Investing for beginners

[Richard]

As a side note on 401ks. I found out by accident that once I reached the age of 59 1/2 I could roll my 401k out of my employers plan into a qualifying 401 without any penalties. I could do that once a year. Most employer plans are limited in choices. Once I found that out in moved my 401 to my financial advisor. I thought I heard something about it actually being a federal law that applies to all 401's but I didn't check it out.

This is correct.

Once you attain the age 59 1/2 you can do an "in service" rollover. You can take your $100K 401K and move it to an IRA, meanwhile, your next paycheck will start rebuilding your (now zero) 401K as per your contribution amount.


Also.... if you have attained the age 55 and LEAVE YOUR company..... you can then take a DISTRIBUTION (not a rollover) of 401K pretax dollars without the 10% penalty. Age 55 is considered early retirement so there is no 10% penalty AS LONG AS YOU LEAVE THE FUNDS IN THE 401K. If you MOVE them to an IRA, you are back under the 10% penalty until age 59 1/2.

So, reworded....if you leave your company and have attained the age 55, LEAVE your 401K there until you at least, hit age 59 1/2. This way you will have liquidity.

You might ask the 401K if they allow multiple distributions, and if the answer is yes, then you can move part of it to an IRA and simply leave behind an 'emergency fund' that you think would cover any emergency between age 55 and 59 1/2. (there are some companies that do NOT allow multiple distributions...at which time, you are forced to move the account to an IRA, that's their polite way of saying please leave)

 

[MinnesotaEric]

An actively managed account usually has a charge as a percent of account value (say 1%).... therefore "churning" is usually not an issue as any stock trading expsnese are part of the management fee.

Interestingly, if you have an actively managed account and they SIT on it for too long, they can get into trouble for "reverse churning"..... meaning, taking the fee without doing ANY trades!!

In today's day & age, most managed accounts will be full of funds and not individual stocks although I suppose an exception to that can be found.

Up until Wednesday, active managers had clubbed passive management. I haven't seen any data on Wednesday but it sure felt like a fund was blowing up and needing to raise cash at any cost. Then it looked like stop losses were triggered and unwittingly piles of managers were fleeing for cash, no matter the losses. I blew through half my cash buying on Wednesday and Thursday and Friday rewarded those who went long.

 

[newbury]

Up until Wednesday, active managers had clubbed passive management. I haven't seen any data on Wednesday but it sure felt like a fund was blowing up and needing to raise cash at any cost. Then it looked like stop losses were triggered and unwittingly piles of managers were fleeing for cash, no matter the losses. I blew through half my cash buying on Wednesday and Thursday and Friday rewarded those who went long.

Did you mean rewarded on Friday with a drop of only 913?

 

[/pine]

Cash is king on a Friday at the close...ten fold in the surreal scenario we are living out right now...!
Good luck to all...

 

[California]

Can anyone recommend the best way to start investing for beginners? For example, opening an account with TD Ameritrade or Fidelity? Broad topic I know, just would like someplace to start. Thanks!

Long ago I looked at the alternatives. I concluded: Vanguard is excellent with the lowest fees. Fidelity is excellent with slightly greater fees for the active investor. But this buys you 24/7 phone access and other customer-service benefits not present at Vanguard. I went with Fidelity because at the time their phone advice was helpful, top quality. No regrets. I suppose other firms now match this top quality. (but several of the firms I considered back then have disappeared!)

And a bit of luck: I have been getting nervous that the market was well into 'irrational exuberance' so we both took our Minimum Required Distributions early in the year.

Then - our kids have been pressuring us to consolidate home and investments into a Trust, well before we are so old that we couldn't understand that. They want eventual estate (or Trust) administration to be more rational than what I had to accomplish in late 2000 for our elders. (Detour - worst example: PacTel had sold its Mobile division to Vodaphone of UK, then as cell phones took off those shares skyrocketed. The British transfer agent representing Vodaphone when I as Trust Adminstrator ordered sale of the shares, had no interest in learning California Trust law and basically told me to get lost. The Vodaphone shares dropped $45k while I made futile requests by phone and mail to liquidate. Finally a friendly transfer agent told me they need to hear the request to sell in Dad's own voice. 'So have Dad call back'. I did, "I'm 'Dad' calling you". That worked. Lots more nightmare drama on other issues but the smartest thing I ever did was follow Dad's advice and liquidate everything possible on the day after he died.)

Anyhow back on topic - The last financial asset we hadn't moved into the Fidelity master account was wife's 457. After urging from the kids to simplify our affairs, a month ago she requested Fidelity to initiate closing that outside 457 and move the proceeds into a Fidelity IRA. (One of the many things full-service Fidelity can do for you!) Blind luck! The proceeds of 40 years 457 savings that sold at the recent market peak is presently sitting in a cash account at Fidelity. That had been about a third of our savings. Now with today's market it could be half. I'm afraid to look.

 

[BoylermanCT]

Are redemptions so high that everybody is selling no matter the cost? Wednesday felt like a big fund was blowing up and just offloading everything including the crown jewels into what are normally thinly traded markets overwhelming them to ridiculous lows.

A 30% hair cut is index level losses. Is everything generally passively managed? ?

These are all 401A, 401K, 403B and 457 plans which are self directed by the individual employees. Surprisingly, there has been no sell off and movement to safe investments. I think it is because everyone is panicking about their health and getting toilet paper. Retirement accounts take a backseat.

 

[BoylermanCT]

A 457 is "essentially" the same as a 401K with a couple differences:

1. You can't borrow from it
2. No Roth Option
3. The BIG difference....... there is NO 10% penalty on early withdrawal


I'll sometimes ask the crowd I'm talking to (usually with their HR present) "Mr. HR....please cover your eyes for this next question..... (hahahahaha) Now, (to the crowd) is there ANYONE here that plans by design, on leaving PRIOR to age 55???"

Why? A 457 might be a good bucket to put some "walking cash" into. Not that it's a GOOD idea but if you leave and think you will just take the funds from your 401K to say, move to Montana, then maybe it's more prudent to use the 457 and at least avoid the 10% penalty.....

Early withdrawal is usually a bad idea

There are 2 types of 457B plans. The most common is for government employees. These 457 plans offer loans and Roth contributions. Every city and state employee has access to these plans. It is the non-govt 457 plans that do not allow loans and Roth. These 457 plans are for executives at hospitals and non-profits. Interesting when the govt made the rules for retirement plans, they penalize regular workers 10% if they withdraw retirement money too soon. But for their own employees, there is no 10% penalty even if they withdraw all their money at age 21, 31, 41 etc.

 

[MinnesotaEric]

Did you mean rewarded on Friday with a drop of only 913?

I cooked through one half of my cash purchasing on Wednesday. The kind of stuff I purchased went up on aggregate--i.e., #talkingmybook ARR-PRC, ARR, AGNC, piles of MITT (it went to 1/8th its former value), NLY, some more RAD (short squeeze can happen there in light of an on-going recovery made suddenly more interesting by the sudden drop in lending costs), and reestablishing a position that got shopped out, BABA (because China and my own fear of missing out). I don't particularly think I'll experience more capital gains on those purchases in a choppy news risk cycle through the end of summer, at which time I believe we will have a much better handle on the virus issue and our attention will be mostly on economic recovery from what already feels like an immediate ice age recession. I do, however, expect stupidly high dividends to remain until the mREITs common I purchased offers secondaries to better reposition itself with low-interest rates through higher leverage (mREITs take the interest rates from short or long term notes and leverage that against long or short term notes in whatever way makes the most sense), while I anticipate holding the preferreds I purchased until they are called while collecting a 21% dividend on them with a 300% upside when they are called.

I don't watch Cramer handly at all but I noted that on Thursday he too thought an unknown fund was blowing up on Wednesday. Even so, we've got a lot of price discovery to go through a bad news cycle but if we're ever fearful of deploying our cash in the face of irrationally low valuations, then there is little point in hoarding it.

 

[drssg]

MinnesotaEric, I will trust that you know what you're talking about. I sure don't.

 

[MinnesotaEric]

Long ago I looked at the alternatives. I concluded: Vanguard is excellent with the lowest fees. Fidelity is excellent with slightly greater fees for the active investor. But this buys you 24/7 phone access and other customer-service benefits not present at Vanguard. I went with Fidelity because at the time their phone advice was helpful, top quality. No regrets. I suppose other firms now match this top quality. (but several of the firms I considered back then have disappeared!)

And a bit of luck: I have been getting nervous that the market was well into 'irrational exuberance' so we both took our Minimum Required Distributions early in the year.

Then - our kids have been pressuring us to consolidate home and investments into a Trust, well before we are so old that we couldn't understand that. They want eventual estate (or Trust) administration to be more rational than what I had to accomplish in late 2000 for our elders. (Detour - worst example: PacTel had sold its Mobile division to Vodaphone of UK, then as cell phones took off those shares skyrocketed. The British transfer agent representing Vodaphone when I as Trust Adminstrator ordered sale of the shares, had no interest in learning California Trust law and basically told me to get lost. The Vodaphone shares dropped $45k while I made futile requests by phone and mail to liquidate. Finally a friendly transfer agent told me they need to hear the request to sell in Dad's own voice. 'So have Dad call back'. I did, "I'm 'Dad' calling you". That worked. Lots more nightmare drama on other issues but the smartest thing I ever did was follow Dad's advice and liquidate everything possible on the day after he died.)

Anyhow back on topic - The last financial asset we hadn't moved into the Fidelity master account was wife's 457. After urging from the kids to simplify our affairs, a month ago she requested Fidelity to initiate closing that outside 457 and move the proceeds into a Fidelity IRA. (One of the many things full-service Fidelity can do for you!) Blind luck! The proceeds of 40 years 457 savings that sold at the recent market peak is presently sitting in a cash account at Fidelity. That had been about a third of our savings. Now with today's market it could be half. I'm afraid to look.

In light of what you've shared, all of which is excellent, the transferring of investment management to anybody qualified BEFORE you get vascular dementia, strokes, Alzheimer's, or too old to care is the salient point!

The second best takeaway is assigning that money management to somebody nimble enough to have the wherewithal to react to bad news or market cycles in your interest rather than morbidly watching the ship sink.

My only contribution is to include some sort of check and balance as I have two friends who allowed their accountant management and then embezzlement happened and suddenly the song "Postcards from Paraguay" took on new meaning.

 

[MinnesotaEric]

There are 2 types of 457B plans. The most common is for government employees. These 457 plans offer loans and Roth contributions. Every city and state employee has access to these plans. It is the non-govt 457 plans that do not allow loans and Roth. These 457 plans are for executives at hospitals and non-profits. Interesting when the govt made the rules for retirement plans, they penalize regular workers 10% if they withdraw retirement money too soon. But for their own employees, there is no 10% penalty even if they withdraw all their money at age 21, 31, 41 etc.

I hate learning about rigging the system as if the Plebes don't have the wherewithal to money management. Thanks for sharing.

 

[Racenut]

I'm an IT guy, consider myself decently smart. I read Eric's post up there and it sure sounds like he knows what he's doing, but may as well be written in French lol. This stuff makes my head spin. Wish I understood it better, especially how to take advantage of a declining market. Buying stock and holding onto it when things are good is easy.

 

[jjp8182]

Lot of talk on actively managed funds, but depending on investment goals a long-term cost averaged (i.e. not reacting to every market swing) can actually be more advantageous from the data I've seen.

Really the heart of financial investing is to have an idea what you're investing goals are and then doing some backward planning with realistic returns on investment (e.g. <10%) while also considering your own level of risk tolerance/discipline. Yes, year-to-year returns may greatly exceed that, but then there are the things like we're seeing now that can wipe out years worth of gains that will recover over the course of years. Now from the data I've seen in the past there's never been a decade where an index, or conglomeration of assets has been a net negative. Individual companies may collapse, but that's part of the reason for diversification - which is easily done with things like mutual funds, and exchange-traded funds (ETFs). So picking a realistic return on investment and backward planning can be very useful, and there are a great many calculators/tools that can help with that task. One being this Compound Interest Calculator on an SEC site for investors: Compound Interest Calculator | Investor.gov

As has been previously noted when investing in 401k's or other designated Individual Retirement Accounts there can be penalties and limitations on what age you can start withdrawing funds (possibly with some exceptions).

However, I'd say one of the single worst things a person can do with their money (other than spend it on frivolous items they don't need or really want) is to keep it in an account that has an average return that is less than the average rate of inflation. Something like that makes money at a rate that doesn't even offset the loss of value (buying power) due to inflation, and the only practical reason to use something like that is because it provides greater liquidity/ease of access to funds (which is what many traditional savings, and checking accounts do).

For example if a 2% interest rate turns $100 into $102 over the course of the year, and the inflation rate for the year is 3% .... then that $102 is really only worth $98.94. Granted that is still better than $97 dollars the $100 would have been without the 2% interest gain, but it's still case of turning a large amount into a smaller amount.....

For a beginning investor I'd also recommend the Vanguard website for information whether a person chooses to use Vanguard's services or not. Personally I do because they have some of the lowest costs, and they where willing to freely provide educational information -- I prefer to do certain types of business with entities that are willing to help make me a more competent customer/client/individual.

 

[jjp8182]

There are 2 types of 457B plans. The most common is for government employees. These 457 plans offer loans and Roth contributions. Every city and state employee has access to these plans. It is the non-govt 457 plans that do not allow loans and Roth. These 457 plans are for executives at hospitals and non-profits. Interesting when the govt made the rules for retirement plans, they penalize regular workers 10% if they withdraw retirement money too soon. But for their own employees, there is no 10% penalty even if they withdraw all their money at age 21, 31, 41 etc.

I'm guessing that no penalty is for state, county and city level government employees using 457 plans?

While the Thrift Savings Plan for US federal employees doesn't have penalties (per se) for taking personal loans (usually paid back with floating interest) from a personal contributions to the TSP there are definitely penalties for early withdrawal (I just learned how bad they can be last December during a retirement planning course for federal employees). Which is where standard investment accounts (i.e. non-IRA/401(k)/etc) can be handy to have in addition to employer provided retirement funds/investments - granted they don't have some of the tax advantages, but the increased flexibility/liquidity can be very worthwhile.

 

[GeneV]

I'm an IT guy, consider myself decently smart. I read Eric's post up there and it sure sounds like he knows what he's doing, but may as well be written in French lol. This stuff makes my head spin. Wish I understood it better, especially how to take advantage of a declining market. Buying stock and holding onto it when things are good is easy.

Yup, all greek to me too. Ok, I've a question for you know-how guys. Let's say somebody vested 50/50 stocks/bonds in a managed 401k. Wise move right at this moment to rebalance the portfolio to 80/20 stocks favored, and start aggressively contributing to that?

 

[California]

Yup, all greek to me too. Ok, I've a question for you know-how guys. Let's say somebody vested 50/50 stocks/bonds in a managed 401k. Wise move right at this moment to rebalance the portfolio to 80/20 stocks favored, and start aggressively contributing to that?

My own opinion - and don't put much weight on it - is the short term future is uncertain but if you have a 10 year horizon before any critical need to use that money, then do it. Riding out the cycles has worked for me.

One comment on strategy from Warren Buffet or somebody was: You can never time the market. But long term its more costly to be out, rather than in. This is because the increases that create superior overall return appear on random days and you miss those if you are out.

I've stayed at least 60~70% stocks (mostly S&P Index fund) through the downturns of 2000 and 2008 because I didn't need the money short term, and believed that the concept above was valid.

Buying today is a 50/50 gamble on the short term - that's what determines today's stock price, today's price is quite simply the balance of today's greed and fear. But long term I expect the US economy to continue to make money and pay dividends so I want to be a participant.

Another theorem: 85% of individual investors underperform the S&P 500. I want to be in the top 15%! So an S&P index fund with the lowest fees is my preferred investment. 'It will fluctuate' but in the long view I think these are the companies so powerful that they create their own opportunities (or buy competitors) while everyone else just tries to compete against them. Back in the late 90's I was newly retired and made some money day-trading in the dot-com boom of then. I felt I understood technology better than some, and made some good choices. Way back then Forbes seemed to have good forecasting ability, I don't know about now. But subsequent to the tech boom of the 90's I haven't felt I was wiser than the average investor so this S&P index strategy is now the better choice for me - and it doesn't require any attention to the investment news of the day.

My wife watches market commentators and reads Kiplinger etc. She is more bold, comparing overseas funds etc. Yes dear . I've never compared her choices to the hands-off S&P but the results seem to be similar. As we get older I don't want to stay fine-tuned to today's news but rather just let things perk along.

Tesla is the one stock stock today where I think their product will bury the competitors. But that's priced into the stock. So while it may be the next winner, it will take years for an investor to be rewarded.

Whatever. What works for someone may not fit changing times. YMMV.

 

[GeneV]

California, thx. Yeh, I'm 47, I ain't gonna be dipping into the pot for a long time still. I'm not privy to this stuff besides sticking money into my 401k, but figured it's wise to start sticking more into stocks now that there's such a fire sale going on.

 

[jjp8182]

Just for consideration (at 37 ...and aiming to retire at 57) I've been going 100% stock portfolio with the mix being 40% large domestic/40% small to medium domestic, and 20% non-US markets (just so I'm not fully dependent on the US economy being good). I actually regret the past few years where I deviated from that and had money in bonds & treasuries.

Of course, I also agree with what California quoted with "You can never time the market. But long term its more costly to be out, rather than in. This is because the increases that create superior overall return appear on random days and you miss those if you are out." ...and I've seen data that backs that that statement.

When it comes to "long-term" (i.e. greater than 10yrs) that's also what the independent financial advisor recommended in the retirement planning course I took last December. Now when you're inside of 10 years to using it for retirement, it's probably better to be shifting to a less stock heavy portfolio. Recommendations vary on that (in part do to lifestyle costs, and life expectancy) , but me I'll probably slowly move toward each of those percentages being half what they currently are and move the funds into a mix of bonds and government securities once I'm within 10 years of retiring. So personally I figure there's a good chance I'll need to be pulling from it for a good 30-40yrs based on how long my family members have lived -- which means I'll probably be a bit more stock heavy just to maintain solid growth.

Biggest thing is to have an idea of what you want to retire into do and about how much it's going to cost annually, and then back plan from there being conservative in the estimates..... running out of cash isn't fun, and from what I've seen running out of cash when you're past "retirement age" is even worse.

 

[Racenut]

Sounds like I'm doing about what California is... S&P seems to be the benchmark funds try to beat, so rather than trying to find one, just put most of my stuff in Vangard S&P index fund. And it has been good for me. I have played a few "bets" in individual stocks with smaller amount of money. I did triple up on GoPro in just a few months... but that's the best I've ever managed to do. At this point I'm still in, and I'm still 49 so this money isn't going to be needed for a while, but I'm still questioning riding it all the way to to the bottom just because that's the way it's always been done before.. this all just feels different to me.

 

[jjp8182]

. this all just feels different to me.

..agree it does, but there's a few things I keep in mind for myself:
1) losses are only realized when you sell (or you invested in an individual company that goes under)
2) most market downturns (>90%) no matter how severe are overcome within 10 years (or less)
3) there really aren't any better options out there for long term investments (at least not that I've seen in all my looking)

Thing that puzzles me is where are all these people selling at such low prices putting the money the received from the reduced price sale? In their mattresses? ...or where they really that over-leveraged?