Take 2 = When, Where, and How to Invest (Investing 101)

May 17, 2007

Based upon some of the emails I received recently I need to get back to teaching what I do well….. Investing!

There are tons of podcasts out there that explain how to spend less than you make, and how credit card debt can drain financial freedom. How many actually have the training and know how to help you with the crucial portion of your extra cash flow and retirement funds? I would dare to say not many because most either do not know what to tell you or they are trying to sell you a product so they will never tell you (unless you invest $2k into their proprietary system). I am here to help by focusing the next few shows on investing.

Today is the first part of our investment series and we are getting back to the basics, but before I get into the details I wanted to mention an article I read this weekend:

Yahoo / Bankrate.com (linked here if you care to read it for yourself “Status on America’s retirement” by Leslie Haggin Geary) . The article starts out with this startling statement, “Americans’ dreams of retirement are more likely to resemble fitful nightmares unless they do more to plan ahead, according to numerous studies that show many workers fail to adequately prepare for life after work.”

** The “do-it-yourself” era of retirement – as I have been saying for years now the traditional pension is going extinct. Employers now offer defined contribution plans with the most popular being 401ks.

** Status as to how everyone is doing with their savings?!…. According to research and polling from the EBRI research group 49% of workers have saved less than $25,000. Among older individuals who are at least age 55, one third has under $25,000. Only a small minority – 14% of people of all ages – have more than $250,000. Among those 55 and older, 29% have saved that much or more.

** Missing Free Money Opportunities – 22% of those who contribute to a 401k fail to save enough to qualify for a full match from their employers, according to Hewitt Associates.

I blame some of these missteps on lack of knowledge and plain old frustration that you feel overwhelmed by your investment choices. Let us see if we can correct this problem and get you on the road to financial independence.

WHEN Should you Invest? There is never a bad time to invest, but you do have to remember that time is both your friend and foe. Need an example? Consider this:

To reach $1,000,000 by the time that you are 65 you will need to save the following amount per month depending on your age (assuming an interest rate of 10%) =

** 1 year old needs to save $14/month
** 20 year old needs to save $95/month
** 30 year old needs to save $263/month
** 40 year old needs to save $754/month
** 50 year old needs to save $2,413/month

As you can see from the information above. The longer you wait the harder it becomes to build financial independence.

WHERE should you invest? I think that most people should invest with one of the low cost Mutual Fund Companies or Brokerage Firms. Below are a few companies with links that are known in the industry as low cost providers:

Mutual Fund Companies:
Fidelity Investments (click here for link)
Vanguard Funds (click here for link)

Low Cost Brokerage Accounts:
TD Ameritrade (click here for link)
Fidelity Investment (click here for link)

Charles Schwab (click here for link)

HOW should you invest? I am going to keep this as simple as possible.

Stocks/Bonds vs. Mutual Funds:
I know that we are all tempted to buy individual stocks, so that we can be a part of the next Wal Mart, Apple, Microsoft, Home Depot. However, even if you choose the right company, when do you sell it? Also, do you keep up with the financial markets enough that you could unload an individual stock fast enough to protect yourself if that company turns out to be the next Worldcom or Enron? I think individual stocks are great, but very hard for the average investor to be successful with in the long-term. The easier solution that has a proven track record are mutual funds.

Investors fall into two groups when it comes to mutual fund investing:

People with < $200,000 in investments (should consider self managing their money) People with > $200,000 in investments (should consider working with an institutional fee-only advisor)

If you have less than $200,000 of investment capital you can set yourself up with an ultra low cost asset allocation fund and focus on what is important…. saving as much money as possible. Many of the low cost mutual fund companies offer retirement and asset allocation funds that do a somewhat decent job of spreading you money out across many diverse investments. Below I have provided a few suggestions:

Vanguard offers Target Retirement Funds (starting with a 2005 fund – 2050 fund (5 year increments)). The minimum initial investment is $3,000 with of course no commissions and internal expenses less than .25%/year

Fidelity offers Freedom Funds (starting with a 2000 fund – 2050 fund (5 year increments)). The minimum initial investment is $2,500 with no commissions. Internal expenses range from .50% to .80%/year.

Those with >$200,000 can probably do better by hiring an adviser because of the following:
1) Institutional Advisers have access to Institutional funds that are not available to the public. Examples include:

Pimco Total Return Institutional managed by Bill Gross. This fund is a great bond fund, but check out the difference between the retail and institutional fund.

Pimco Total Return A (PTTAX):
Minimum Investment = $2,500
Front-end commission = 3.75%
Net Expense Ratio = 0.90%
10 Yr Performance (as of 3/31/07) = 6.58%/year

Pimco Total Return Instl (PTTRX):
Minimum Investment = $5,000,000
Front-end commission = 0.0% none
Net Expense Ratio = 0.43%
10 Yr Performance (as of 3/31/07) = 7.08%/year

2) Institutional Advisers can still purchase mutual funds for clients that have closed to new money. Examples include the following funds:
Hotchkis Wiley Mid Cap Value Instl (HWMIX)
Artisan Small Cap Value (ARTVX)
Oakmark Intl Small Cap (OAKEX)
Matthews Asian Growth and Income (MACSX)
3) Once you have accumulated a decent amount of investment assets (>$200k) you also need an adviser to help you with the asset allocation. Life style, asset allocation, and retirement funds do a great job of allocating your money as you begin accumulating investment assets, but once you reach a certain level you can do better by creating a personalized investment plan. These personalized investment plans can make use of the institutional and closed funds that I mentioned earlier as well as other asset classes that are sometimes excluded from asset allocation funds (hedge funds, commodities, specialized real estate, and such.

In our next podcast I will go even deeper into the world of investing, so if you feel that this episode was too simple for your financial situation tune in for our next podcast (Investing 201):


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** How Mismanaged 401(k)s Put Many Retirees in Jeopardy
** An Analysis of Variable Annuities (Buyer Beware)
** Important planning changes in how to handle Retirement Beneficiaries
** Five Economic Indicators to Watch Now
** A Checklist of Estate Planning Essentials

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