Beginning investor course
Monday, August 11th, 2008Some of you know I have ideas about what I’m going to put on my blog by some of the conversations I have during my daily strolls on earth. Today, I happened to walk upon a conversation about finances and investing today with one of my cousins who was seeking advice from my grandfather.
During our conversation my cousin discussed his investment avenues and he has a portfolio that consists of a 403b & some account he contributes to out of pocket. Basically, he had no idea what he was throwing money into.
His investments were giving him good returns but as with every conversation I bring to you, I realize that a lot of US (yes I’m guilty) are ignorant about things that’re really important to our future. OUR RETIREMENT!
During our conversation, he was only involved in the dollar amount he was getting for the quarter. Instead, he should be concerned with the percentage of his returns. LET ME REPEAT… NEVER LOOK AT THE DOLLAR AMOUNT OF RETURN ON YOUR INVESTMENTS. ONLY LOOK AT THE PERCENT OF RETURN!
Reason being, he got a pretty good dollar amount from his quarterly statement but he was only getting a 5% gain (because 65% of his portfolio is in a fixed fund). He’s 35 and that’s a BIG no-no. The younger you are, take the biggest chances. You have time to recover from something catastrophic.
Use the well adopted rule of “120″ when figuring out what should be allocated where. 120 - your age is the percent of your portfolio that should be in stocks. So by that rule he should have 85% of his portfolio in stocks (or mutual funds). I’d suggest Mutual fund because they aren’t as volatile as individual stocks.
Back to my point of focusing on the percent. Not bragging, but following Dave Ramsey’s advice of picking the 4 best performing mutual funds over a 10-15 year period, I was able to gain 24% last year within my 401k. Within my Roth (I started last year), I managed 15% (ticker:FNARX). This year is down in my 401k as I’m currently posting a -15.7% return (but that’s OK considering the market is down more than that). I look at it as a buying opportunity (as every investor should).
Anyhow, just imagine what his numbers would’ve looked like if he got even a 12% return last year instead of 5%?
It’s not all bad however, I managed to get him to look into a Roth IRA account and I encourage you all to do the same. It should be the first individual investment you guys should make. It’s already taxed since it’s coming out of your pocket. Did I mention that it’s already taxed? Did I? That means that when you turn 65, you can take it all out without taxes or penalty. What about before 65 you ask? What you contribute to it is YOUR MONEY ANYTIME YOU WANT IT without taxes or penalty. The catch is, it’s so good of a retirement plan that it’s capped at $4k/year you can contribute. For you ballers, I’d suggest paying monthly or quarterly instead of contributing all at once in order to average in your buy-in points of the mutual funds you select.
This article took a different turn than what I intended it to so I guess I’ll follow up later on what I wanted to originally write about: Differences in investment options.
