Another note to self

[catsittingstill]

IRA contributions done.  Remember to rebalance stock/bond percentages.

Public Service Announcement, hopefully unnecessary, but just in caste. 

For those who are interested, there's a pretty good book called "Personal Finance For Dummies" that explains a lot about investing.  Try not to let the title put you off; if a dummy can learn it from this book it should be a piece of cake for the rest of us.  I read it years ago because  Mom gave me a copy and kept nagging me about it till I finally choked down a chapter a day until I could tell her I'd finished it.  Looking back on it, I'm very glad I did.  I was quite surprised (I hope I didn't show it) to learn that some promenent local business people had all their retirement savings invested in stocks (none in bonds, apparently) in the recent market downturn, and are now really hurting and planning to postpone retiring.  Hopefully it will only be a couple of years before the market bounces back, but still, having to work 2 more years when you were planning to retire has got to hurt. 

In general, PFFD recommends that people invest in both; bonds tend to do well when stocks are doing poorly and vice versa.  Stocks go up faster overall, but that's over decades, so it's recommended that as people get closer to retirement age they invest more and more in bonds, and money market funds, which have a lower rate of return but are less volatile.  One rule of thumb I have heard (though I didn't get it from PFFD) is to put your age percent of your retirement funds in bonds and the like.  (So if you're 40, have 40% in bonds).  The trick is that you don't just deposit the money in that percentage, you keep rebalancing; if the stock fund gains more than the bond fund, you move a little of the stock fund money into the bond fund to keep things at 40% bonds, and vice versa.  I'm unclear on how often to do this rebalancing, but I'm figuring now is about the time.

Also PFFD recommends investing in index funds rather than individual stocks and bonds, kind of automatically diversifying your portfolio and insulating you from the risks of any one company going bankrupt.  Index funds are better than non-index funds because buying and selling is less common, reducing fees, and the decisions can be made automatically, reducing labor costs, so that the costs of the fund can be kept very low (typically 0.5%).  Since the costs come straight out of the profits, and the profits compound over decades, the lower the costs the better.

And now that everyone's eyes have glazed over, we now return you to your usual livejournal..

Comments

[bigbumble.livejournal.com]

This technique worked well for David's 401K. He rebalanced annually. (I know because I am the estate executor.)

[catsittingstill.livejournal.com]

Thanks for letting me know.

[pondside.livejournal.com]

That was a good synopsis of recommendations. D moved his 401K from it's previous mix to a really tame capital preservation mix a year ago and it's actually gained steadily over the past while when stocks were plummeting faster than the arbitrage guys were falling from windows.

[catsittingstill.livejournal.com]

D had good timing :-).

[billroper]

The one note that I'll add here is that you don't even want to be in bond funds with a significant average time to maturity when you're close to retirement, as rising interest rates could substantially erode your principal. The trick then is to be in debt funds (like money markets) that have very short maturities.

[catsittingstill.livejournal.com]

Very good point, which I should have addressed and didn't.

In fact, it was a very good thing that the money for our house down payment was in a money market fund (least hassle for me at the time); if we'd moved it into a stock fund, as I thought about doing, we'd have been in a world of hurt at this point. Or at least we'd have had a 25% smaller down payment.

Thank you for bringing it up.

[billroper]

Happy to be of service!

My dad was always interested in investments and spent a couple of years as a stock broker at Merrill Lynch (during a recession, which had a lot to do with why he stopped being a broker -- honesty will get you that way). So I've got a family history...

[randwolf.livejournal.com]

Oh, and congratulations on your house purchase!

[randwolf.livejournal.com]

As speculative investments, I've been looking at the the Guiness/Atkinson alternative energy (GAAEX) and global innovators (IWIRX) funds--prudent investment in those areas is likely to make good money in the long term. But I think the best piece of advice right now is to invest internationally--in Japan and the EU. I doubt that the dollar will still be the world's reserve currency in 10 years and substantial inflation is a real possibility. The real economic growth is probably in the "emerging markets"--China, India, probably Latin America--but I'm not convinced that anyone without substantial property and connections in those places can make money there; they are are too corrupt. Maybe India.

Yawawnawn. Designing user interfaces is much more fun, but no-way pays as much!

[catsittingstill.livejournal.com]

I expect alternative energy to be a growth area if everything works out like I hope it will, but 1) my hopes are not a reasonable market prediction and 2) I have no way to guess *which* alternative energy companies will do well, hence my general reluctance to bet.

I'm very leery of foreign markets; they seem to be even more volatile than ours, and considerably less predictable about whether things will get nationalized, for example. But best of luck to the people who do invest there.

[randwolf.livejournal.com]

Well, the USA is probably going to sort-of nationalize GM, and and Western European or Japanese markets are no more volatile than US markets. Exchange rates are always volatile, but for some time to come they probably favor the investor in non-US equities. In terms of actual productive businesses with products people internationally want to purchase, Western Europe and Japan are in much better shape than the USA. That's not a guarantee of future success, of course--"The fight is not always to the strong, nor the race to the swift,"--but, as Damon Runyon put it, "that's the way to bet."

My suggestion of an alternative energy fund, rather than a particular firm, was in the line of letting the fund management do the work of picking. A small speculative investment in such a fund might pay off and I think G/A is making a reasonable attempt at managing one. (Of course, never speculate with money you can't afford to lose!) You're also in a good position to evaluate funds which invest in biotech--I wasn't able to locate any, but I expect they are out there. My sense right now is that speculation is actually wise at this time. The economy is changing very fast. Before the dust settles, a lot of the blue chip stocks on the indexes are going to be gone or unrecognizable, and a lot of currently minor firms--or even firms which don't yet exist--are going to become major.