Investing Advice\Best Mutual Funds

[blashmet]

Given my financial situation, I'm wondering if I should start taking allocating more money to a Roth401k (currently allocate 5% of paycheck to an "aggressive" fund) or taking a separate amount out for a mutual fund. If so, what would be the best mutual funds to look at given my current financial situation and how much should I allocate? If there's any other advice you guys have it would be much appreciated.

Thanks!

[Petunia 100]

Given my financial situation, I'm wondering if I should start taking allocating more money to a Roth401k (currently allocate 5% of paycheck to an "aggressive" fund) or taking a separate amount out for a mutual fund. If so, what would be the best mutual funds to look at given my current financial situation and how much should I allocate? If there's any other advice you guys have it would be much appreciated.

Thanks!

I wouldn't invest a single cent in a taxable fund before I maxed out my Roth IRA. (Not Roth 401k, Roth IRA). In fact, I suggest you open a Roth IRA immediately, sell the 3k of stocks, and contribute the proceeds to your Roth IRA.

5% towards retirement is a nice start, but it's not enough to build a sufficient retirement nest egg. 10% should be your minimum goal, 15% is better. Also, you want to have both tax-deferred and Roth monies.

When it comes to picking mutual funds, that is the last step in the process. The first step is to determine a reasonable asset allocation plan. That means how much in stocks, how much in bonds, how much in cash. Of your stocks, how much in US stocks, how much in foreign stocks. Those are the big decisions. Then you get down to decisions having less of an impact. Will you tilt towards value, will you hold a separate Reit fund, etc.

What is your asset allocation plan? That is the place to start.

[disneysteve]

Is there an employer match on the 401k contributions? If so, invest enough to get the full match.Then open a Roth IRA and fully fund that ($5,500/year). Are you married? Does your spouse have an employer plan or a Roth IRA? If not, that would be the next step.

The goal is to be saving 15% of your gross household income for retirement, preferably in tax-sheltered accounts if you have access to them.

[blashmet]

I wouldn't invest a single cent in a taxable fund before I maxed out my Roth IRA. (Not Roth 401k, Roth IRA). In fact, I suggest you open a Roth IRA immediately, sell the 3k of stocks, and contribute the proceeds to your Roth IRA.

I already have a Roth401k through work (to which I contribute 5% no match), but not a Roth IRA. Should I get rid of the Roth401k altogether? Why is a Roth IRA better?

As for the stocks, selling is an option, but I would take a very large loss. Should I still sell?

5% towards retirement is a nice start, but it's not enough to build a sufficient retirement nest egg. 10% should be your minimum goal, 15% is better. Also, you want to have both tax-deferred and Roth monies.

So should I have a Roth401k, Roth IRA, IRA, and 401k? I'm not sure which combination you're suggesting. Also, is it ever beneficial to convert from one to another after/before retirement? I'm not sure if there's a strategy with that.

When it comes to picking mutual funds, that is the last step in the process. The first step is to determine a reasonable asset allocation plan. That means how much in stocks, how much in bonds, how much in cash. Of your stocks, how much in US stocks, how much in foreign stocks. Those are the big decisions. Then you get down to decisions having less of an impact. Will you tilt towards value, will you hold a separate Reit fund, etc.

What is your asset allocation plan? That is the place to start.

I'm not exactly sure. I suppose I need to figure out which accounts I will have open first (roth401k, 401k, etc.)

What percentages do you suggest for each?

Thanks for your help.

[blashmet]

Is there an employer match on the 401k contributions? If so, invest enough to get the full match.Then open a Roth IRA and fully fund that ($5,500/year). Are you married? Does your spouse have an employer plan or a Roth IRA? If not, that would be the next step.

The goal is to be saving 15% of your gross household income for retirement, preferably in tax-sheltered accounts if you have access to them.

There is no match on the 401k. As of now I only have a Roth 401k.

Are you suggesting to get rid of the Roth 401k and use a Roth IRA instead? And not use a 401k at all if they don't match? Who should I open the IRA with? I don't think my company offers one; if I remember correctly, IRA's are never through ones employer but through a broker. Is that correct?

[Petunia 100]

I already have a Roth401k through work (to which I contribute 5% no match), but not a Roth IRA. Should I get rid of the Roth401k altogether? Why is a Roth IRA better?

Don't get rid of the Roth 401k, no. But a Roth IRA is a better savings/investing vehicle. Why? Well, 401ks often (not always, but often) have high fee structures. High fees are the enemy of the long-term investor. 401ks have limited investment choices. With an IRA, you choose the custodian, you choose what you want to own in the account.

As for the stocks, selling is an option, but I would take a very large loss. Should I still sell?

Absolutely! You get to deduct that large loss against your regular income (up to 3k per year). You can turn right around and buy the same stocks (if you choose) inside your Roth, and any growth will be tax-free.

So should I have a Roth401k, Roth IRA, IRA, and 401k? I'm not sure which combination you're suggesting. Also, is it ever beneficial to convert from one to another after/before retirement? I'm not sure if there's a strategy with that.

In general, you want to invest in your employer plan to the extent there is any match first. Next, you want to max your own IRA (Roth or traditional). Which type of IRA is "better" is up for debate, and really depends on your own situation. After that is maxed, if you have more to invest your employer plan is a good choice.

Eventually, you will probably roll any money in an employer plan into your own IRA.

I'm not exactly sure. I suppose I need to figure out which accounts I will have open first (roth401k, 401k, etc.)

What percentages do you suggest for each?

Thanks for your help.

There is no one best allocation plan. You just want to pick a reasonable one, follow your plan, rebalance, and watch your costs.

You are young, right? A reasonable plan for you might be:

US Stocks 60%
Foreign Stocks 30%
US Bonds 10%

You can break those large categories down further, or you can just stick with broad market funds. My preference is index funds with no individual securities at all. I believe that the vast majority of us are better off investing just that way.

As you get older, you will probably want to cut back on stocks while adding bonds and eventually some cash.

[Petunia 100]

There is no match on the 401k. As of now I only have a Roth 401k.

Are you suggesting to get rid of the Roth 401k and use a Roth IRA instead? And not use a 401k at all if they don't match? Who should I open the IRA with? I don't think my company offers one; if I remember correctly, IRA's are never through ones employer but through a broker. Is that correct?

That is right, IRAs are not something you do through your employer, it is an account you set up with the custodian of your choice.

If you want to buy individual securities and/or ETFs, any broker who will give you free trades will do. If you want to buy mutual funds, stick with Vanguard, Fidelity, or T. Rowe Price. All three are no-load, and all three offer mutual funds from any category you could need. This is important because you don't want to pay transaction fees to purchase mutual funds, which can happen if you are buying funds from a different fund family. My personal preference is Vanguard.

[disneysteve]

As for the stocks, selling is an option, but I would take a very large loss. Should I still sell?

Absolutely! You get to deduct that large loss against your regular income (up to 3k per year). You can turn right around and buy the same stocks (if you choose) inside your Roth, and any growth will be tax-free.

I agree wit almost everything Petunia said except this. If you sell the stock and immediately rebuy it in the Roth, I think that would trigger the "wash sale" rule and the loss wouldn't be deductible. You need to wait at least 30 days after the sale to buy it again even if held in a different account but please check with your tax advisor. Don't quote me on that.

[Petunia 100]

I agree wit almost everything Petunia said except this. If you sell the stock and immediately rebuy it in the Roth, I think that would trigger the "wash sale" rule and the loss wouldn't be deductible. You need to wait at least 30 days after the sale to buy it again even if held in a different account but please check with your tax advisor. Don't quote me on that.

Yes, you are right. Wait 31 days.

[J.Apple902]

Everyone here has you pretty much covered on the personal finance and tax advantage side of things; now for some considerations for mutual funds. I certainly agree that you first have to choose an asset allocation that fits not only your investment horizon but retirement targets as well. After this, calculate out how much you need / would like to have, and choose an asset allocation plan which fits this. Capital protection and risk management should always be prioritized over returns. You should be concerned more with how much you can lose than gain. Ensure you are informed, and have taken in several sources and as much information you can, before making an investment decision. You will make mistakes in your investment career, everyone does, it is true that the best investors make fewer and less severe of these same mistakes.

Your personal attitude on investing is good to consider as well. Some people, most individual investors actually, react very poorly to watching their portfolio get slashed by 20% - this will happen one day to anyone with an all stock portfolio. Look at the tech sector in 2000. This will also happen if you react just the way most individual investors do when they see loses. They like to get involved with investments too long after they are hot, and sell when things are low. Statistics show that investment moves for the long haul are the way to go, a reason why low-cost index funds have become so popular over the last few years. Even the experts like Bill Gross have horrible odds on calling macroeconomics (15% or less!), so why should you allow a fund adviser to choose stocks and bonds for you? Typically, active funds that barely beat the market (because few beat it by a considerable margin) are simply offset but the additional fees and expenses taken off the top by the fund manager himself. The vast majority of investors in actively managed funds actually under perform the market.

The final consideration is price. Even worse than Bill Gross, you as an individual investor have no shot at predicting the direction of interest rates, markets, crashes, bull and bear runs, etc. You have no way of predicting anything, so don't even try to speculate. What you can control are the fees and prices you pay. This is why index > active. So where you cannot tell where the future of a fund or stock will go, what you can control is the price you pay. Consider the history of a fund, if it's had a good 5 year or 1 year run. If you examine a fund like an all US stock or target 3-fund or SPindex fund, everything saw a 25-30% year. Is that the type of inflated price an investor should be attracted to when buying something? No. But for some reason, it is very popular for individual investors to buy something that has recently gone up up up, absolutely removing a margin of safety and therefore, setting themselves up to fail. People like to chase returns, and usually by the time the chase is on, the cyclic balloon is nearly deflated. You should look at funds that are down, sectors that are out of rotate, consider an environment with 0.25% interest rates and know that one day this will have to go up, consider a still weak and recovering European market, consider a currently weakening emerging and international market situation, consider a US equities market that is really high, but be ready @ the sidelines, etc etc etc. You cannot speculate, but you can control your purchasing to look @ what is on sale rather than what is overvalued. If you have to get things in before the end of the year, so be it, buy something non-US lol.

Most of these thoughts are Ben Graham type value long horizon ideas. Cheers!

[kv968]

All very good investing advice but I'd suggest, first and foremost, that you make sure you'll have enough to pay off those credit cards before the 0% interest rate runs out.

And I'd also suggest taking a look at your emergency fund and make sure you have enough (3-6 months of expenses) in there before putting more in retirement.

[feh]

With all due respect blasment, I think you need to take a step back. The posts you've made on the forum the last couple weeks indicate investing is very new to you. You need to look at the big picture. I suggest you educate yourself - do some reading.

Read the links in the "start-up kits" section of this page: http://www.bogleheads.org/wiki/Getting_started

[WilliamBriat]

Investing Advice\Best Mutual Funds

Over the past decade stock investors handed Sam an average of one percentage point a year in total returns, while bond investors forked over twice as much, according to Lipper -- and that was at a time when tax rates were relatively low and a balanced portfolio earned a modest 5%.

[snafu]

blashmet, have you been able to work out your ROTH 401K, fees and costs? The problem is how much you silently lose to Management fees whether your holdings are moving forward or tumbling, fees silently go to to others. It's helpful to compare with one of the low cost providers like Vanguard or Fidelity for example.

[budgetingtech]

I'm also planning to invest some money in mutual funds. For this I have started analysis MF companies performance during last few years. Initially I'm planing to choose MF with low management fee, front load/back load charges, taxes etc. Obviously you can't ignore the risk factor so can look into the portfolio of different MF that what %age of investment they are making in money market, stock market, bonds etc.