I will be paying off my Sears bill with my refund check, and I will have an extra $125 each month.
Rather than blowing it, I want to shove it directly into another retirement vehicle.
I currently have a 401k at work with fairly aggressive investments. I am in my mid-30s, so my risk tolerance is high at this point.
I don’t know where to go to invest this extra money. I think I want no-load mutual funds (?) but where do I find them? Ivlyad gave me a Motley Fools book with individual stocks and advice, but I don’t know enough about the market to play individual stocks.
Does anyone have a site or a book to recommend so I can get started? Should I contact a brokerage service, or go to my bank? Am I in the market for an IRA or a Roth IRA?
Please use tiny words when explaining this to me. I didn’t do very well in math, and when people start talking about margin calls and splits my mind starts to reel. Pretend I’m five years old.
You might try Charles Schwab, which offers a whole bunch of mutual funds that you can buy without paying any commissions (the Schwab “One Source” funds - there are hundreds of them). They have a nice “Select List” that gives you some idea of how well various funds have been doing, divided into different categories, along with rough indications of how risky they are, how they’ve done over the last 3 months, 1 year, 5 years, and so on.
You can also hunt on their site for info about IRAs, about which I know very little (I’m retired, so IRAs aren’t particularly relevant for me). Anything that lets you grow some money tax-free, or at least tax-deferred (i.e., you don’t pay taxes on the gains until you’re old and gray) should be given consideration.
If you have children, look into ‘529’ plans. These are college savings plans that let your money grow tax-free, and contributions can be deducted. You are not limited to your own state’s plan, so shop around.
Stay away from individual stocks. Lacking the ability to properly diversify, it is a crap shoot.
Early Out, you can also open 529s for grandchildren, as I often remind my parents.
Disclaimer: I do not work, nor have I ever worked, for a firm offering 529 plans.
I am very fond of places like sharebuilder.com which allow you to buy partial blocks of stock. This way you can add when you have money and buy a little at a time. However, this is only wise for the buy-and-hold invester.
If you start playing individual stocks, I will find you and punch you. If I were you I’d go with a market index fund–something indexed to the DOW or the S&P 500. I’m suprised you didn’t read that in the Motley Fools.
Basically, with fund indexed to the market you’ll take away most of the risk since your are diversifying quite a bit. You’re still getting alot of benefit because the market grows quite a bit over time. IIRC, since the index funds don’t involve buying and selling to adjust the portfolios, you don’t bear the fees or the taxes involved in those trasactions. Of course, there’s still risk: the market can crash before you retire and leave you screwed. But without professional help, I can’t see how that isn’t the best way to go for someone who is already in a high risk 401K yet still likes risk.
Since you already have high risk investments, you may be interested in something like I-Bonds. They’re federal gov’t. bonds that pay off at something like 3% above inflation. The risk is that some other investment might pay off more, but you know they’ll never default. Taking the rule of 72, the money you put in will double in real value every 24 years. This may be a wise investment for your late retirement years when you need something that you can count on being there.
There’s a book called “Everybody’s Money Book” by Jordan Goodman. He is a regular commentator on the Public Radio program “Marketplace”. He has a web site: www.moneyanswers.com
Anyway, check out mkt. index funds in the Motley Fools. I recall seeing them on C-Span and they went on at length about their value.
I second js_africanus’ suggestion about index funds. That’s where I’ve got almost all my money these days: some in a large-cap index funds (the 1000 largest stocks), some in a mid/small-cap index fund (the next 1000), some in an international index fund, some in a total market bond fund (I just use Schwab’s index funds, in the interest of keeping things pretty simple).
“Managed” mutual funds (i.e., all the ones other than index funds) rely on the ability of a fund manager to pick and choose stocks, and thereby, one hopes, out-perform the broader market. Over time, however, almost no fund manager has ever succeeded in doing this; some will experience periodic “hot streaks,” but it never lasts. Even in the course of just one year, I believe that only about 20% of managed funds succeed in doing better than a comparable index fund.
And, yes, index funds have much lower expenses associated with them, and tend to me more tax-efficient (not as important if you own the funds as part of an IRA, but very important if they’re not held in a tax-deferred account of some sort).
(D_Odds: I don’t have any kids, and my nephews are still single twenty-somethings, so all my money is for me! Whoopee!)
Market index funds…okay, that sounds what I’m looking for.
Will I be paying fees or commissions on this investment?
No fear, js, I’m not buying individual stocks. I don’t have the time to keep track of them. I want to invest monthly, not worry about it, and retire in 30 or so years with a nice chunk of as much tax free change I can get.
Pay attention to expense rates, even on index funds. Some are not cheap, although they should be. And make sure you invest in a way to defer taxes. If you don’t, even though you’re not selling any mutual funds (selling triggers taxes), you can still be hit with a tax bill as the fund passes through its capital gains and income to investors.
I was thinking about this last night. For $1,500/year, which if you keep it up would be $45,000 by the time you retire in 30 years, plunking down a couple hundred bucks for some professional help might be a very good investment indeed. My only worry would be getting a salesman instead of a counselor–you’ll have to shop around I guess…
For an index fund, you’ll pay fees and commissions, but it should be much lower than an actively managed fund. I prefer these for investing because they kind of take away the worry, you’re going to flow with the market, for better or worse. No concerns about your own stock picking skills, or the skills of some fund manager, no daily watching of the particulars.
Easy peasy, and you don’t really lose out on overall earning potential.
If you buy funds that are part of Schwab’s One Source program, there are no commissions, and Schwab’s own index funds are certainly included in that program. And there are no fees for having an account with Schwab (like service or maintenance charges).
The fees on an index fund are generally very low, since they don’t have to pay someone to research a bunch of companies, and then figure out what to buy. In any event, you’ll be largely unaware of the fees; they don’t actually bill you for them, nor do they take money out of your account to pay for them.
Essentially, they get their fees by taking a penny or two of the price per share of the fund. So, you buy shares of the fund at $20. A year later, the shares are worth $26.79, based on the value of the underlying securities (i.e., the stocks that are in the fund). But what shows up on your statement is that the shares are worth $26.78 each. An imprecise explanation, but you get the idea. You never even notice it.