know what studies these are, because everything I've seen suggests 4% might be too high a withdrawal rate, and 6% is highly likely to bust you. Certainly if you're all stocks it would.

 

[muu]

I'd like to know what studies these are, because everything I've seen suggests 4% might be too high a withdrawal rate, and 6% is highly likely to bust you. Certainly if you're all stocks it would.

MMM's blog post on the 4% rule and associated links within I believe provide a pretty good explanation.

 

[Cyan]

MMM's blog post on the 4% rule and associated links within I believe provide a pretty good explanation.

Heh. Yes, I'm familiar with the 4% rule; it's the most common rule of thumb for retirement withdrawal rates. I'm asking about these studies showing that 6% drawdown is just fine.

 

[Randolph Freelander]

Heh. Yes, I'm familiar with the 4% rule; it's the most common rule of thumb for retirement withdrawal rates. I'm asking about these studies showing that 6% drawdown is just fine.

Seems reasonable that if you draw down 6% but gain 8%, gains will keep outpacing withdrawals.Of course, a poorly timed, severe bear market could really put a hurting on you, increasing your withdrawal (as a percentage), eating into the base for the eventual bull market recovery.

 

[RumblingRosco]

Seems reasonable that if you draw down 6% but gain 8%, gains will keep outpacing withdrawals.Of course, a poorly timed, severe bear market could really put a hurting on you, increasing your withdrawal (as a percentage), eating into the base for the eventual bull market recovery.

Right, and seeing as how swings like that can occur fairly often, assuredly at least once or twice during the average retirement span, it seems a bit unrealistic in my opinion to rely on 6% draw downs. It seems like Gaand isn't agreeing with the studies (which I'd also like to see, just for curiosity's sake), just stating that some evidence is out there to suggest, on average, it'll work out just fine.

 

[Cyan]

Seems reasonable that if you draw down 6% but gain 8%, gains will keep outpacing withdrawals.Of course, a poorly timed, severe bear market could really put a hurting on you, increasing your withdrawal (as a percentage), eating into the base for the eventual bull market recovery.

Sure, if every year you draw down 6%, and every year your portfolio goes up 8%, you're going to gain ~2% a year. But that's not what happens. The market is volatile--highly volatile, if you're in 100% stocks.

Which means that your results are going to be path-dependent. Retire right at the beginning of 2013? Sweet, your portfolio jumps 30+%, you're in great shape. That'll really help you maintain a solid standard of living and support your drawdown rate. Retire right at the beginning of 2008? Uhoh, your portfolio crashes 30+%, and you're kinda fucked. Hope you can live off a much smaller drawdown than you had anticipated. For years to come.

Point is, you can't easily calculate what the outcome will be. The only thing to really do is run a bunch of simulations using a certain amount of randomness, and see how your portfolio does (Monte Carlo simulations). I could probably rig up a Monte Carlo to see how a variable 6% drawdown does if I had my laptop with me (and could remember how to run the cumbersome Monte Carlo add-on), but unfortunately, most of the calculators I've found that use Monte Carlo to find your chances of going bust ask for an annual drawdown dollar amount, rather than a percentage. Although... that makes more sense than assuming you're going to cut your drawdown anyway, since you've still got to eat and pay your medical bills or whatever even if the market crashes.

If you do run some Monte Carlos assuming a 6% initial drawdown rate, you'll find that you've got a fairly high chance of going bust. Depends on your assumptions, but it's something like a 35% chance of not making it if you live 30 years after retirement. Live longer and it gets worse.

Here are a few calculators to play around with:
https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf
http://www.flexibleretirementplanner.com/wp/

 

[Gannd]

I'd like to know what studies these are, because everything I've seen suggests 4% might be too high a withdrawal rate, and 6% is highly likely to bust you. Certainly if you're all stocks it would.

I'll post some later. That number includes income as well.

 

[Piecake]

Since this is pretty American-centric, if anyone is willing to make a post about how to invest for retirement in X country, I'll be sure to include a link to it in the OP. I can'y say I know enough about Canada, Britain, etc's retirement vehicles, differences to make an informative contribution.

 

[chaosblade]

Looking at my 401k options, by default everything has been going into a 2055 fund with a .34 expense ratio.

There are two index options, Russell 1000 and Russell 2000, but both say N/A for expense ratio? Looking at another site it's listing .04 and .07 respectively. Why wouldn't they be listed?

Considering switching to that, even though it hopefully won't make much difference since I'd like to get a new job in the not too distant future.

 

[Giard]

Since this is pretty American-centric, if anyone is willing to make a post about how to invest for retirement in X country, I'll be sure to include a link to it in the OP. I can'y say I know enough about Canada, Britain, etc's retirement vehicles, differences to make an informative contribution.

Damn, I wanted to ask you about Canada.

I just got my first real job, and I was planning to start investing. I checkout Vanguard Canada's website, but unlike the American version, it seems you can't create a brokerage account with them. I'm really not sure how I'm supposed to invest in that case. Do I need to ask my financial institution?

 

[RumblingRosco]

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[Giard]

I think you can have a non-brokerage account with them that allows you to invest in their mutual funds. I could be wrong about that though. It has always confused me, but for some reason I have two accounts (under one login) with Vanguard; one is a "Brokerage" account in which I can trade ETFs and the other is some other account without a specific title that doesn't let me buy ETFs, but lets me trade Vanguard funds.

I have not found how to create an account on Vanguard Canada's website yet. It took me about 10 seconds to find it on their normal website.

Maybe I just suck, but you can try: https://www.vanguardcanada.ca/individual/portal.htm

EDIT: What they say on their "How to Invest" page:

Vanguard ETFs™ are traded on Toronto Stock Exchange. Two ways to purchase Vanguard ETFs are with the help of a financial advisor or through a brokerage account.

Working with a financial advisor

Many investors find professional financial advice helpful, particularly as they amass wealth and their financial situations become more complex. In addition to investment advice, a financial advisor can offer advice and guidance about taxes, retirement, estate planning, insurance, education planning, and more. If you don’t have an advisor, consider choosing one through the Investment Industry Regulatory Organization of Canada (IIROC). From the IIROC homepage, click the Investors tab.

Using a brokerage account

If you're a self-directed, do-it-yourself investor, you can buy or sell Vanguard ETFs during normal trading hours through an online or discount brokerage account. Your brokerage or trading platform will likely charge its customary commissions and/or fees.

 

[RumblingRosco]

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[Advocatus Diaboli]

Finally got my assets transferred over to Vanguard. Liquidated my Roth IRA and I'm going for admiral shares of VTSAX and VTIAX. What sort of breakdown do you would make the most sense (e.g., 60% domestic stock base, 40% international)? I know Ghaleon cited one theory, but if there's any competing wisdom, I'd like to hear it.

Unfortunately, I had to sell off some funds that Vanguard wouldn't hold for my individual brokerage account, so I incurred some LT cap gains, but that's fine. This year will be alright for that. I'll slowly consolidate there too.

For anyone else considering this process, it takes a while - at least a few weeks - for the transfer process to actually occur; but it's not altogether too complicated, and Vanguard assigned me an overeager concierge to assist me in the process. I imagine the other firms have similar turnkey service.

 

[simplayer]

I have not found how to create an account on Vanguard Canada's website yet. It took me about 10 seconds to find it on their normal website.

Maybe I just suck, but you can try: https://www.vanguardcanada.ca/individual/portal.htm

EDIT: What they say on their "How to Invest" page:

Does your employer not offer a matching RRSP plan?

You should be able to follow the same general advice of this thread. RRSP<=>401k, TSFA<=>IRA.

An RRSP is only taxed deferred though, where as a 401k can be either deferred (traditional) or post tax (Roth). RRSPs have higher contribution limits though (up to 23K per year), but max you out at 18% of your previous year's income (where as 401k is 50%). RRSP limits rollover though, so if you don't max out one year, you carry the extra room into the next year.

As long as your employer matches, I'd use up to matching on that first.

If your RRSP plan has decent index funds to choose from, do that over an ETF as your plan should have a lower expense ratio than what you can get on your own through an ETF.

TFSA is again like a traditional IRA, Canada has no equivalent to a Roth IRA.

Also, if you're planning to move to the US, don't get a TFSA, they'll tax the shit out of it. RRSPs won't be taxed by the feds, the state may choose to though (i.e., California does).

 

[simplayer]

What's a good place to put short to medium term savings?

I'm maxing out my 401k, and I'll probably max out my IRA, but I still have some other savings left over.

I currently have it stuck in a citibank savings plus account (which I think is getting a 2% return).

Should I put them into an ETF and go for index funds? Is that a reasonable strategy with an investment horizon of only 5-10 years?

 

[Cyan]

Finally got my assets transferred over to Vanguard. Liquidated my Roth IRA and I'm going for admiral shares of VTSAX and VTIAX. What sort of breakdown do you would make the most sense (e.g., 60% domestic stock base, 40% international)? I know Ghaleon cited one theory, but if there's any competing wisdom, I'd like to hear it.

Unfortunately, I had to sell off some funds that Vanguard wouldn't hold for my individual brokerage account, so I incurred some LT cap gains, but that's fine. This year will be alright for that. I'll slowly consolidate there too.

Do you mean you transferred both a Roth IRA and an individual brokerage account to Vanguard? If it's just the IRA, there will be no cap gains.

What's a good place to put short to medium term savings?

I'm maxing out my 401k, and I'll probably max out my IRA, but I still have some other savings left over.

I currently have it stuck in a citibank savings plus account (which I think is getting a 2% return).

Should I put them into an ETF and go for index funds? Is that a reasonable strategy with an investment horizon of only 5-10 years?

Typically 10 years or more is viewed as long-term, and depending on other risk tolerance factors you might consider index funds with that kind of time horizon. 5-10 years is more medium-term, and it really depends on other risk tolerance factors. Is this a future house down-payment? A college fund for your kids? etc.

 

[iamblades]

What's a good place to put short to medium term savings?

I'm maxing out my 401k, and I'll probably max out my IRA, but I still have some other savings left over.

I currently have it stuck in a citibank savings plus account (which I think is getting a 2% return).

Should I put them into an ETF and go for index funds? Is that a reasonable strategy with an investment horizon of only 5-10 years?

5 years is a bit on the short side for index investing, if the market hits a down period during those 5 years you might not make any money. 10 years and I'd definitely dump the money in some index funds. But really with this type of investing you should be planning on buying and holding the assets forever. All you are doing by selling off the assets is missing out on future gains. You should buy and hold equities forever. Use the dividends to buy things with if you need to, but never sell the asset as long as it is producing decent returns.

The thing that really decides this question for me is the size of your emergency savings. If you have enough liquid cash in your savings to cover 6 months to a year of your bills, and you have no short term plans for that money, ie. you aren't going to need it for a down payment on a house or a car in the next year or two, it should always go into investments.

There is no reason to have more than a year's worth of liquid cash laying around. I can't think of anything that could come up where you would need that amount of money available immediately.

 

[simplayer]

Typically 10 years or more is viewed as long-term, and depending on other risk tolerance factors you might consider index funds with that kind of time horizon. 5-10 years is more medium-term, and it really depends on other risk tolerance factors. Is this a future house down-payment? A college fund for your kids? etc.

Yes, these savings would be for a house downpayment.

I guess after that's done it would just be a place to store money.

 

[simplayer]

5 years is a bit on the short side for index investing, if the market hits a down period during those 5 years you might not make any money. 10 years and I'd definitely dump the money in some index funds. But really with this type of investing you should be planning on buying and holding the assets forever. All you are doing by selling off the assets is missing out on future gains. You should buy and hold equities forever. Use the dividends to buy things with if you need to, but never sell the asset as long as it is producing decent returns.

The thing that really decides this question for me is the size of your emergency savings. If you have enough liquid cash in your savings to cover 6 months to a year of your bills, and you have no short term plans for that money, ie. you aren't going to need it for a down payment on a house or a car in the next year or two, it should always go into investments.

There is no reason to have more than a year's worth of liquid cash laying around. I can't think of anything that could come up where you would need that amount of money available immediately.

I'm keeping enough money in my chequing account to cover 3 months worth of expenses. 6 months seems a little extreme to me.

Initially these medium term savings would be for a down payment on a house. After that, I'd just like to place the extra savings in a long term vehicle, for, well, just some place to store it.

If 5 years is too short for index funds, what's another vehicle that's good? High yield bonds? Would I just buy an ETF and invest it into whatever type of asset I want (i.e., bonds, stocks, etc)?

 

[Chris Murphy]

Since this is pretty American-centric, if anyone is willing to make a post about how to invest for retirement in X country, I'll be sure to include a link to it in the OP. I can'y say I know enough about Canada, Britain, etc's retirement vehicles, differences to make an informative contribution.

UK has pension providers that manage various portfolios ranging from high risk to low risk. Pension providers are regulated by the Financial Conduct Authority (FCA), which governs all financial institutions in the UK, including banks.

Next year every company that has over 10 employees has to offer it's employees a pension where they match the employees monthly contributions.

I recently just got a pension through my work. There are obviously a lot of options but the Financial Adviser that I spoke to recommended a low risk fund that has historically grown at a steady rate. I have not yet received the breakdown of the actual investments but at any point you can ask for a detailed breakdown of the investments that they are using and can change the pension in to a higher or lower risk fund at any point.

I myself have a pretty good knowledge of the stock and forex markets when it comes to technical analysis. I think I will most likely make a lot more money in that much higher risk market (using spread betting) than I will with my pension. I'm still learning and have lost a fair bit of money over the past 2 years but I'm winning the war of self control and greed (which is the main thing you have to learn) and am slowly becoming profitable. This is for another thread though.

 

[iamblades]

I'm keeping enough money in my chequing account to cover 3 months worth of expenses. 6 months seems a little extreme to me.

Initially these medium term savings would be for a down payment on a house. After that, I'd just like to place the extra savings in a long term vehicle, for, well, just some place to store it.

If 5 years is too short for index funds, what's another vehicle that's good? High yield bonds? Would I just buy an ETF and invest it into whatever type of asset I want (i.e., bonds, stocks, etc)?

The ETF would be based on what you are investing in. Also when I said 5 years was too short for index funds, of course I meant growth/blend index funds. A value index fund may have low enough volatility and high enough yield that it is safe for such a short time scale.

High yield bonds are not a terrible idea, though you may want to go high yield munis instead of corporate bonds for the slightly lower risk exposure. REIT index funds and preferred stock index funds are also good mid term options. Obviously in the long term you will not make as much money with these as you would with equities, but you are going to receive substantial dividends to either spend or reinvest, and they are (even high yield corporate bonds) are unlikely to quite the same degree of volatility.

Personally if it were me, and I had a sum of cash that i wasn't comfortable investing long term, it probably go 50/50 into a REIT index fund and a Muni index fund. Every 6 months decide on whether to reinvest the dividends or keep it as cash or spend it elsewhere. Even better, invest the dividends into a total stock market index, so at the end of 5 years you should have all your principal and maybe a little extra in addition to a boatload of equities.

REITs bottomed out hard in 2008 with the real estate crash, so they are fairly cheap these days with like 10-15% yields, and municipal bonds will give you fairly safe returns at a decent rate and some tax benefits as well.

There are lots of other options as well (MLPs, preferred stock, etc.), just have to realize that everything you do will have risks, and the shorter your timeframe is the more impact volatility will have on your overall return. That's why the best thing to do is to buy some solid high performing assets and forget all about them, just hold on and keep reinvesting dividends. Treat that money like it is already lost, and then in 20 years it will be like you won the lottery.

 

[Piecake]

Finally got my assets transferred over to Vanguard. Liquidated my Roth IRA and I'm going for admiral shares of VTSAX and VTIAX. What sort of breakdown do you would make the most sense (e.g., 60% domestic stock base, 40% international)? I know Ghaleon cited one theory, but if there's any competing wisdom, I'd like to hear it.

Unfortunately, I had to sell off some funds that Vanguard wouldn't hold for my individual brokerage account, so I incurred some LT cap gains, but that's fine. This year will be alright for that. I'll slowly consolidate there too.

For anyone else considering this process, it takes a while - at least a few weeks - for the transfer process to actually occur; but it's not altogether too complicated, and Vanguard assigned me an overeager concierge to assist me in the process. I imagine the other firms have similar turnkey service.

Thats the ratio I have it at. I posted a link to a Vanguard study that suggests that anywhere between 20-40% International is fine. No idea if its true, but i think it makes sense so thats why I go with it.

I'm keeping enough money in my chequing account to cover 3 months worth of expenses. 6 months seems a little extreme to me.

Initially these medium term savings would be for a down payment on a house. After that, I'd just like to place the extra savings in a long term vehicle, for, well, just some place to store it.

If 5 years is too short for index funds, what's another vehicle that's good? High yield bonds? Would I just buy an ETF and invest it into whatever type of asset I want (i.e., bonds, stocks, etc)?

I do 3 months as well. 6 months does seem extreme, especially if you know your job is relatively stable.

As for short/mid-term investments, I think the most important question is how flexible can you be with that money. If the market crashes and you are perfectly fine waiting it out for a few years then investing heavily or all in stock is fine. If you are buying a house in 3 years for sure I would go heavily on bonds.

Total Bond, total US Stock, Total International Stock are the only 3 funds that I think anyone needs when you are young. So the shorter time period and more inflexible that is, the more bonds you need - that 3 year time frame I would probably invest all in bonds, for example.

UK has pension providers that manage various portfolios ranging from high risk to low risk. Pension providers are regulated by the Financial Conduct Authority (FCA), which governs all financial institutions in the UK, including banks.

Next year every company that has over 10 employees has to offer it's employees a pension where they match the employees monthly contributions.

I recently just got a pension through my work. There are obviously a lot of options but the Financial Adviser that I spoke to recommended a low risk fund that has historically grown at a steady rate. I have not yet received the breakdown of the actual investments but at any point you can ask for a detailed breakdown of the investments that they are using and can change the pension in to a higher or lower risk fund at any point.

I myself have a pretty good knowledge of the stock and forex markets when it comes to technical analysis. I think I will most likely make a lot more money in that much higher risk market (using spread betting) than I will with my pension. I'm still learning and have lost a fair bit of money over the past 2 years but I'm winning the war of self control and greed (which is the main thing you have to learn) and am slowly becoming profitable. This is for another thread though.

Thanks! Ill put a link in the OP. If anyone else wants to contribute, feel free.

 

[Cyan]

As for short/mid-term investments, I think the most important question is how flexible can you be with that money. If the market crashes and you are perfectly fine waiting it out for a few years then investing heavily or all in stock is fine. If you are buying a house in 3 years for sure I would go heavily on bonds.

Well, the other question is whether there's a specific savings target in mind for the down payment amount. If there is, and savings alone will get him there, all bonds or something similarly low-risk is probably the way to go. No need to screw it up by shooting for an unnecessarily high return.

Treat that money like it is already lost, and then in 20 years it will be like you won the lottery.

In a subsequent post, he noted this is money being saved for a house down payment, so this is probably not suitable advice in this particular case.

 

[Piecake]

Well, the other question is whether there's a specific savings target in mind for the down payment amount. If there is, and savings alone will get him there, all bonds or something similarly low-risk is probably the way to go. No need to screw it up by shooting for an unnecessarily high return.

Very true, I think William Bernstein's saying that 'when you have already won the game, why keep playing?' makes a lot of sense.

Still, for a down payment I think the the greater amount you can get the better off you will be. 4-5% compounded interest on a 150K+ loan is no joke

 

[simplayer]

Well, the other question is whether there's a specific savings target in mind for the down payment amount. If there is, and savings alone will get him there, all bonds or something similarly low-risk is probably the way to go. No need to screw it up by shooting for an unnecessarily high return.



In a subsequent post, he noted this is money being saved for a house down payment, so this is probably not suitable advice in this particular case.

It's a bit of a guess right now.

I'm living in the SF bay area now, so I'm not sure how hot the housing market will be in 5 years time.

I'd like to put down 20% at least, but I'm not sure what that'll amount to.

 

[simplayer]

...4-5% compounded interest on a 150K+ loan is no joke

Heh, if only.

 

[Y2Kev]

As for short/mid-term investments, I think the most important question is how flexible can you be with that money. If the market crashes and you are perfectly fine waiting it out for a few years then investing heavily or all in stock is fine. If you are buying a house in 3 years for sure I would go heavily on bonds.

I think this is poor advice. There is plenty of data out there that shows returns on hypothetical asset allocations. Putting some into bonds doesn't materially reduce your return.

On top of that, should the stock market crash, you can move out of bonds and into equities with the money. Cheap deals.

I don't think there's ever really a reason not to diversify your AA if you are really 90-100% stocks.

Actually you said heavily so maybe you meant that.

Short term investments, like really short term, should also have you thinking about tax implications of certain asset types.

 

[Piecake]

Heh, if only.

Hah, thats why I said 150k+. The price of homes just varies so greatly. SF though, ouch. I probably should have added an extra 0 onto the number in that case! On the bright side, you will actually see some benefit from the home mortgage interest rate deduction!

 

[Cyan]

It's a bit of a guess right now.

I'm living in the SF bay area now, so I'm not sure how hot the housing market will be in 5 years time.

I'd like to put down 20% at least, but I'm not sure what that'll amount to.

Bay Area. Hoo boy.

Good luck, man. Personally, I'm more or less resigned to renting forever. Housing prices here are insane.

 

[simplayer]

Bay Area. Hoo boy.

Good luck, man. Personally, I'm more or less resigned to renting forever. Housing prices here are insane.

Ya, I'd rather not do that. I don't like the idea of paying someone else's rent, but if I can't find anything "reasonably" priced...well...

 

[Piecake]

I think this is poor advice. There is plenty of data out there that shows returns on hypothetical asset allocations. Putting some into bonds doesn't materially reduce your return.

On top of that, should the stock market crash, you can move out of bonds and into equities with the money. Cheap deals.

I don't think there's ever really a reason not to diversify your AA if you are really 90-100% stocks.

Actually you said heavily so maybe you meant that.

Short term investments, like really short term, should also have you thinking about tax implications of certain asset types.

I believe that it does. I think 100% stock will, generally, get you the best return. I think the purpose of bonds is to reduce volatility and risk. If your short/mid-term time frame is very flexible you do not need as much volatility and risk hedging, i.e. bonds.

Moreover, holding a 80/20 allocation - meaning that you will be buying stock on a market crash - will, generally, get you less of a return that a 100% stock portfolio because that 20% bond was and is a drag on your theoretical return. Even if you invest 20% bonds and then go all in on stocks after a crash, that crash price might be higher than the price you originally started at so you might lose out on returns. Again, this is all in general terms because bonds could net a higher return than bonds in the future, but historically, stocks do much better.

I think this is especially true for short to mid term investments because a stock market crash might never happen. What exactly was the point of investing in bonds if you had a mid-term time frame and where very flexible on the sell date? Now, I am not suggesting to not hold bonds because I think people should do what they are comfortable with and understand their own situation, but I don't think its necessary to hold a good percentage of bonds or perhaps not even any if your investment period is 10 years and your sell date is extremely flexible.

I agree that you definitely need to take into consideration the tax implication of short to mid term investments. Luckily, stock index funds are the most tax efficient funds that you can buy. Bonds, REITS, etc are less so.

Ya, I'd rather not do that. I don't like the idea of paying someone else's rent, but if I can't find anything "reasonably" priced...well...

http://www.businessinsider.com/nobel-prize-robert-shiller-housing-not-great-investment-2013-10

You should read this. I think its pretty convincing that you should consider housing as a lifestyle choice and not an investment.

 

[ferr]

My current company doesn't match, pretty lame. I put in 6% anyway.

I also rolled over a good amount from my last company into a traditional IRA which I monitor heavily. They are all 1.5-3% dividend growth large cap. I am attempting a quarterly value-average strategy at 3% per quarter, which is pretty fun. I don't know if the effort is worth it, by my calculations from historical data I probably won't gain more than 1-2% extra per year from VA. I'd probably look at it just as hard if I didn't have a maintenance strategy anyway, so might as well.

Unfortunately from everything I've put together, the pre-tax status of my t-ira investments would be ruined if I contributed after-tax money, even into a different t-ira, and I think even a roth ira. So I plan to just increase the 401k and leave it at that.

 

[Husker86]

My current company doesn't match, pretty lame. I put in 6% anyway.

I also rolled over a good amount from my last company into a traditional IRA which I monitor heavily. They are all 1.5-3% dividend growth large cap. I am attempting a quarterly value-average strategy at 3% per quarter, which is pretty fun. I don't know if the effort is worth it, by my calculations from historical data I probably won't gain more than 1-2% extra per year from VA. I'd probably look at it just as hard if I didn't have a maintenance strategy anyway, so might as well.

Unfortunately from everything I've put together, the pre-tax status of my t-ira investments would be ruined if I contributed after-tax money, even into a different t-ira, and I think even a roth ira. So I plan to just increase the 401k and leave it at that.

Are you sure about this? I thought you could have a traditional and a Roth, have the respective benefits for the money in the corresponding IRA, however the $5,500 yearly limit applies to funds added to both IRAs.

 

[ferr]

Are you sure about this? I thought you could have a traditional and a Roth, have the respective benefits for the money in the corresponding IRA, however the $5,500 yearly limit applies to funds added to both IRAs.

It's all considered one bucket, and I'm pretty sure there's no distinction between roth and traditional with the IRA bucket when distributing. Not exactly sure, can't find the material I saw earlier.

You can get an accurate distribution if you maintain everything correctly, I think I overlooked that you can do this to get the exact amount of post-tax money accounted for so you don't get taxed twice. http://www.investopedia.com/articles/retirement/05/aftertaxassets.asp example in there. It's just a matter of actually getting this all recorded correctly and taking care of things when it comes time for distribution.. in that case maybe I should put some after-tax money in there, maybe next tax year. Can anyone clarify this, though?

 

[fuzzylogic]

Something I don't understand about capital gains tax in an example:

I invest $10,000. After a year, the investment is worth $11,000. Say, I have an unexpected, large bill and need to withdraw $2,000 from the account. Does the $2,000 count as withdrawing a piece of your initial investment ($2,000 of the initial $10,000), thus is not subjected to capital gains tax (because it was already taxed before you invested it). Or does it count as withdrawing $1,000 of capital gains (dollars $10,001 to 11,000 which were earned from the investment), and $1,000 of it as your post-tax invesment money, thus you owe capital gains tax on $1,000 of the withdrawal? Which way does it work?

I am not in the above situation. I have a separate emergency fund of money outside of my investments, but I'm just curious.

 

[Husker86]

Something I don't understand about capital gains tax in an example:

I invest $10,000. After a year, the investment is worth $11,000. Say, I have an unexpected, large bill and need to withdraw $2,000 from the account. Does the $2,000 count as withdrawing a piece of your initial investment ($2,000 of the initial $10,000), thus is not subjected to capital gains tax (because it was already taxed before you invested it). Or does it count as withdrawing $1,000 of capital gains (dollars $10,001 to 11,000 which were earned from the investment), and $1,000 of it as your post-tax invesment money, thus you owe capital gains tax on $1,000 of the withdrawal? Which way does it work?

I am not in the above situation. I have a separate emergency fund of money outside of my investments, but I'm just curious.

My understanding is as follows:

Your initial $10,000 bought, let's say, 100 shares for $100 each (or share equivalent price, for mutual funds). Those shares are now worth $110 a piece. If you need to withdraw $2,000, you'd be withdrawing ~18.2 shares (or 19 shares if it's an index fund, since you can't buy/sell partial shares). You'd only have to pay capital gains tax on the gains of $182/$190 (18.2 or 19 shares multiplied by the $10 in gains for each share).

 

[iamblades]

I believe that it does. I think 100% stock will, generally, get you the best return. I think the purpose of bonds is to reduce volatility and risk. If your short/mid-term time frame is very flexible you do not need as much volatility and risk hedging, i.e. bonds.

Moreover, holding a 80/20 allocation - meaning that you will be buying stock on a market crash - will, generally, get you less of a return that a 100% stock portfolio because that 20% bond was and is a drag on your theoretical return. Even if you invest 20% bonds and then go all in on stocks after a crash, that crash price might be higher than the price you originally started at so you might lose out on returns. Again, this is all in general terms because bonds could net a higher return than bonds in the future, but historically, stocks do much better.

I think this is especially true for short to mid term investments because a stock market crash might never happen. What exactly was the point of investing in bonds if you had a mid-term time frame and where very flexible on the sell date? Now, I am not suggesting to not hold bonds because I think people should do what they are comfortable with and understand their own situation, but I don't think its necessary to hold a good percentage of bonds or perhaps not even any if your investment period is 10 years and your sell date is extremely flexible.

I agree that you definitely need to take into consideration the tax implication of short to mid term investments. Luckily, stock index funds are the most tax efficient funds that you can buy. Bonds, REITS, etc are less so.



http://www.businessinsider.com/nobel-prize-robert-shiller-housing-not-great-investment-2013-10

You should read this. I think its pretty convincing that you should consider housing as a lifestyle choice and not an investment.

Well muni bonds are actually, but your returns are also substantially limited compared to other asset classes. Though high yield munis are yielding like upwards of 5-6%, which as far as (mostly, possibly depending on location) tax exempt income goes is pretty damn good

^^ on housing not being a worthwhile investment. If you want to invest in real estate, a REIT fund will make you far more money than your own home ever will. Which is not to say I don't think you should own a home. With mortgage rates as low as they are and as easy as they are to get, there is very little reason not to buy a home.

Just don't expect to do much better than breakeven after accounting for maintenance and upgrades

Something I don't understand about capital gains tax in an example:

I invest $10,000. After a year, the investment is worth $11,000. Say, I have an unexpected, large bill and need to withdraw $2,000 from the account. Does the $2,000 count as withdrawing a piece of your initial investment ($2,000 of the initial $10,000), thus is not subjected to capital gains tax (because it was already taxed before you invested it). Or does it count as withdrawing $1,000 of capital gains (dollars $10,001 to 11,000 which were earned from the investment), and $1,000 of it as your post-tax invesment money, thus you owe capital gains tax on $1,000 of the withdrawal? Which way does it work?

I am not in the above situation. I have a separate emergency fund of money outside of my investments, but I'm just curious.

You pay cap gains tax on whatever profit you made from selling off the shares. So however many shares you have to sell to raise the $2000 x the increase in valuation per share.

 

[giga]

I'm about to put $3k into VTSMX for my first Roth IRA. Stupid question, but if I wanted to max it to $5.5k later in the year, I can right?

 

[iamblades]

I'm about to put $3k into VTSMX for my first Roth IRA. Stupid question, but if I wanted to max it to $5.5k later in the year, I can right?

up until april 15th of next year you can make your contributions for this year.

You can still make your contribution for last year for another month as well, so you could put that $3k in on last years, then do another full $5.5k later in the year if you have the cash.

 

[giga]

up until april 15th of next year you can make your contributions for this year.

You can still make your contribution for last year for another month as well, so you could put that $3k in on last years, then do another full $5.5k later in the year if you have the cash.

Awesome.