Question for the Finance Guys/Gals

In My Humble Opinion
1

How to invest or save money?

From age 0…

From age 20…

From age 30…

From age 40…

From age 50…

From age 60+…

I don’t think schools, blogs or websites accurately or helpfully allow people to understand what their money is, how interest can help or hinder, why there is an opportunity cost is some endeavors, how money can work for them or against them.

I, in a previous occupation, tried to help people understand their money, savings, investments, pensions, mortgages, credit cards, credit ratings, day-to-day spending, insurance, borrowing and lending. Each case I approached individually, and I spoke with thousands of people. The one mantra or thread I found was people spend too much on stuff they don’t need.

Now, I work in education but not of the financial kind. I’m a bit rusty as to how to help friends, relatives and colleagues if they ask about their money. I find many are asset rich but cash poor, others are the opposite - they’re earning a good salary (not the 1%) but housing is too expensive right now. I’m in the later group and the UK has recently passed laws which mean if you are 40+ you cannot buy a home, because the mortgage will be for 25 years and so it’ll still be payable in your retirement. Crazy, IMO, but it is what it is.

I think investing in stocks when you’re young is more sensible than it looks, it has been that way since the start of the boom in the early 90s. Others prefer cash/bonds/gilts, still others prefer tangible assets like gold or property.

What do you Dopers consider is best for this range of generations? In the New Year will you change or stay with your preferred method? What would you say to your children, nephews/nieces, cousins, uncles/aunts or grandparents if they’d only listen?

Opinions, as none of know how things will turn out - we can’t predict the future, I think all are relevant. Someone I know invests in old movie posters, another chooses gold mining companies, another day trades in bio stocks. Many prefer to invest in precious metals, canned food, water filtration, lead and lead delivery equipment. I stick with index trackers and a few big companies that are not popular (value stocks, some would say). My chance of retiring within 25 years are looking slimmer by the day, and my preference for di(worse)ification isn’t really helping.

We all look back at trends and imagine they’ll extrapolate forever. It’s obviously wrong, when you look at it, but some trends do just that. I have family in every age group I mentioned, but being out of finance for so long my views have become somewhat unfocussed. The people I fret about the most are those in the 60+ group, although those in their 20s - burdened with student debt - should also qualify for consideration. I wonder if anyone here has some helpful hints I could use?

2

This is far too complicated and country specific to get a complete answer here. There are advisors who make a good living doing this and every solution has to be tailored to the individual. Not only their age and disposable income, but their perception of risk and their ambition.

Interest rates, taxes, incomes, old age, health requirements - makes you dizzy thinking about it. In my opinion, children need to be taught the basics - how tax and pensions work, and how to budget and save.

3

Moderator Action

This is more advice and opinion than factual.

Moving thread from General Questions to In My Humble Opinion.

4

General financial advice -
[ul][li]Don’t touch your principal[/li][li]Don’t borrow money to buy a depreciating asset (unless it generates enough income to make up for it)[/li][li]Compound interest is the only miracle in finance[/li][li]There is exactly one way to do credit cards. Find a card that charges no annual fee. Pay off the balance in full, every month, no matter what. No Matter What. No, that is not a good enough reason.[/li][li]Work out a monthly budget and stick to it. You can deal with almost any expense if you can plan for it.[/ul][/li]

If it is not a hijack, can you describe these laws? This sounds bizzarre to me.

Regards,
Shodan

5

Does the mortgage have to be for 25 years, or are they available for “up to 25”?

6

Finance guy here, (MBA, not Certified Financial Advisor)

Generic advice:
-have a basic monthly and annual budget, updated annually
-have a spreadsheet with all of your assets and liabilities, updated annually
-understand the retirement options available to you and use them (401k with match, Roth, IRA, Profit Sharing Plan, etc)
-have enough liquid assets to find a new job
-save as much as possible (even when you are young)
-understand how much you need to “retire” and how long your nest egg will last
-project forward based on reasonable rates of return
-don’t carry credit card balances
-have an umbrella policy
-live within your means

Investing advice
-buy index etfs or mutual funds, not individual stocks unless your are screwing around with play money (which is by definition not investing)
-diversify geographically
-buy and hold, don’t try to time the market
-be heavy into stocks when you are young trending to choose your own risk level when you are close to retirement
-never take any advice from anyone who says they can “beat the market” or have a “hot tip” or “know why the market is behaving the way it is”

7

As a layman, what I did was: buy a house, save steadily (in a deferred tax scheme), and never, ever, carry a credit card balance. I do pay an annual fee for my card, but also get a 1.25% rebate that much more than covers. Now I have been retired for nearly (3 days short of) 15 years. When I retired, the accumulated savings over the years, compounded, came to about $700,000 and my pension holdings in a defined contribution plan were about $960,000. My house is worth in the neighborhood of $700K-800K, thus have a net worth of roughly $2.4M. And while I have had to draw down on the deferred tax savings, I have spent almost none of it.

8

The single most important bit of advice is save early and let it ride.

A monthly amount invested from ages 20-30 will be worth more at age sixty-five than a like amount monthly from 30-60. (Using the historical average return of 7% of an index fund).

9

I disagree, that’s the second. The first is spend less than you earn. That lets you save early and let it ride.

Other things that haven’t been mentioned, understand concepts like opportunity costs (if I buy these cute boots I won’t have money to go out with friends on Friday, which would I rather have) and risk (not only investment risk, but the simple idea that you might want a cushion in non risky investments to get through a layoff. Or buying a cheap used car may involve more risk than one two years newer that the dealer will give you a warranty on)

10

Ok.

To spend less than I made, I started putting every raise or bonus into some sort of savings. I figured if I hadn’t spent the extra money the months before the raise, I didn’t need to spend it after the raise.

In a surprisingly short period of time I was maxing out the retirement contributions, had an emergency fund and separate savings that could be tapped if needed.

11

I find that hard to believe.

12

Probably a mis-statement about some actual regulation of state pension funds.

13

Nope, easy to believe according to the BBC.

14

Rather than a long list of do’s and don’ts, I’d identify the following skills as necessary:

  • Calculate compound interest
  • Be able to compare the relative cost-benefit-risk of two different scenarios
  • Understand the difference between savings and investments, and the purposes for each.
  • Understand diversification and basic asset/investment categories.
  • Be able to establish a budget (short-term) and an action plan for achieving a prioritized list of goals (long-term)

With those five items, you have essentially the complete tool box of skills necessary to come up with your own list of do’s and don’ts. For example, Shodan’s list is generally smart, but rules like “Don’t touch the principal” are not true for everyone in every situation. There are actually times when touching the principal is recommended.

15

See, I strongly disagree with this sentiment. Unlike law, where you should use a lawyer for all but the most trivial of legal matters, the vast majority of people do not need a financial adviser. Personal finance is not that complicated. Or rather, it can be complicated, but it needn’t be.

The first step is spending less than you earn. That’s where a budget comes in. Do that, and you’re better than a sadly large proportion of people.

For investing, you need put your money only in two things: an index fund of stocks, and some sort of bond fund. Today, there are funds that will do both for you, so you don’t even need to worry about two. People argue about the proportion of each at different stages at life, but that’s nitpicking. The important thing is to get your money into those, starting at an early age. If you go to a financial adviser through your bank, they’ll try to sell you other types of investment. You don’t need them. Some of them aren’t bad investments, but none will provide much of an advantage over the couch potato investment strategy.

For most people, taxes are pretty simple. You have a job with regular income, you get taxed a certain percentage of it. You don’t even need to send a check; Uncle Sam is nice enough to take it right out of your paycheck. You invest, and a certain, relatively small amount of the money that you make will be taxed as capital gains. For most people, there is little value in any sort of tax avoidance scheme, further than your 401K or IRA.

The hardest part of the whole business is deciding how much to invest. The calculations aren’t too complicated, but they’re not trivial. Luckily, the internet can help out. If you can decide when you want to retire, how much money per year you plan to withdraw once you retire, and how long you plan to live (OK, the last part is trickier), you can plug it into one of many internet calculators. A good rule of thumb for most people (assuming you start early) is to save at least 15% of your income.

16

buddy, I’m really not sure where to even start with your post. There are plenty of good ideas for how to get started there, but it’s like telling someone they don’t need to go to school after 4th grade.

For example, the proportions of your investments as you age is NOT nitpicking. Stocks outperform bonds, on average. That means that an untended portfolio will have a high percentage of stocks the longer it goes on. However, bonds are the safer investment and you should have a higher proportion of bonds as you near retirement.

And there are no tax avoidance schemes other than 401k or IRA? Really? So I guess you won’t be needing any college savings plans for your kids. You won’t be claiming education credits when your kids go to college, or deducting interest on student loans. There’s no reason anyone would ever invest in rental property (because if it’s not a stock or a bond, it’s not a real investment, apparently), even though rentals are a great tax shelter for a middle-class person. There will be no point in taking advantage of energy efficiency credits on your home improvements, or claiming the credit for alternative fuel vehicles. Trust me, none of this is being taken care of on your paycheck.

I would say that your advice is fine for someone under 30 with a W-2 job, no kids and no house. Follow that advice and you’re off to a decent start. But eventually, it will be time to get some professional advice.

17

I worked with an advisor/broker for over 20 years and finally decided it was a waste of money. I realized that I had inadvertently been running a nice little experiment.

While the advisor had been managing an old IRA and a taxable account, I also had two self-managed accounts. An active, low cost 401k and a long ignored retirement plan. Over the same 20 year period the self managed accounts beat the S&P 500 simply by letting them sit.

The IRA beat them by 1% but only because of three stocks that I bought and held. All the funds (and most of the stocks) recommended by the advisor ended up loosing me money (along with the fees I paid him).

As I got close to retirement, the advisor recommended moving to a suite of funds that would be managed and rebalanced for me with no effort - and would easily provide the standard 4% safe withdrawal in retirement. The problem was that the fees would be 1%.

I could not see how giving him 25% of my retirement income was worth it. So, my retirement investments are now sitting in Vanguard index funds that cost me 0.25%.

18

The common advice about increasing your allocation of stocks as you age might not even be very helpful. It is common wisdom, and I do follow it, but the couch potato investment of 50-50 stocks-bonds is pretty darn good. A 75-25 stock-bond mix is probably a little better.

You’re right, a 529 plan can be useful for saving for college. I do think that no middle class person needs to invest in rental property. If they want to, they’re welcome to. If they want to pay a financial adviser to help them, they are welcome to. But they don’t need to in order to manage their finances prudently. Like I said, there are a lot of investments out there that are not bad investments that you don’t need.

For tax deductions, sure, if you want to get a tax preparer to help you help you with your returns, that’s fine. That’s not what I generally consider a financial adviser as in someone who helps manage your assets, and in any case turbo tax is pretty sufficient for most people.

The problem I have with financial advisers is not that they don’t provide good advice (although anyone who tells you to put money in an actively managed mutual fund is giving you bad advice, and many financial advisers will tell you to do so). The problem is that they represent themselves as indispensable for anyone above the poverty line, and that just isn’t true. You don’t need a financial adviser to tell you how much to save, or how to save it. You don’t need a financial adviser to tell you what sort of home you can afford. That’s not to say that you can be financially illiterate and make good decisions - you still need to do a little research, but nothing that a person of average means and intelligence is incapable of doing. And a financial adviser will want to charge you 1% of your assets each and every year to do what you can do on your own. 1% doesn’t seem like much, but when you consider that you’re expecting your money to grow at what, 5% after inflation, a 1% fee is really a 20% dip the growth of your money.

19

I had a financial advisor briefly. Now, I do have an accounting degree, so I’m better educated on finances than the average 4th grader. But when the financial advisor gave me really bad advice on stock options (she just didn’t get how they worked or would be taxed), I decided I could probably do as good a job on my own - after all, I was going to have to double check her work.

You should always understand what is happening with your money - its your money, no one cares about it as much as you do. If you feel the need to get some advice because you aren’t sure where to start, a financial advisor might be a good idea, but you should still understand what advice they are giving and not blindly follow their advice. If you don’t want to pay some one (or want a second opinion) check out the Bogelheads forums where you can get an education on personal finances that is pretty darn good by reading a message board. They’ll give you advice as well. But regardless of where your advice comes from - do your own research and understand what you are doing and why. You have to understand your own money well enough to evaluate the advice. And your own priorities, goals, dreams, risk tolerance - no one else is going to understand them like you do, even if you try and communicate them. (And sometimes you don’t know. You think your risk tolerance is high until you wake up in the middle of the night wondering why you bought all those shares in Facebook - the next morning, you’ve learned something.).