Need some help with investments (IRA, 401K etc)

**VJW** · 09-12-2005, 07:15 AM

Re: Need some help with investments (IRA, 401K etc)

Originally posted by Russell

1. Interest rates are rising and Charles Givens' strategy says to start moving out of stocks and into money market funds. What are your thoughts on this strategy ?

Well, it WAS a good theory back in the good old days (before 2001), but it’s a rather late call. The time to get out of the stock market (as a whole) was before 2001, as it’s down for the fifth calendar year in a row.

2. How different are money market funds from bond funds ?

Very different.

From what I've read, money market funds invest in short term bonds. Bond funds also invest in bonds so is it safe to assume that both are similar ?

Money Market funds, in other than extraordinary examples, offer shares that are FIXED in price (usually at $1.00 each), whereas the shares of Bond Funds move with the markets.

If so, why does Givens think that bond funds should used when the interest rate is declining

Because, as interest rates decline, the value of the underlying bonds held by the fund would RISE in value.

and money market funds should be used when the interest rate is rising ?

I assume because he considers it a safe holding position, particularly compared to the falling value of bonds and the faltering performance of stocks, in rising interest rate environment.

3. I read somewhere that its not a good idea to buy mutual funds towards the end of the year, something about dividends and capital gains that you'll have to pay ?

That concern is generally only expressed by those with large sums invested that could find themselves with tax bills on large earnings.

Not sure what the difference is between dividends and capital gains

A dividend is a disbursement of the funds earnings that are shared with the shareholders, whether from interest or dividends from securities they hold, whereas capital gains is the gain in the value in the underlying securities.

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**CRFSaver** · 09-12-2005, 12:37 PM

Re: Need some help with investments (IRA, 401K etc)

One of the differences between a money market mutual fund and a bond fund comes in, the term limit on investments and rule 2A7. Money Market funds fall under rule 2A7 (dont ask me of what act cause I can't remember). To be considered a 2A7 fund the maturity of a single investment cant be longer then 18 months. The beauty of 2A7 is that a fund does not need to mark to market its holdings. It can value them at the discount or premium and let them amortize to par. Because of this feature Money Market funds very rarely go below $1.00 a share. I believe there has been either 1 or 2 times this has happened. When it does happen it is because there was a default in one of the investments. This happens from time to time but the management company usually buys the investment at par from the fund to maintain that $1.00. For example Strong did this when a finance company defaulted and they held commercial paper.

Bond funds have many characteristics and there are lots of different ones depending on your risk tolerances. The most famous of them being the Pimco Total Return fund which is one of the largest funds in the world. IT is run by Bill Gross who is a legend in the bond world. Most funds will elt you know if they are an short, intermediate or long bond fund. Some specialize in a particular market. MBS, Government, Corporate Bond, High Yield (Junk), International, etc.

If you like Bill Gross is my advice is not to pay the load for the Pimco Total Return but to invest in the Fremont Bond fund that is "sub-managed" by Pimco and Bill Gross. I am a big fan of the Managers Short Duration and Managers Intermediate duration funds. They are no load bond mutual funds. The reason I like them is the "sub-manager" is a company called Smith Breeden associates. These guys are some of the smartest I have ever met. Pioneers in the Mortgage Backed Securities business. I used to sell bonds to them is how I came upon them.

I am also a huge fan of Balanced funds. For some reason my balanced funds have always outperformed any other fund I have for some reason. Go figure.

**darrellmak** · 09-14-2005, 11:19 AM

Re: Need some help with investments (IRA, 401K etc)

Here�s my attempt to hopefully give you some short and easy-to-understand answers to your questions.

Although Charles Givens had some interesting opinions, I would not rely on them. His advice was written in the days when rates were much, much higher than they are now. If I remember correctly, his break point for moving out of stocks and into money market funds was around 9%, which we are no where near today. Anyway, stock have risen in rising interest rate environments, so Givens� advice is far from a sure thing.

One of the goals with money market funds is to maintain a stable value per share (net asset value), which is not the case with bond funds. Money market funds invest in very short term debt so that if interest rates change, it won�t have an impact on such short-term securities. Bonds (and thus bond funds) are different. When interest rates rise, bond prices correspondingly fall and vise versa. How much they fall (or rise) depends on how much interest rates move and the remaining term of the bond (a longer term bond will move more dramatically in price than a shorter-term bond). Givens advice here does make sense that you should invest in money market funds when rates are rising because the money market fund�s rate will rise as well, and rising interest rates make bond prices (and stock to some degree) fall.

Regarding avoiding funds at the end of the year, all else being the same, it is better to invest in a fund after it has declared any capital gains and/or dividends so that you won�t have to pay tax on those distributions so quickly. I will emphasize, however, that what�s at stake is WHEN you pay taxes and not HOW MUCH. You will not be paying any more taxes by buying a fund before a distribution; you will only be paying the tax sooner (as in the current tax year) rather than later (as in when you ultimately sell the fund). Of course, you wouldn�t want to intentionally wait a few days to avoid the distribution if the market was going to rise during that time, since you�d lose out more in appreciation than in tax savings!

I myself have tried individual stock and funds, and although I sometimes do well with individual stocks, I personally feel that funds work out better (at least in my case). I�m also inclined to stick with index funds, as I�ve been hard pressed to find funds that consistently beat the indexes year after year.

Hope that helps. Feel free to e-mail me if you have any questions at darrellmak@yahoo.com.

**Russell** · 09-14-2005, 05:29 PM

Re: Need some help with investments (IRA, 401K etc)

Thank you for the explanations and suggestions VJW, CRFsaver and Darrell.

After some thinking I'm considering employing two strategies (at the same time):

1. Buy some quality stocks outside of the retirement accounts and see where I end up in 3-5 yrs. I have about 29 yrs before I retire so I have to hold on to them long term I will.

2. Buy some ETFs through Roth and see where I end up in about 29 yrs.

**PFJournal** · 09-14-2005, 09:52 PM

Re: Need some help with investments (IRA, 401K etc)

Yeah, 3-5 years for stocks seems to be the right timeframe, although they do need to be monitored.

Aslong as you set stop losses, you should be fine.

**BAGAGT1** · 09-15-2005, 07:16 PM

Re: Need some help with investments (IRA, 401K etc)

I'm not big on buying individual stocks, especially in this market they are too volatile. On the other hand, I really like ETF's, they give you a lot of what mutual funds do, with very low expense fees.

**suedavids** · 10-29-2005, 11:13 AM

Re: Need some help with investments (IRA, 401K etc)

Originally posted by Russell

I'm finally taking the time and interest to learn about investing and this stuff is not easy to understand. I've read 3 books in two weeks, several online articles that I thought would help me answer my questions but the more I read the more questions I have.

I'm hoping one of you guys can help me with a few questions:

1. Interest rates are rising and Charles Givens' strategy says to start moving out of stocks and into money market funds. What are your thoughts on this strategy ?

2. How different are money market funds from bond funds ? From what I've read, money market funds invest in short term bonds. Bond funds also invest in bonds so is it safe to assume that both are similar ? If so, why does Givens think that bond funds should used when the interest rate is declining and money market funds should be used when the interest rate is rising ?

3. I read somewhere that its not a good idea to buy mutual funds towards the end of the year, something about dividends and capital gains that you'll have to pay ? Not sure what the difference is between dividends and capital gains

Here's my situation:

1. I want to move my rollover IRA (sitting in FFFEX) into something better. I was thinking of some sort of an index fund (VTI ?), despite my (bad) experience with VTSMX and VIVAX in the last couple of years. I figure in the next 30 years VTI can probably ride out the ups and downs of the market OK.

2. I also have my 401K sitting in mostly stock funds and the performance in the last couple of years has been pretty good despite the limited choices of funds to pick from. However, again since the interest rates are starting to rise should this be moved to mostly bond funds or should I let it ride the market out over the next 30 yrs ? Current investments are in FBIDX FCNTX FEQIX FRSGX NBGEX POVSX TEDMX

3. I also have a Roth account that I recently switched from index funds (VTSMX, VIVAX) to an energy fund PSPFX and its doing really well...for the moment anyway.

4. Finally, I want to start investing outside of the retirement accounts as well. I'm not worried about taking risks for greater returns since I'll start out small. Most books and articles favor mutual funds. Also, some of the stocks I was eyeing are at their 52 wk high already...some higher. Am I getting into it at a bad time and make the classic mistake of "buying high selling low" ?

I know I probably asked a few questions that are either difficult to answer or people don't feel comfortable answering and that's OK. I'm not going out and buying stuff, I'm more looking for your opinions as to what you would do if you were in my shoes.

Russell,
If you invest in stock mutual funds outside of retirement accounts, I would suggest opening an account with the Vangaurd group and I would use the no load mutual fund - total stock market Index. Index funds are a sampling of the market and not a sector fund (as your energy funds). Index funds are tax efficient (not much tax on these), low management fees (some as low as.20% instead of some funds being 1% or greater. Another good fund family is Fidelity but you need larger amounts to open an account. Most of Vanguards funds are $1000 to open. I would either dollar cost average per month or contribute when there is a dip in the market. If you have a money market with vanguard, you can just transfer funds into your account on line.

What ever fund family you pick, look for no load, no brokerage fee and low expenses.
Fully fund your roth each year too.

**baselle** · 10-29-2005, 03:41 PM

Re: Need some help with investments (IRA, 401K etc)

Russell - Your original questions and the answers here are pretty detailed and thoughtful, but I think you're at the stage now where you are going to have to look for a fee-based financial planner. I have the sneaking suspicion that I both know too much and not enough about your financial situation.

I especially think that several of your moves are chasing returns and causing churn. For example, moving roth money into energy right now might prove to be okay, but my gut feeling is that the profits in that EFT have been factored in already.

Need some help with investments (IRA, 401K etc)