So right up front I’ll admit that I’m an idiot about investing and I’ve been tossing money into a retirement account for years without having the slightest idea of what it’s invested in and why or if it’s doing well compared to other choices. Understanding it all has been on my to-do list for a decade. Now I have to do something about it and I’m realizing that I know even less than I thought I did.
I wasn’t planning to retire until at least 2015 so I had about 50K in the stock market but this chance to retire now came up very quickly. In the last month or so I saw my account drop to 30K and now it’s back to being a bit over 40K. I know that only idiots keep all of their money in stocks when they get close to retirement and that they’re supposed to move most of it into safer investments but I don’t even know what that means. What kind of things are considered to be safe(er)? I know that if I move it now I’m locking in the loss but that seems better than risking losing a lot of it again. I’m not asking for investment advice but it would help me to at least understand what I should be looking for.
Um, you should be asking for financial advice.
And from a professional.
I set up a retirement fund a year ago with advice from my bank, and although the capital value has dropped, the payments are still holding.
I was advised to buy more shares recently, since the price is low.
So if i were you, I wouldn’t sell shares at a loss now. But I’m not you!
I’m sure that I will get professional advice before I move it if I can afford to but I’m just trying to understand the basics before I do. What I meant was that I wasn’t asking anyone here to give me specific advice, just general information.
I think you need some professional help, too. Not because you’re an idiot, it’s just that confusing!
If you don’t want to look in to hiring a financial planner, I suggest looking into some books. I’ve always been a fan of Suze Orman. Her book “The Money Book for the Young, Fabulous and Broke” has been great for me. While I’ve never read it, You’ve Earned It, Don’t Lose It! is her book on retirement planning and such. Check out the Amazon reviews.
Does she have one for old, holding up ok and not broke people? ; )
Thanks for the suggestion. I’ve seen her name and she has a show on one of the news stations. I’ll check out the books and start watching for her show. I know I’ll end up going to see a financial planner but I hate talking to professionals before I’ve done at least enough basic research to be able to follow the conversation without annoying them. It think that my retirement plan comes with a few sessions of free advice so I’m going to check that out also.
For safety, you can look into govt bonds. Fed gov’t bonds are safer than muni bonds, corporate bonds and corporate stock. The Fed t-bills don’t make you any $$$ but then again, they don’t lose as much either. It’s the typical risk vs reward tradeoff. Right now, you seem to be more concerned with risk.
As a disclaimer, I’m of the opposite mind of glee. I think most financial advisors are incompetent (especially the ones serving the needs of the small-time investor.) You get to guarantee professional financial planners income by paying their management fees, but they in turn do not guarantee gains to you— how convenient. (Think about why it’s structured that way.) Get some good intro investment books from amazon. Read some financial blogs. You ultimately have to be responsible for your investment literacy because no one else (including financial advisors) will take responsibility for your financial outcomes.
Assuming you are well-diversified, safe® in this context typically means investments that have lower price volatility. Again, assuming proper diversification, the value of investments tends to rise over long periods of time, but there can be substantial price fluctuations in the short term. Investments with more volatile prices such as stocks generally yield better returns, hence their appeal. However, the risk is that you may need to withdraw money during a period when prices are low, ruining your investment strategy. The goal is to have enough money invested in low-volatility investments so that you can cash those out even in a downturn, since the differences between selling high and selling low will not be as severe. The rest of the money is left in higher-volatility, higher-return investments in order to continue to grow your money.
Some typical investments (in order from less-to-more risky):
-Savings Accounts/CDs/Cash : About as safe as you can get. Slowly appreciating asset and typically insured against loss.
-Money Market Fund: Very safe. A slowly appreciating asset that usually does not lose value. There have been occurrences where money market funds have actually lost value, but these situations are usually pretty rare.
-Government Bond Funds: Loans to the government. The government usually does not default on its debts. However, various economic changes can affect bonds and bond prices, so they can lose value .
-Corporate Bond Funds: Loans to companies. The rate of return and volatility risk is tied to the company’s ability to pay back its debts. More uncertainty there is about a company’s financial health, the greater the potential for the bond prices to fluctuate.
Is that 50K (now 40K) all of your retirement savings or is it only the portion that is invested in stocks? If it’s all of your savings, that it not much to retire on unless you will have some other source of income in retirement, such as a pension. To give you useful advice, we will need lots of personal information - your age, your income, your expenses, your assets, expected income from Social Security, etc. Without knowing your specific circumstances, nobody can give you good advice.
Thanks Caldazar. I guess it’s up to me to decide how risk averse I am and strike a balance between moving some for safety and leaving the rest to continue to climb or fall with the stock market. I’m wandering around their website and now some of it makes more sense in that context.
Gus, I’m pretty sure that all of it is invested in stocks but I’m still trying to figure that out. I’m 49 and I have a pension of about 40K that short of an emergency is more than enough to live on combined with my partner’s salary and his eventual pension. He has a very secure job and we have about 40K in another emergency account as well. We both worked for local government so the chances of our pension plans disappearing are relatively very low. I have no plans to touch the retirement account because it’s there for the future problems that I can’t anticipate or plan for. We own a home that was worth 300K more than we paid for it until a few months ago and now it’s worth just a bit more than I owe but we have no plans of selling it for at least 10 years anyway. We have no problem making our mortgage payments and we’re both eligible for social security. We aren’t in the greatest shape but it’s not too bad and we live pretty simply. I have a year or 2 of car payments left and other than that we have no other debt besides the mortgage.
They aren’t usually incompetant, but they can’t gurantee what is going to make money. Otherwise, why would they work instead of just sitting at home daytrading all day? Their value is that they know more about investing in general than you do. But ultimately you are correct. Any chimp can pick a couple of Vanguard funds based on their risk and investment category (growth, value, etc).
It helps to understand what exactly a stock, bond, treasury bill, CD and so on actually are. Next, you want to understand the concept of risk vs return on investment (ROI). For example, stocks are riskier, but over the long term they have the potential for hire returns. The problem is that during short term fluctuations, they can lose money. If you happen to have one of those fluctuations right before you retire, that can be problematic.
The other thing people should understand is inflation and time value of money. Sitting in your savings account, your investment will lose real purchasing power every year because of inflation. So ideally you want to find an investment that outpaces inflation.
Since you are retiring soon and only dealing with about $40,000, T-bills, bonds or a CD might be your best bet. Because the market is down, you might also want to throw some money into a no fee index fund. Basically a portfolio of stocks tied to a particular index (ie the S&P 500). I have one with Vanguard that has no fees if you invest over $10,000 IIRC.
So, for a 5 year timeframe, you might want to go with something like this:
$10k Vanguard S&P 500 index fund (for when the market goes up again)
$10k Treasury fund
$10k short term CDs (6 mo-2 years) (some banks offer risk-free CDs that allow you to cash out at any time with no penalty, although for a slightly lower return).
$10k savings account
This is just an example and shouldn’t be taken as investment advice. Or go ahead, just don’t blame me if you go broke. I’m not an investment professional, I just happen to know a bit about finance.
What a real financial professional would (or should) do is help you figure out exactly how much money you need over time and then they would help you structure a plan taking into acount liquidity (how easily it is to access you funds), risk tolerance and other factors.
Given those circumstances, you shouldn’t worry too much about the $40K in the retirement account. It’s not a lot of money and since you’re not going to be dependent on it for income you could just leave it all in stocks. If you’re not comfortable with the risk of having it in the market, by all means move it to something safer, but it sounds as if you’d be OK even without that money.
Read the stickies in the ‘Help with Personal Investments’ forum, I recommend the ‘Investment Planning’ sticky thread first. Browse some threads to get a feel for the place. Plenty of people on that forum could wax the asses of 90% of all financial analysts on financial knowledge.
I highly recommend this forum for your investing queries. It will be the only investing forum you’ll ever need to visit.
As for the financial advisor thingie, there is a right way to go about finding one. It is recommended that you find one that is hourly, and isn’t trying to sell you an expensive product. Plenty of threads on Bogleheads.org on trying to find a good advisor.
Boglehead investing Wiki, pretty cool too. http://www.bogleheads.org/wiki/index.php/Main_Page
Thanks so much for all of the help, everyone. It’s given me a great start on what it is that I need to understand before I make any decisions or pay a professional. I don’t have to do anything quickly and life won’t come to an end if it goes back down again. I’ve never counted on my retirement fund being a necessary part of my income because it isn’t a sure thing and I don’t want to draw it down for living expenses unless I absolutely have to. I don’t count on the equity in my home being available for retirement either because it doesn’t really exist until I sell the house.
I agree with ParentalAdvisory. Go see Bogleheads. Buy the book (I did and it’s great). Read the Wiki. I recommend against seeing a financial adviser. The other day I saw a fund with an 18.4% expense ratio and a 4.5% load. You think money managers care about you? Go to people who make no money off of what you buy - they will give you honest opinions for the most part. But better yet learn on your own. It’s really not that hard and you can make educated decisions for yourself. The financial planners and brokers have a vested interest in taking money from you.
If you have stayed around here for over a year without getting banned you can certainly manage your money on your own.
I started checking out Bogleheads and it looks great. The Wiki has a ton of good info and people seem to be very patient about explaining things. Thanks for the reference.