DaFunkyUnit

Props to the GAM's and admins for the new forum!

Now, on to our little discussion.... How does all the ppl here save up for retirement? Most likely everyone pumps money into their 401(k), but how much do you contribute? And how do you distribute (amongst bonds, stocks, money market funds, etc...)?

I have plenty of time to save up (I'm only 22, so... retirement wont be for awhile... ) So invest agressively (high risk, higher potential return) at first and then tone it down and be more conservative as you get older? Also, do you contribute after taxes? My company matches 75 cents to the dollar up to 8%, so its not that shabby.

Oh, and isnt there a law on how much you can contribute per year?

Love to hear your thoughts on this.

-daUnit

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Cubsfan

In your case, contribute at least 8% if possible. That's basically free money (my plan only matches up to 6%).

As far as contibution limits, looks like this year it's $12,000 and will grow by $1,000 every year until it hits $15,000 in 2006. The only thing I never really know is if that includes your employer's match, or independent of it.

ray

My employer has a matching contribution up to 6%, so I currently put in 6% to my 401K. However, I do also try to max out my Roth IRA account. With my 401K, I do not have the liberty of investing in individual stocks (which I would really like), so I have chosen to put all 100% into a high growth, high risk mutual fund. In my Roth IRA account I have about 70% stocks and 30% mutual funds.

I have been contributing to an IRA since I was 19 years old and have contributed to some kind of 401K plan since I was 21.

gear02

My company doesn't match at all. Instead after working for 3 years, they automatically contribute money into your 401k account, which they claim is better since you don't even have to contribute.

It's still crap though, and I've stopped contributing since I need the extra cash while I move.

LegendKiller

I completely agree here. Most "experts" will tell you to put a mix of stocks and bonds into your 401k or other retirement funds. They say this is to reduce risk, but for somebody that is 5 years or more away from retirement all it does is reduce your returns.

Risk is a factor in everything but since you're young you will be able to ride out any cycles in the market and follow the average of 7-10% appreciation. If you were older (less than 5 years to retirement) then bonds would be appropriate.

Considering a cyclical cycle down turn usually lasts less than 3 years and if you hit one just as your going into retirement, you will see an appreciation back up rather quickly.

Go "risky" for a vast majority of your portfolio and remember that the long term outlook on "risk" is in your favor.


LK

yo

I don't max out my 401k because the company doesn't match. I just max out the Roth IRA and put other cash into various mutual funds

Merlin

The best way to save is of course the 401(k). Due to its tax advantaged status, everyone should contribute as much as they can up to the annual maximum. Somewhere over $10,000, I forget the exact number. Pre Tax money that grows on a tax deferred basis is the most efficient.

After that, IRAs can offer many of the same benefits. If you don't make too much, Somewhere south of $50,000 you can get a standard IRA. Again pre tax money that grows tax deferred. Good. Roths are also nice and help out if your income is over the $50k threshold. But if you are in that income bracket you might want to consult a financial planner.

As for what to invest in...Since this money is long term you generally can afford to be more risk seeking with it and have a heavy allocation to equities. Hell, I'm all equities. I know that it is not good but I'm swinging for the fences. As for allocation it will depend on your risk appetite. I've gone with 33% in an S&P index fund because it is efective and cheap, 33% in a small cap fund for additional return potential, and 33% in an international fund to both expand my opportunity set and offset risk.

The last one, the International fund, is onw area I think most poeple neglect to their own peril. 60% of the world's economy exists outside of US borders and contains some damn fine companies. Couple this with the fact that international investing will also help hedge your portfolio against the impact of a falling dollar. Given all of this I really think that everyone who has a stock portfolio should have a sizeable international allocation.

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ray

Some of us already do

That's good advice, however, sometimes it is more difficult to verify the financials of such given corporation(s) that are traded on foreign exchanges, since the SEC does not, and cannot, regulate other foreign exchanges.

Merlin

Good point. That is why I like foreign developed markets like Japan, Germany, UK, Italy etc. Emerging markets like South America etc are much more difficult.

ray

I like the Chinese and Indian markets right now because they are both growing exponentially, especially in the tech sector. However, it is absolutely impossible to verify the accuracy of their financial reports.

attgig

all giving the same advice that I follow.

invest the max into your retirement funds.

seems like every company matches up to 6%. I only get 50 cents to the dollar up to 6%, but still, it's free money .


anyways, I have still neglected to open up a ROTH IRA account. And actually, I only know the concepts of the RothIRA...don't even know how I would go about getting that started...

help?

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ray

That is very very true about Roth IRAs. However, i'm in a relatively low tax bracket now I don't care getting taxed up front. Hopefully by the time i'm withdrawing I will be in the highest tax bracket and thinking back to this thread saying to myself "you my boy blue! you made the right choice 35 years ago"

Kevster

My financial planning includes a company pension plan, 401k that matches 5%, Roth IRAs for Mrs. Kevster and I, and individual stock investments. I have my 401k and Roth IRAs broken down into 10% Bonds, 40% S&P, 20% large cap and 30% International (Major companies like Nokia, Mitsubishi, etc). I have spent a lot of time reading and continue to change my %'s about every 3-6 months depending on the markets and the current economic outlook.

I like to think I have done ok with the groundwork for my family's financial future, but I'm sure there's always something I'm missing (oh, thanks to my pension and total income, I don't get any benefit from a regular IRA).

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I think over again
My small adventures, my fears.
The small ones that seemed so big,
For all the vital things I had to get and to reach.

And yet there is only one great thing, the only thing:

To live to see the great day that dawns,
And the light that fills the world.

-old Inuit song

VTGreg

You can invest up to 13% of salary this year with the maximum dollar value being $12,000. Next year it goes up to 14% and $13,000, then 15% and $14,000 in 2005 and unlimited percentage and $15,000 in 2006.

I too am a government employee and contribute the full 13% to my TSP (401k) account. One of the drawbacks is the lack of options for investing the money, but it is difficult to pass up the pretax investing right now.

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It only ends once... Anything that happens before that is just progress.

Courage is not the absence of fear but rather the judgment that something else is more important than fear.

LegendKiller

All you are doing by having 10% bonds is reducing your annual returns. That is 10% more stocks that you can have returning a much better rate.


LK

ray

Assuming he chooses stocks that perform well. Bonds at least guarantee a certain return, whereas stocks could provide a return of 75% or a loss of 75%

Kevster

I have only recently chosen to put bonds in my portfolio as a guarantee of some return. My portfolio has taken some heavy hits in the last few years thanks to the market and I am not going to make that mistake again in this tumultuous market.

So what I'm really doing by having some of my money in bonds is covering some of my risk.

ray

Many will tell you that bonds are a waste of time, especially at a younger age. However, I know plenty of people who have lost faith in their judgment and luck after the dot-bomb phase when many lost pretty much everything in their investments.

There is nothing wrong with being more conservative. It's good that you have a diverse portfolio with a medium risk level. Nothing wrong with it and it's a shame more people don't follow suit.

LegendKiller

I understand his basis for a balanced portfolio liquid, I have studied it in finance courses and also during my CFA. However, having money in bonds for anybody outside of 5 years of retirement is only locking out return.

No offense Kevster, but you are being pretty near sighted. Your looking at a "sure return". ALL stocks ARE sure returns over time, it is a proven fact.

As far as your "stocks could provide a profit or loss of 75%" that is BS, even the thought of it is BS. Over the past 90 years the DJIA has appreciated between 7-10% (depending who you ask) annually. That isn't some BS figure, thats proven.

So, your giving up 7-10% PROVEN because you dont want to risk losing 10-15% SHORT TERM. It doesn't make any sense at all, again, no offense, just a debate.

If you need that security blanket, thats fine. However, if you invest in a good, diversified mutual fund, you are going to be OK.

As far as picking individual stocks, I have seen many studies, both in academia and outside that show most people who try and pick stocks lose a big chunk of return in the long run. There are very few people who do make good picks for a long period of time. However, 90% of all people who make individual picks and make money are more lucky than skilled, even with the best research. You have to remember that the market is a random walk and you cannot judge human reaction.


LK

ray

Enron, Worldcom, Nortel, Lucent, CMGI, JDS Uniphase

Over time I think most people would lose money on these investments.

Kevster

Pretty nearsighted with 10% of my current portfolio in bonds? That's a pretty rash statement don't you think? It seems pretty obvious that you are focusing on only 10% of my portfolio and not the other 90%. What level CFA are you? When you get to 3rd level then maybe you can say that to me. Considering where the market has been and where it's pointing in the near future, having some of my money in bonds isn't a bad choice in my book. Also consider my bond fund did better than more than 50% of my mutual funds in the last 9 months - I think I made a good choice.

Will I rethink my direction again in 3-6 months? You bet I will, but for right now this is my plan and it's doing better than when I had someone doing it for me (gee thanks Merrill Lynch!).

LegendKiller

Yeah IF they were investing in INDIVIDUAL stocks. I have stated MANY times that investing in a broad based mutual fund instead of individual stocks is the way to go. If you actually read my previous post I said that.


LK

ray

I agree with what Kevster says. Some people are just more conservative with their investments, ESPECIALLY after they are hammered by a recessing economy. In many cases, investors lost faith in the entire system after the dot-bomb, so they began investing in things that would provide guaranteed returns ie: bonds or CDs.

There are risky traders and low-risk traders. I think that Kevster did the right thing by realigning his portfolio to reduce his risk levels during a recessionary state. He is also doing the right thing by reevaluating his portfolio every 3-6 months. With the economy picking up ground again, perhaps he will dive back into the stock market that provides "sure returns over time"

LegendKiller

I currently am studying for the lvl2, I have an MBA in finance and I work for a company that just sold off 375mm worth of ABS bonds (57% AAA, 25% of that with a LIBOR float). I set up the swap hedge for the company and ran all of the strats for the loan portfolio, I am familiar with portfolio theory and bonds.

First, how close are you to retirement?

I will repeat this one more time since you and liq apparently do not read posts very well.

Over the past 90 YEARS there has been a SOLID and CONSISTANT trend line that shows that the AVERAGE stock market return is anywhere from 7-10% (depending if you take inflation into account and a couple other factors). Over the same period of time bonds have returned anywhere from 4-7% (depending on the risk class).

Now, if we consider that the average economic cycle lasts 10-15 years (peak to valley to peak), we would see that over time it always has returned to the mean.



It is even more risky, at this point in time, to invest in bonds. Why? Because bond porfolio's based upon current yield bonds are going to tank like a mofo, and already have been.


If you take your 90/10 split, 200k in funds and project it out 30 years compared to a 200k/100% you see a difference of 150k, which represents 6% of the terminal amount. That is not huge, but it is 6% that you're not getting by investing in a 6% average bond fund. Yes, commercial paper is higher yield, but it is also more risk, which is what you are supposedly reducing.

Risk is something that should be considered in a retirement porfolio when you hit an older age when you KNOW you will need the money soon and you NEED to that money. Then you have to worry about your portfolio fluctuating with the economic cycles. Until that time all you are doing with bonds in the mix is reducing your return.


LK

LegendKiller

That fear is irrational and illconceived.

1. He is looking at short term returns, not over the life of his investments, which is the same thing you keep talking about. Go read Beyond Greed and Fear, it is probably THE BEST book for investors, it really shows you everything that you can do wrong when investing.

2. Risk need only be considered when your well being is going to be threatened at the present or near term. Otherwise over the long haul risk is reduced by the economic cycle REGRESSING TO THE MEAN OF 10%.

3. Perhaps the biggest mistake investors make is buying in AFTER things improve. By him not buying in already he has given up a chunk of returns that would already be factored into the long term appreciation of assets.

This is like the person buying a share of IBM after the WSJ has already run an article of how things are improving. That fool will go to his E*Trade account, plop down 2k and watch it tank the next day. Why? Because he is buying in at the high, when all availible information is ALREADY built into the price. Profit takers will then sell and he will be the victim of late trading again.

By the time Kevster revisits his portfolio he will be in at a higher level, buying high. Then, AFTER it has reduced he will sell again, at the low, forever keeping to the cycle of a news trader trading on old news.

ray

Where did this statement come from? Nobody said he WAS going to reinvest in stock in 3-6 months. He just noted that he would reevaluate his portfolio in 3-6 months. You are assuming way too much. If you KNOW that the market is going to be a higher level in 3-6 months, then you should be making millions of dollars right now. You have obviously beaten the street if you can somehow prove that in 3-6 months the market will be [in] at a higher level

LegendKiller

Now you are just nit picking to try and prove a point. I should have more clearly stated that if he revisits, sees that he needs to realign, and does so, he will be missing the chunk of profits that he missed by using bonds.

Furthermore, I was stating a hypothetical that it could go higher, and all indications point that it will go higher. Not buying in, especially now, is even more misguided. It does not take a mental giant to see that the DJIA has appreciated significantly in the past few months and the GDP and other growth factors are ticking up in a major way.

The overall lesson you refuse to get out of my posts is that investing a 401k according to short term trends is not the best strategy. You need to invest to how your lifestyle matches the risk category you are in. Younger people (more than 5 years from retirement) CAN WAIT OUT SHORT TERM OR LONGER TERM CYCLICAL TRENDS and capture the long term trend of 7-10% easily without realigning their portfolio during higher volitility (risk) periods.

This is a premise that is not difficult to understand, however, you would rather nit pick on symantics and hypotheses than look at that chart, which CLEARLY shows that the long term investor HAS ALWAYS won and will continue to do so if that person has TIME to ride out the cycles.

LK

Cubsfan

Can't we all just get along?

Ok, I think there's two different points here...

One is that if you have 40 years to wait, over the 40 years you will avereage 10% return, more or less guaranteed. If you get into socks (or mutual funds) and hold onto them for 40 years, you're going to do pretty well.

However, on the other side, think if you would have shifted all of your money to bonds in 1999, after they had gone up with the .com boom. Then, then the market was at its lowest awhile ago, you put all that money back into stocks. You'd be doing even better now. Basically timing the market. That can yeild greater market returns, but you can also screw yourself bigtime.

Anyway, a couple of contrasting philisophies that we can discuss, but maybe not get too personal (i.e. "I think it is a bad decision to..." vs. "You made a bad decision...")

ray

Sounds like somebody has a case of the Fridays.

I never thought a financial discussion could turn into something like this. Man, I think everyone's pretty much tired of this thread now. I know I am. What turned out to be an informative thread has turned into a "i have this experience, i have that experience, i study financial models, i have this CFA i have that CFA."

Before these forums get shut down after only being up a week, perhaps some of us, including myself, can be a little more helpful.

For starters, most of the information you have shared with us has been very very good. But I would say that a majority of the people had absolutely no clue what you were talking about. After all, you've been working in industry for such a long time.

Next, many of us have offered advice, suggestions and opinions, while others have tried to force feed what is the "best" Each person has his/her own style of investing. I know that my style of investing is vastly different from my brother's style of investing. I am lucky on one hand, but very diligent on the research side (not always financial-model based research) on the other hand. My brother worked on Wall Street for 3 years, attended law school, and has now returned to I-Banking. Most would think that with my brother's academic and professional background that his diligent financially-based investments would outperform my half-ass uneducated/unprofessional investment portfolio. Wrong.

Needless to say, yes, there are historical indicators that say stocks post stronger returns over the long-term. Yes, bonds have not historically performed as well. Yes, the DJIA has performed very well recently. Blah blah blah blah blah. Do you think Warren Buffet was always basing his investments decisions on the "best-proven historical trends"? I would think that he adjusted with the economy and looked at both short-term and long-term consequences and outlooks.

Again, each investor has his own style. My style is certainly not orthodox and it is extremely high-risk. Peter Lynch would look at my portfolio and think that i'm smoking crack. However, if you look at my annual returns I am outperforming the S&P500 by 40%. Now tell me something, how can a person without an industry experience or without a CFA do so well investing? I don't calculate the 300 financial ratios before i make an investment. I am not always looking at historical trendlines and analyzing the past 50 years of the DJIA to see that stocks outperformed bonds. I am not always looking at the short-term and long-term, but I do take them into consideration. I'm guessing that after reading this, most people would not trust my judgment when it comes to investing. The bottom line is, it is MY money and it is MY choice.

I am sure everyone appreciates your suggestions and all the wonderful points that you have made (I know I do), but some of your posts are almost forcing us to listen to what you have researched, what you have experienced and what you believe. Perhaps you are right in EVERYTHING you have said, but that does not mean there are other ways of investing just as effectively. There is absolutely no need for you to tell another forum browser that his/her investment style is bad, irrational or just flat out stupid. Kevster has explained his reasoning and I think that you should leave it at that.

I have nothing else to say here.

LegendKiller

Good rant, sums it up.

One point though, Warren Buffet actually invests for long-term appreciation. Look at the Berkshire Hathaway stock, it is set at ~60k per share last time I checked. He has never done a split in the life of the company for one reason, he expects somebody to buy it and hold it to gain the long term appreciation from his guidance of the company. He doesn't want day traders and news traders to buy/sell his stock according to trends, which is exactly what he doesn't do.

Of course, it comes down to judgement decisions based upon your outlook on life. I take a longer, more balanced, outlook and try to show people how that outlook has always proven to be successful over time. MOst people do not look at long term trends, instead, they look at the 3 years they have seen, not the 30. They are not stupid, they are just unaware of the full facts. If I can help one person realign their beliefs to that, thats great. If I can help an 18 year old make decisions about the next 40 years, cool. I guess I am just an idealist that people might listen, whether that happens or not remains to be seen.

LK