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[Piecake]

Cyan,Y2Kev ,SomewhatGroovy's , and Tokkun's Bond allocation and investment thoughts (read them since they are different than my opinion, which is expressed in this post)

Canadian? Go here
UK Situation

Why

The average social security benefit is $1,234 a month, or about $14,800 a year. If that is your only source of income you will be living in poverty and be unable to meet unexpected expenses, which are likely to increase as you get older and frailer.

You need to invest if you want to have a comfortable retirement. You might say, why not just save and stick my money in a savings account? The problem with that is is that is a sure-fire way to lose money. The interest rates from savings account due not keep up with inflation. That means that if you put all your money in a savings account you will have less money when you retire than you actually put into that savings account. It doesnt make a whole lot of sense.

Remember that I said that the average social security payout is 15k a year? That doesnt sound too good, right? 48k a year sounds much better, right? Well, if you retire at 65 and live until you are 95, you will need 1 million dollars to have a yearly income of 48k. Now, the math is a bit more complicated than that, but the moral of the story is that you will need to invest in stocks to actually make anywhere close to that amount. Putting all of your money into bonds and savings accounts is simply not going to cut it.

For most people, that also means that all of their investment should be aimed at saving fo retirement.

You might ask, isn’t investing in stocks risky? Just look at the 2008 crash! I would be screwed if I had my money in the stock market! I will get into this further later on, but I am not going to lie. There is a reason why you get the best returns in the market. And that is because It is risky, but there are ways to mitigate that risk.

How

You might be thinking, but I have no idea how to invest in the stock market! It all seems so complicated to me and so much work! Luckily, there is a way to invest in the stock market that requires absolutely no work, no skill, and no thinking. The best part is, is that this method will, statistically, give you the best return as well!

This method is low cost index funds, specifically US Total Stock Market and Total International Market.

What are Index funds? Well, index funds, instead of being picked by a manager (aka human being), they passively follow an index. What this means is that if you invest in the two funds above you will passively follow the entire world stock market at an insanely low cost.

But I want to beat the market! Well, good luck with that. There is a lot of data out there that basically shows that that is a pipe dream that only the really lucky or the really skilled and knowledgeable (my guess is like 1% of the population) can do. Basically the data shows that actively managed funds consistently lose to their index (some win, obviously), and that no actively managed fund can consistently beat their index year after year. What this says to me is that actively managed funds pretty much beat their index on luck because none of them can consistently beat it. Moreover, there is absolutely no way to ‘pick’ the right actively managed fund for this year because they simply invest in way too much stuff.

http://www.businessinsider.com/index-funds-beat-actively-managed-funds-2013-6

http://www.nerdwallet.com/blog/investing/2013/active-mutual-fund-managers-beat-market-index/

The other avenue, of course, is individual stocks, but that is far more risky, takes a lot more time, and why would you want to take that chance with your retirement savings? Hell, even Warren Buffet hasnt beaten the S&P 500 (An index of the US 500 biggest companies) in the last 5 years

http://www.bloomberg.com/news/2014-...iling-buffett-5-year-test-for-first-time.html

Another reason to invest in index funds is fees. Fees are a huge huge deal because they do not take a percentage of your gains, they take a percentage of the total amount that you invested. Over time, that is a huge deal. For example, if you invest 5k a year for 40 years and you get a return of 7% you will end up with a balance of 1.075 million. However, if you invested in a fund that has an expense ratio of 1% and a turnover rate of 100% (which equals about 1% expense ratio), the average for an actively managed fund, you will have 637k after 40 years. COngrats, you just lost 438,000 to fees

Therefore, I really think the only logical conclusion is to invest in Index funds

Investment Strategy

Thanks to the magic of compound interest, the earlier you start, the better off you will be (math is a bit more complicated than I am suggesting). For example, in the example above, you only had to invest 200k to achieve that 1 million dollars because you started investing really early. If you wait until you are 40 and only have 15 years to invest, you will have to invest 558,000 to achieve the same amount. Investing early will save you 358,000 dollars.

Starting early, gotcha. Now how should I go about investing? I am glad you asked! Personally, I am a fan of investing two funds, the Total US Stock Market and the Total International Stock Market, because it invests in everything and has the lowest cost. I invest 60% of my funds into the US and 40% in the International fund, just my personal preference. I do not invest in bonds because I am still young and I think the biggest aim right now is growth, and stocks are by far the best way to do that. Further, you only lose money if you sell, so why should I give a shit if the market crashes in 10 years? It will bounce back.

Once I am 10 years or so from retirement I will start investing in Bonds though. The reason for this is that bonds are a lot less volatile than stocks, which means that if a stock market crash comes along, they won’t less nearly as much, if at all any, as stocks (hell, they might actually go up). Why is this important? Well, if you turn 65 and don’t have a job, you are basically living off of your investments. If a stock market crash occurs right after you do that, you do not want to be forced to sell your stocks to pay for your living expenses. You would be selling at a HUGE HUGE loss. It would be much better to sell your bonds, because like I said, those are far less volatile so you will either take a small loss, no loss, or a small gain

As for what bond funds and what percentage of my portfolio, I am in favor of 50% Total US Bond market and 50% TIPS fund. Total bond fund should be self-explanitory, but I like the TIPS fund because it is inflation protected. Stocks themselves are inherently a hedge against inflation so moving into bonds you are losing quite a bit of that. Investing in TIPS takes care of that. As for the percentage of bonds compared to stocks, that really depends on how much you have invested. If you already have more than enough money invested for retirement, well, I would go heavily invested into bonds (like 80-100%). If you still need more money, you are obviously going to need to take on more risk, i.e. stock (so 40-60% stock maybe?)

There is another investment strategy, and that is holding your age in bonds, which basically means that you will increase the percentage of your bond holdings as you get older. I think that is way too conservative though since I think the purpose of investment is growth and you only need bonds until time stops being such a fantastic hedge and you need another one (bonds). Really up to you though and how much risk you can handle, because geting freaked up by a crash and selling all of your retirement low is FAR FAR FAR worse than taking a conservative approach to investing for retirement.

Retirement vehicles

What about those 401k and Roth IRA things I keep hearing about? I am glad you asked! Those are tax advantage vehicles that your employer can offer (401k) or that you individually set up at a broker like Vanguard (Traditional IRA and Roth IRA).

They are tax advantaged because you will not have to pay capital gains on any of the money invested in these vehicles. That is pretty huge because you won’t have to pay 15% of your gains to the government (15% of a gain of 800k is quite a bit) and you won’t have to pay capital gains on the dividends that you get from the funds every quarter.

As for income tax, they work a bit differently. If you invest your money in a 401k and traditional IRA you will not pay income taxes now, and your taxable income for the year will be lowered by how much you invest. So if you invest 15k into your 401k, your taxable income will lower by 15k. You will pay income tax on it when you start selling and taking money out. This benefits people who have a high income tax now, but will have a lower income tax when they retire

For a Roth IRA, you will pay income taxes now, but won’t pay them when you retire and start taking money out. This benefits people who have a lower tax bracket now and will have a higher tax bracket when they retire. It also is a hedge against uncertainty. Who the hells knows what the tax rate will be in 40 years? It could be a lot higher. Well, if you invest in a Roth IRA, you won’t have to worry about that.

This is a bit more complicated since it involves tax strategies, but another benefit of 401ks and traditional IRAs is that because it lowers your taxable income that might mean that you will become elligible for tax credits that will lower your bill even further. Moreover, if you have student loans and are on the income based repayment plan, investing in the above will also lower your monthly payments.

So, which one should I choose? Well, the rule of thumb for most is:
- 401k up to the employer match (401ks usually have higher fees and shittier funds)
- Fully fund Roth or traditional IRA (5,500)
- Fully fund 401k (17,500, i think)

Like I said, you get a 401k from your employer, and you can set up a IRA at a place like Vanguard or Fidelity. After that, put the funds I mentioned above in them, or at least ones that are close. Below are links to the funds that I talked about.

Vanguard Total Stock Market Index Fund

Vanguard Total International Stock Index Fund

Vanguard Total Bond Market Index Fund

Vanguard Inflation-Protected Securities Fund Investor Shares(look into this fund when you are nearing retirement)

So yea, in conclusion, start investing early and do not be afraid to invest. You can make it as simple or as complicated as you want it to be, and the method I mentioned above is stupidly simple that will give the greatest return for the vast majority of people. If you don’t invest for retirement, you will definitely regret it when you get older.

How to save and actually get money to invest

Well, this one is tricky because it takes discipline and long-term planning. The best way to save money is to first figure out how much you actually spend. Programs like Mint are very useful because it just automates everything.

Once you figure out how much you spend you need to create a list of priorities. Is eating out super important to you? Are video games super important? Cable TV? that smart phone? Once you make that list, you can figure out what you definitely should cut back on. because if having cable TV is only somewhat important to you, and your retirement is small, well cut it. It might be nice to have it, but it is definitely not worth it if it means that you will be living in poverty when you retire.

For things super important to you, say like video games or reading, there are obvious ways to cut back by borrowing books from the library and only buying video games that go on sale and stop buying games that you never play.

All of these savings might seem small, but they add up. That 5k a year means investing 418 dollars a month. If you cut cable and stop buying 2 games every month you are basically half way there.

And don't be this guy:

You have no idea how stupid people can be with money. For example, I know of a forum where a lot of people spend thousands of dollars every year on video games they have no intent of actually playing. Meanwhile, they haven't put the first dollar into a retirement fund.

Suze is telling those people to stop being dumb.

As for more serious savings, those come down to two things: car and home. Want to buy a fancy new car at 5% interest? Well, dont. Thats stupid. Making yourself poor by buying an expensive car or house that you can barely afford is about the dumbest thing you can do because besides wiping away all of your savings, the interest rate on both of those things will make it a lot more expensive than the sticker price.

The location of your home compared to your work also matters a lot. To drive 1 mile its about 60 cents. If you live 20 miles away from work you will be spending about 8.5k a year on gas and other car expenses. Thats ridiculous.

This is a good site that gives a bunch of strategies to save serious money

http://www.mrmoneymustache.com/

You might think he is a bunch of BS, or whatever, but that doesnt change the fact while you might not be able to retire in 10-15 years, you will save a lot of money if you adopt some of his suggestions.

 

[Pterion]

Index funds.

Beaten.

 

[Manmademan]

Index funds.

Beaten.

Pretty much.

The OP is pretty comprehensive here. The only thing I might add is municipal bond funds. Vanguard offers them as well (I have some money here, but it's not my primary retirement vehicle.)

The advantage over an IRA or an index fund is that a municipal bond fund is much lower risk and guarantees a set return (though the risk is not zero, nothing is zero) and if you have a fund composed of bonds from your state, all gains are completely non taxable.

might be worth looking into alongside an IRA or 401K.

 

[Neo C.]

Assuming more and more people start investing in index funds - does it have some (negative) consequences on the stock market? There was an article I read years ago, but I didn't understand the argument. Perhaps some smart gaffers could answer this question.

 

[Manmademan]

Assuming more and more people start investing in index funds - does it have some (negative) consequences on the stock market? There was an article I read years ago, but I didn't understand the argument. Perhaps some smart gaffers could answer this question.

No.

The market will gradually go up but that's about it. Republicans were pushing for an end to traditional social security and giving people the "option" to stick their funds in the stock market instead, which would basically have been the same thing on a larger scale, as well as a massive giveaway to wall street.

 

[grumble]

Assuming more and more people start investing in index funds - does it have some (negative) consequences on the stock market? There was an article I read years ago, but I didn't understand the argument. Perhaps some smart gaffers could answer this question.

Kind of but not really. All you need is a critical mass of active traders to exploit mid pricing and it keeps things in line. There is that mass.

Op, I'd talk a bit more about how to actually save money too; what percentage of your money needs to be saved, how to do it, etc.

 

[Tenck]

Perfect thread for a friend of mine. Thanks OP.

 

[B.K.]

I really need to start doing some saving or investing. I don't plan to live to retirement age, but if somehow I do, I don't want to end up like my parents. They're almost 60 and have no savings.

 

[Piecake]

Assuming more and more people start investing in index funds - does it have some (negative) consequences on the stock market? There was an article I read years ago, but I didn't understand the argument. Perhaps some smart gaffers could answer this question.

No, it was probably an argument that if everyone moves into stock market, the market will lose its liquidity (I think that is the right term) because there will be far fewer people who are moving the market and setting the proper price than if everyone just followed it.

The issue with that argument is that the market right now is still far more liquid (might totally have the wrong term) than years previous, and even if it does become non-liquid, that simply gives stock-pickers and investors a greater chance to get higher than market returns and increase the amount of individual stock investors because now it would actually be worth it.

Basically their argument is the purpose of the stock market is to redirect capital to the most worthy companies. Index funds don't do that. If everyone invests in index funds, we are doomed! Pretty stupid argument for the reasons I mentioned above. Plus, like 97% of the stock trades in the market is speculation, not investment, so I think that is rather an absurd point

 

[Manmademan]

I really need to start doing some saving or investing. I don't plan to live to retirement age, but if somehow I do, I don't want to end up like my parents. They're almost 60 and have no savings.

The hell? retirement age is generally 65. Do you work with high explosives or something? lion taming?

No, it was probably an argument that if everyone moves into stock market, the market will lose its liquidity (I think that is the right term) because there will be far fewer people who are moving the market and setting the proper price than if everyone just followed it.

]The issue with that argument is that the market right now is still far more liquid (might totally have the wrong term) than years previous, and even if it does become non-liquid, that simply gives stock-pickers and investors a greater chance to get higher than market returns and increase the amount of individual stock investors because now it would actually be worth it.

Basically their argument is the purpose of the stock market is to redirect capital to the most worthy companies. Index funds don't do that. If everyone invests in index funds, we are doomed! Pretty stupid argument for the reasons I mentioned above. Plus, like 97% of the stock trades in the market is speculation, not investment, so I think that is rather an absurd point

I hate to be mean, but virtually none of what you just said makes any sense at all.

No, it was probably an argument that if everyone moves into stock market, the market will lose its liquidity (I think that is the right term) because there will be far fewer people who are moving the market and setting the proper price than if everyone just followed it.

everything in the market is a liquid asset, in that it can be sold fairly easily. Non liquid assets are things like real estate or cars, which might take months or years to sell if you find yourself in a tight spot. The amount of people in the market has no effect on "liquidity", stocks are liquid by definition. As for the market moving, few people buy individual stocks- most buy into a fund. Fund managers typically buy (and sell) on a regular basis as well as change their asset mix, which would account for your "movement."

Basically their argument is the purpose of the stock market is to redirect capital to the most worthy companies. Index funds don't do that

This is not the purpose of the stock market, for one. Companies receive ZERO capital from the stock market, outside of IPOs which 99.999999% of investors don't participate in.

Second, index funds follow the indexes. The two biggest ones are the Dow Jones (which are 30 companies) and the S&P 500 (which is 500). These indexes are curated, meaning companies that don't maintain certain standards get kicked off the index. REALLY bad companies might find themselves kicked off the exchange entirely. on top of that, most funds have fund managers who decide which companies are "worth" investing in.

Plus, like 97% of the stock trades in the market is speculation, not investment,

This is also false. much of the market is controlled by large institutional investors and retirement funds, which do not engage in speculative investment at ALL- they're actually quite conservative.

 

[RustyNails]

Who the fuck needs an investment banker when you got piecake. Thanks for the thread dude.

 

[Cyan]

I want to note that while I agree with most of what Piecake says here, I would consider his asset allocation to be very aggressive. Even as someone comfortable with high risk and volatility, "no bonds until 10 years before retirement" is too much for me.

"Your age% in bonds" is a conservative strategy; too conservative for me. I personally use "your age-20% in bonds." But please, think very carefully before you adopt an investment allocation, about your own risk tolerance and if it really makes sense for you to be highly aggressive. Risk tolerance is more than just personal preference, it also encompasses the amount of risk you can actually afford to take.

Remember, funding retirement isn't just about getting to the highest number possible in your retirement fund. It's also about having the best chance of getting to a high enough number for you to retire comfortably. If you're contributing enough to retirement investments, you don't need to be highly aggressive!

Also, I can't find the equations right now, but I'm pretty sure I remember working out that under standard assumptions, your total E(R) is actually slightly higher with a small percentage of bonds than with only stocks. This will vary as correlations vary, of course.

 

[NetMapel]

Dividend funds !

 

[Piecake]

Kind of but not really. All you need is a critical mass of active traders to exploit mid pricing and it keeps things in line. There is that mass.

Op, I'd talk a bit more about how to actually save money too; what percentage of your money needs to be saved, how to do it, etc.

How to save and actually get money to invest

Well, this one is tricky because it takes discipline and long-term planning. The best way to save money is to first figure out how much you actually spend. Programs like Mint are very useful because it just automates everything.

Once you figure out how much you spend you need to create a list of priorities. Is eating out super important to you? Are video games super important? Cable TV? that smart phone? Once you make that list, you can figure out what you definitely should cut back on. because if having cable TV is only somewhat important to you, and your retirement is small, well cut it. It might be nice to have it, but it is definitely not worth it if it means that you will be living in poverty when you retire.

For things super important to you, say like video games or reading, there are obvious ways to cut back by borrowing books from the library and only buying video games that go on sale and stop buying games that you never play.

All of these savings might seem small, but they add up. That 5k a year means investing 418 dollars a month. If you cut cable and stop buying 2 games every month you are basically half way there

As for more serious savings, those come down to two things: car and home. Want to buy a fancy new car at 5% interest? Well, dont. Thats stupid. Making yourself poor by buying an expensive car or house that you can barely afford is about the dumbest thing you can do because besides wiping away all of your savings, the interest rate on both of those things will make it a lot more expensive than the sticker price.

The location of your home compared to your work also matters a lot. To drive 1 mile its about 60 cents. If you live 20 miles away from work you will be spending about 8.5k a year on gas and other car expenses. Thats ridiculous.

This is a good site that gives a bunch of strategies to save serious money

http://www.mrmoneymustache.com/

You might think he is a bunch of BS, or whatever, but that doesnt change the fact while you might not be able to retire in 10-15 years, you will save a lot of money if you adopt some of his suggestions.

 

[Manmademan]

How to save and actually get money to invest

Well, this one is tricky because it takes discipline and long-term planning. The best way to save money is to first figure out how much you actually spend. Programs like Mint are very useful because it just automates everything.

Once you figure out how much you spend you need to create a list of priorities. Is eating out super important to you? Are video games super important? Cable TV? that smart phone? Once you make that list, you can figure out what you definitely should cut back on. because if having cable TV is only somewhat important to you, and your retirement is small, well cut it. It might be nice to have it, but it is definitely not worth it if it means that you will be living in poverty when you retire.

For things super important to you, say like video games or reading, there are obvious ways to cut back by borrowing books from the library and only buying video games that go on sale and stop buying games that you never play.

All of these savings might seem small, but they add up. That 5k a year means investing 418 dollars a month. If you cut cable and stop buying 2 games every month you are basically half way there

As for more serious savings, those come down to two things: car and home. Want to buy a fancy new car at 5% interest? Well, dont. Thats stupid. Making yourself poor by buying an expensive car or house that you can barely afford is about the dumbest thing you can do because besides wiping away all of your savings, the interest rate on both of those things will make it a lot more expensive than the sticker price.

The location of your home compared to your work also matters a lot. To drive 1 mile its about 60 cents. If you live 20 miles away from work you will be spending about 8.5k a year on gas and other car expenses. Thats ridiculous.

This is a good site that gives a bunch of strategies to save serious money

http://www.mrmoneymustache.com/

You might think he is a bunch of BS, or whatever, but that doesnt change the fact while you might not be able to retire in 10-15 years, you will save a lot of money if you adopt some of his suggestions.

I would disagree with this approach and recommend this instead.

Decide what kind of standard of living you will require in retirement and use THAT to plan how much you're going to put away. This number is going to vary for most of us (are you planning to stay where you are? or retire somewhere warmer? do you have kids that might need help? do you want to travel? take up pricy hobbies?), so it's hard to throw out a percentage and say "this is the amount."

Any simple online calculator will be able to tell you how much you will end up with at 65 or 70 if you start putting away 5K a year or whatever. But keep in mind that with modern medicine, people are living longer than ever. What might be great if your life expectancy is 75 might not be great if you end up living until 97.

 

[Piecake]

I would disagree with this approach and recommend this instead.

Decide what kind of standard of living you will require in retirement and use THAT to plan how much you're going to put away. This number is going to vary for most of us (are you planning to stay where you are? or retire somewhere warmer? do you have kids that might need help? do you want to travel? take up pricy hobbies?), so it's hard to throw out a percentage and say "this is the amount."

Any simple online calculator will be able to tell you how much you will end up with at 65 or 70 if you start putting away 5K a year or whatever. But keep in mind that with modern medicine, people are living longer than ever. What might be great if your life expectancy is 75 might not be great if you end up living until 97.

That was more aimed at people who had no money to invest and needed to find money by cutting expenses and find savings.

And sadly, the question as to how much you need to retire, how much you need to save, how much you need to invest is a lot of guesswork. Its guesswork because we simply don't know what living expenses are going to be 30 years from now and how long you are going to live. My philosophy is to basically save a lot since I'd rather enjoy retirement than barely scrape by.

 

[Tragicomedy]

Far too aggressive for me, although I've made a killing in past markets. I have a healthy pension + decently large inheritance to look forward to, so I can afford to take less risks. I only have 25% in stocks, give or take how long it's been since last rebalance.

My goal right now is to continue aggressively saving for the next ten years, at which point I intend to hang up my professional hat. I'll be 44 and want to pay off my home in cash. I should be bringing in a fixed income of ~$50K a year (pre social security and not tapping into savings). Without a monthly mortgage payment, that is more than enough to sustain our life style.

I may have to work longer than I'm anticipating, but I'm certainly not planning on it.

 

[juliushandle]

How is this different from investing as much as I comfortably can through my employer's 401k and diversifying the direction of where my money goes?

 

[entremet]

How to save and actually get money to invest

Well, this one is tricky because it takes discipline and long-term planning. The best way to save money is to first figure out how much you actually spend. Programs like Mint are very useful because it just automates everything.

Once you figure out how much you spend you need to create a list of priorities. Is eating out super important to you? Are video games super important? Cable TV? that smart phone? Once you make that list, you can figure out what you definitely should cut back on. because if having cable TV is only somewhat important to you, and your retirement is small, well cut it. It might be nice to have it, but it is definitely not worth it if it means that you will be living in poverty when you retire.

For things super important to you, say like video games or reading, there are obvious ways to cut back by borrowing books from the library and only buying video games that go on sale and stop buying games that you never play.

All of these savings might seem small, but they add up. That 5k a year means investing 418 dollars a month. If you cut cable and stop buying 2 games every month you are basically half way there

As for more serious savings, those come down to two things: car and home. Want to buy a fancy new car at 5% interest? Well, dont. Thats stupid. Making yourself poor by buying an expensive car or house that you can barely afford is about the dumbest thing you can do because besides wiping away all of your savings, the interest rate on both of those things will make it a lot more expensive than the sticker price.

The location of your home compared to your work also matters a lot. To drive 1 mile its about 60 cents. If you live 20 miles away from work you will be spending about 8.5k a year on gas and other car expenses. Thats ridiculous.

This is a good site that gives a bunch of strategies to save serious money

http://www.mrmoneymustache.com/

You might think he is a bunch of BS, or whatever, but that doesnt change the fact while you might not be able to retire in 10-15 years, you will save a lot of money if you adopt some of his suggestions.

I love that site.

This is also good.

http://earlyretirementextreme.com

It's better to understand the principles than trying to do everything as is here; both of the guys have very modest lifestyles, but take what you can.

 

[Manmademan]

That was more aimed at people who had no money to invest and needed to find money by cutting expenses and find savings.

True, and that advice is generally good advice. Cut out the silly stuff, put some money away. The commuting advice is not great for a few reasons, but let's not go there.

And sadly, the question as to how much you need to retire, how much you need to save, how much you need to invest is a lot of guesswork. Its guesswork because we simply don't know what living expenses are going to be 30 years from now and how long you are going to live. My philosophy is to basically save a lot since I'd rather enjoy retirement than barely scrape by.

Yes and no. most of us have an idea of what a comfortable standard of living is. Generally (unless things are pretty bad) it's where we are now, or where our parents are.

Calculating your current income, subtract things like mortgage payments (assuming you plan on having your house paid off by retirement) and adjusting 2 or 3% a year for inflation should give most people a ballpark estimate of what they need to maintain their current lifestyle. Is this going to be exact? of course not- but as a rule of thumb, it's a starting point. From there you can plan for things like "I might want to travel" or "I might want a vacation home."

 

[Cyan]

How is this different from investing as much as I comfortably can through my employer's 401k and diversifying the direction of where my money goes?

It's not. That's pretty close to what Piecake is recommending here. Though if you have index fund options in your 401k plan, take those.

And sadly, the question as to how much you need to retire, how much you need to save, how much you need to invest is a lot of guesswork. Its guesswork because we simply don't know what living expenses are going to be 30 years from now and how long you are going to live..

Sure, but we don't need to throw up our hands and give up! It's still worth the exercise of looking at how much you spend now, considering how much that's likely to change, then calculating out how much you would need to fund that. Sure, there are going to be error bars, but it's useful information.

 

[Deleted member 12837]

I've got a Roth IRA that my parents set up for me with Charles Schwab. I don't think it has any money in it right now. Should I move to Vanguard or Fidelity since you specifically mentioned those? Is there a significant different in user experience, etc?

 

[Tragicomedy]

How is this different from investing as much as I comfortably can through my employer's 401k and diversifying the direction of where my money goes?

It isn't, so long as the 401k has solid options and very low fees.

You're almost always better off maxing your Roth in addition to the 401k vice ignoring it. A Roth is always a good idea, especially if you've hit your employers match cap.

 

[Tragicomedy]

I've got a Roth IRA that my parents set up for me with Charles Schwab. I don't think it has any money in it right now. Should I move to Vanguard or Fidelity since you specifically mentioned those? Is there a significant different in user experience, etc?

Vanguard is always the correct choice if you have even basic investment knowledge. Always. Compare fees and see why.

 

[Piecake]

I want to note that while I agree with most of what Piecake says here, I would consider his asset allocation to be very aggressive. Even as someone comfortable with high risk and volatility, "no bonds until 10 years before retirement" is too much for me.

"Your age% in bonds" is a conservative strategy; too conservative for me. I personally use "your age-20% in bonds." But please, think very carefully before you adopt an investment allocation, about your own risk tolerance and if it really makes sense for you to be highly aggressive. Risk tolerance is more than just personal preference, it also encompasses the amount of risk you can actually afford to take.

Remember, funding retirement isn't just about getting to the highest number possible in your retirement fund. It's also about having the best chance of getting to a high enough number for you to retire comfortably. If you're contributing enough to retirement investments, you don't need to be highly aggressive!

Also, I can't find the equations right now, but I'm pretty sure I remember working out that under standard assumptions, your total E(R) is actually slightly higher with a small percentage of bonds than with only stocks. This will vary as correlations vary, of course.

I would agree that my strategy is highly aggressive, but thats because I don't see the point of being conservative until 10-15 years before retirement. During that time you will have enough time to move part of your money over to bonds. And I would agree, if you have already won the game, there is no need to risk it by investing in the stock market (maybe like 10-20% would be enough).

If you can't handle seeing the market crash in 10 years and seeing half of your funds being wiped out, even though that loss does not matter to you, then I definitely would take a more conservative approach. Though I honestly don't see much of a difference than losing half of 70% of your funds and losing half of all of your funds from a psychological perspective. Like I said, none of those loses matter until you actually sell. 10-15 years should give you enough time to move into bonds so you can sell those when the market tanks.

100% stocks will give you the most, its just only slightly higher than 90% stocks and 10% bonds. Investing in 90/10 will also gain you comparatively 'more' less risk for the cost of losing return

Who the fuck needs an investment banker when you got piecake. Thanks for the thread dude.

I definitely wouldnt do that because those dudes usually will charge you 1 to 2% fees to manage your account. Thats bad news if they are recommending actively managed funds as well. 3-4% fees would probably cost you 600-700k in fees. Pretty ridiculous

 

[Cyan]

Vanguard is always the correct choice if you have even basic investment knowledge. Always. Compare fees and see why.

Depends on how much money you're able to put in to start out with. They have minimum initial investments even for IRAs, IIRC.

 

[RumblingRosco]

-

 

[isual]

need to invest

 

[Tragicomedy]

Depends on how much money you're able to put in to start out with. They have minimum initial investments even for IRAs, IIRC.

You're correct. I took that for granted, my bad.

Once you have enough money to meet their reasonable minimum limit, they're always the right choice.

 

[RustyNails]

So, which one should I choose? Well, the rule of thumb for most is:
- 401k up to the employer match (401ks usually have higher fees and shittier funds)
- Fully fund Roth or traditional IRA (5,500)
- Fully fund 401k (17,500, i think)

Like I said, you get a 401k from your employer, and you can set up a IRA at a place like Vanguard or Fidelity. After that, put the funds I mentioned above in them, or at least ones that are close. Below are links to the funds that I talked about.

https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT

https://personal.vanguard.com/us/funds/snapshot?FundId=0113&FundIntExt=INT

https://personal.vanguard.com/us/funds/snapshot?FundId=0084&FundIntExt=INT

https://personal.vanguard.com/us/funds/snapshot?FundId=0119&FundIntExt=INT

I have roth 401k with employer matching set up. I contribute around 5-6% every paycheck. I also have an account at Vanguard.com and I have a mutual fund like the ones described above. So I should keep these two vehicles going for my retirement? Would you tip the balance in favor of one vehicle or the other when it comes to ROI?

 

[Piecake]

I've got a Roth IRA that my parents set up for me with Charles Schwab. I don't think it has any money in it right now. Should I move to Vanguard or Fidelity since you specifically mentioned those? Is there a significant different in user experience, etc?

Depends. I am pretty sure that Charles Schwab has good low cost index funds like the ones I mentioned above. If so, there is really no reason to switch unless they have account maintenance fees

I like Vanguard because their fees are always the lowest and easily have the best business model

Vanguard is owned by the funds themselves and, as a result, is owned by the investors in the funds.[2]

I'd rather invest in a company with that business model than put money into the pocket of some Wall street fat cat. Doubt its worth it to move money to Vanguard just for that reason though

 

[Tragicomedy]

I have roth 401k with employer matching set up. I contribute around 5-6% every paycheck. I also have an account at Vanguard.com and I have a mutual fund like the ones described above. So I should keep these two vehicles going for my retirement? Would you tip the balance in favor of one vehicle or the other when it comes to ROI?

No. Hit your employer match limit, then max out the Roth for future tax benefits, then pump more into the 401k.

 

[Piecake]

I've got a Roth IRA that my parents set up for me with Charles Schwab. I don't think it has any money in it right now. Should I move to Vanguard or Fidelity since you specifically mentioned those? Is there a significant different in user experience, etc?

Depends. I am pretty sure that Charles Schwab has good low cost index funds like the ones I mentioned above. If so, there is really no reason to switch unless they have account maintenance fees

I like Vanguard because their fees are always the lowest and easily have the best business model

Vanguard is owned by the funds themselves and, as a result, is owned by the investors in the funds.[2]

I'd rather invest in a company with that business model than put money into the pocket of some Wall street fat cat. Doubt its worth it to move money to Vanguard just for that reason though

I have roth 401k with employer matching set up. I contribute around 5-6% every paycheck. I also have an account at Vanguard.com and I have a mutual fund like the ones described above. So I should keep these two vehicles going for my retirement? Would you tip the balance in favor of one vehicle or the other when it comes to ROI?

Invest up to the employer match because its free money. The issue with 401ks is that the those have account maintenance fees attached to them, IRAs dont. Moreover, you have complete freedom to invest in whatever you want to invest in an IRA

That is why its 401k up to the match and then fully fund your IRA. By doing that, you get the free money, but won't be charged the extra fees beyond that. Really, the whole reason is fees and fund choice since the funds you have in your 401k could really suck and have really high fees.

 

[Smiley90]

I posted this in the Stocks-Age thread, but I figured I might as well cross-post it here since there's an active discussion on this exact topic.

What's Stock-Age's opinion on Bonds? I'm not sure if I should even allocate anything into them, and if so how much (in % of total portfolio) and what term max. And I'm trying to find some good info on how Coupon/YTM interplay, but damn it's hard to find good info on that. So I'd appreciate it someone was able to put that in simple terms.

Well I won't be investing much into individual stocks for obvious reasons, I don't have the time or risk tolerance for that. I'll dabble in it a bit with money I can easily afford to lose.

The vast majority I'll be investing in total/branch index funds, but I'm not sure if I should allocate a percentage into bonds, for some stability.

I can afford to not sell when the market is low, I'm not going to invest the money I'm "using on a day to day basis", so to speak. I want to treat it as saving for later and maybe get some extra income.

But given how non-transparent the bond market appears to be (Questrade has a nice list, but the terms are hard to understand and wade through), I'm a bit lost.

EDIT: Oh, and what's GAF's opinion on bond funds? vs individual bonds?

EDIT2: I'm Canadian, so don't mention 401k's and all that stuff, I won't understand/need it.

 

[Cyan]

I would also like to suggest that once people have had their way with this thread, to please join us in the community Stock-age thread. It is more related to investing at-large (individual stock speculations being a major focus) but it's a good place to go for general stock/mutual fund/investment discussion once this thread has ran its course.

I don't want to be rude or to single out that thread in particular, but I think in general it's likely to be counterproductive to get really involved in investment discussion in this kind of setting. There's not a lot to talk about on an ongoing basis about passive investment ("wellp, another paycheck, there goes another automatic $x investment into my index funds of choice!"), which means discussion will be dominated by active investors talking about their favorite stocks and their recent trades.

Especially for new investors, it's probably not helpful to get into these kinds of discussions, as you'll start to see active investing as the norm, and be tempted to do more of it than is good for you. (also, there are several natural problems in these kinds of discussions that act to make active investing appear to have stronger returns than it really does, namely reporting bias, non-inclusion of cash holdings, not accounting for overall allocations or fees, and the like)

Again, I don't mean to call out that thread in particular or imply anything bad about the folks who post there; this is a trap endemic to the form. I don't recommend reading investment blogs, news sites, or magazines for much the same reason.

 

[duderon]

This thread is on the right track. The best book I've read on the subject The Four Pillars of Investing

 

[Tragicomedy]

Aye, stay away from sites like Motley Fool et al.

 

[Manmademan]

I posted this in the Stocks-Age thread, but I figured I might as well cross-post it here since there's an active discussion on this exact topic.





EDIT: Oh, and what's GAF's opinion on bond funds? vs individual bonds?

I generally recommend against investing in individual stocks OR bonds instead of a fund, unless you really know what you're doing- and if you did, you wouldn't be asking about advice on GAF.

Stick your money in the fund of your choice (this may be index, it may not) and as you get older, gradually shift more of your money from mostly stocks into mostly bonds. by the time you're 5 or 10 years from retirement, I would personally be almost 100% bonds.

The reason for this is because if the market tanks 6 or 7 years from retirement for you, its fairly unlikely your investments will recover 100% plus the missed interest by the time you're ready to retire. you don't want to be forced to work another 5 or 10 years to make up for lost income.

 

[Cyan]

That is why its 401k up to the match and then fully fund your IRA. By doing that, you get the free money, but won't be charged the extra fees beyond that. Really, the whole reason is fees and fund choice since the funds you have in your 401k could really suck and have really have fees.

Yes, this is the biggest problem with 401ks. It varies by company and by plan, but it's not uncommon for companies to get kickbacks from the 401k plan in exchange for only having crappy funds with high fees available to invest in.

 

[juliushandle]

It's not. That's pretty close to what Piecake is recommending here. Though if you have index fund options in your 401k plan, take those.

yes, index fund is available as an option and I believe I have maybe 20% going into that. Should I increase the percentage? I think I have a good balance of risk/aggressive options compared to long term options.

I gotta look into this piecake to make sure I'm maximizing my investment.

 

[RumblingRosco]

-

 

[Piecake]

I posted this in the Stocks-Age thread, but I figured I might as well cross-post it here since there's an active discussion on this exact topic.





EDIT: Oh, and what's GAF's opinion on bond funds? vs individual bonds?

EDIT2: I'm Canadian, so don't mention 401k's and all that stuff, I won't understand/need it.

I deal with bonds in my long post and another one above, but I basically don't see the point of investing in bonds for retirement until 10-15 years before retire. I don't want to repeat myself, so I would just read those sections. There is definite disagreement, and for that I would read Cyan's posts. You can figure out what you are comfortable with afterwards since being comofortable with your investment is the most important thing. Nothing worse than panicking and selling low

I am assuming that Canada has tax advantaged investing accounts, so all of the investments we are talking about should be put in there

And I am not a fan of individual stocks or bonds. I really dont think the amount of effort and risk is worth the return since I think the vast majority of people get a higher return off of simply investing in index funds anway

 

[chaosblade]

Was just talking about this today. Really something I need to delve into more since I know so little. Subbed.

I have some sort of mutual fund through Edward Jones that my grandparents set up and put money into for me. They've basically passed it to me and said I can do what I want with it, and they aren't sure it's made much recently. So that would probably be a good starting point.

 

[Piecake]

Was just talking about this today. Really something I need to delve into more since I know so little. Subbed.

I have some sort of mutual fund through Edward Jones that my grandparents set up and put money into for me. They've basically passed it to me and said I can do what I want with it, and they aren't sure it's made much recently. So that would probably be a good starting point.

That is probably an actively managed fund that has a stupidly high expense ratio. Edward Jones is pretty notorious for basically milking its clients with high fees. I would definitely look into that because you are likely not making nearly as much money as you should

 

[Randolph Freelander]

I generally recommend against investing in individual stocks OR bonds instead of a fund, unless you really know what you're doing- and if you did, you wouldn't be asking about advice on GAF.

Stick your money in the fund of your choice (this may be index, it may not) and as you get older, gradually shift more of your money from mostly stocks into mostly bonds. by the time you're 5 or 10 years from retirement, I would personally be almost 100% bonds.

The reason for this is because if the market tanks 6 or 7 years from retirement for you, its fairly unlikely your investments will recover 100% plus the missed interest by the time you're ready to retire. you don't want to be forced to work another 5 or 10 years to make up for lost income.

It's interesting, though, that we just had the worst economic disaster since the Great Depression and after less than 6 to 7 years, the market has more than fully recovered. The young invincible in me says just keep chugging along in funds allocated towards stocks and enjoy the higher returns. I'll probably become more conservative as I actually do near retirement, but since it's 30 years or more away, I just find this most recent economic collapse as an interesting case study that runs counter to fears most often expressed about the market.

 

[Smiley90]

I generally recommend against investing in individual stocks OR bonds instead of a fund, unless you really know what you're doing- and if you did, you wouldn't be asking about advice on GAF.

Stick your money in the fund of your choice (this may be index, it may not) and as you get older, gradually shift more of your money from mostly stocks into mostly bonds. by the time you're 5 or 10 years from retirement, I would personally be almost 100% bonds.

The reason for this is because if the market tanks 6 or 7 years from retirement for you, its fairly unlikely your investments will recover 100% plus the missed interest by the time you're ready to retire. you don't want to be forced to work another 5 or 10 years to make up for lost income.

I deal with bonds in my long post and another one above, but I basically don't see the point of investing in bonds for retirement until 10-15 years before retire. I don't want to repeat myself, so I would just read those sections. There is definite disagreement, and for that I would read Cyan's posts. You can figure out what you are comfortable with afterwards since being comofortable with your investment is the most important thing. Nothing worse than panicking and selling low

I am assuming that Canada has tax advantaged investing accounts, so all of the investments we are talking about should be put in there

And I am not a fan of individual stocks or bonds. I really dont think the amount of effort and risk is worth the return since I think the vast majority of people get a higher return off of simply investing in index funds anway

That sounds about what I had in mind, thanks guys. Was just wondering if I was being "too risky". And yeah like I said, individual stocks I might just dabble a bit in with money I'm totally okay with losing.

One last thing, all you guys are saying keep holding onto your funds through market crashes... what is stopping us from e.g. selling once you realize it's going down and then re-buying once it's hit the bottom? With e.g. stop orders? Wouldn't that theoretically be better than just sticking with it?

That is assuming you can tell once the crash begins and once it ends, obviously.

 

[Cyan]

That is assuming you can tell once the crash begins and once it ends, obviously.

And this is exactly why people tell you not to do it. Recovery often happens largely in brief periods that you're likely to miss if you try to time the market.

What's more likely, simply given human psychology, is that you'll see the market going down, panic, and sell only a short time before it hits bottom, then see it going back up, nervously wait until you're pretty sure the crash is over, then buy only after it's mostly recovered. Trying to time the market often leads to sticking around for the worst days and missing out on the best days.

It's easy to look back in retrospect and think that the top or bottom of the market should've been obvious at the time. But it never is!

 

[Piecake]

That sounds about what I had in mind, thanks guys. Was just wondering if I was being "too risky". And yeah like I said, individual stocks I might just dabble a bit in with money I'm totally okay with losing.

One last thing, all you guys are saying keep holding onto your funds through market crashes... what is stopping us from e.g. selling once you realize it's going down and then re-buying once it's hit the bottom? With e.g. stop orders? Wouldn't that theoretically be better than just sticking with it?

That is assuming you can tell once the crash begins and once it ends, obviously.

Market timing is basically impossible. Don't fool yourself into thinking you can do it because that is how basically everyone loses money (either actually losing money or not getting as high a return as they should)

http://www.bogleheads.org/wiki/Tax_loss_harvesting

I have honestly no idea if this works in Canada, but doing the above works to save money on taxes. Obviously, because the point is saving money on taxes it doesnt work for investments in tax advantage accounts. It has to be a taxable account - which most of us probably wont have.

 

[Smiley90]

And this is exactly why people tell you not to do it. Recovery often happens largely in brief periods that you're likely to miss if you try to time the market.

What's more likely, simply given human psychology, is that you'll see the market going down, panic, and sell only a short time before it hits bottom, then see it going back up, nervously wait until you're pretty sure the crash is over, then buy only after it's mostly recovered. Trying to time the market often leads to sticking around for the worst days and missing out on the best days.

It's easy to look back in retrospect and think that the top or bottom of the market should've been obvious at the time. But it never is!

Fair enough, that sounds right.

Market timing is basically impossible. Don't fool yourself into thinking you can do it because that is how basically everyone loses money (either actually losing money or not getting as high a return as they should)

http://www.bogleheads.org/wiki/Tax_loss_harvesting

I have honestly no idea if this works in Canada, but doing the above works to save money on taxes. Obviously, because the point is saving money on taxes it doesnt work for investments in tax advantage accounts. It has to be a taxable account - which most of us probably wont have.

There are Tax-Free Savings account into which you can invest 5k a year. If you invest your TFSA-money, you pay no tax on dividends/capital gains. (and no tax upon withdrawal) I'm assuming that's the kind of program you're talking about.

Given that I'm still going to school, I haven't been in need of using it yet (as I haven't had to pay any taxes yet with the income I've made), but I'll probably have to start using it very soon.

 

[Manmademan]

It's interesting, though, that we just had the worst economic disaster since the Great Depression and after less than 6 to 7 years, the market has more than fully recovered. The young invincible in me says just keep chugging along in funds allocated towards stocks and enjoy the higher returns. I'll probably become more conservative as I actually do near retirement, but since it's 30 years or more away, I just find this most recent economic collapse as an interesting case study that runs counter to fears most often expressed about the market.

..sorta.

Keep in mind that while the DJIA has recovered back to all time highs, the DJIA has removed a significant amount of companies from the index that were on there during the market crash.

Chevron, Cisco, UnitedHealth, Nike, Visa, Goldman Sachs, and Travelers are all on the average now and weren't in 2007, making the average look a bit higher than it would be if HP, General motors, Kraft, AIG etc were still there.

second, keep in mind the market generally has a gain of about 8 or 9% YOY. That 6 or 7 years or so (which was really fast all things considered) to get BACK to where it was pre-crash is basically lost income when talking about retirement- thats years of gains that one will never get back.