It seems pretty common for someone on my flist to announce they now have a job, and hey, what about all this IRA/401(k) stuff? What do I do? Sometimes the advice they get is good, sometimes it isn't. In addition, there is a lot of advice out there on the net. Some of it is good, some of it isn't. Even the advice from folks who look reputable—e.g., Motley Fool—sometimes isn't that good.
One problem with investment advice in general is that there are no end of people who will explain—often quite honestly and sincerely—how to do this or that in the market. Such as options trading, market timing, starting a saving accounts in a high-interest overseas bank, etc., etc. The problem is that almost no one is willing to say that the average investor shouldn't be doing these kinds of things at all. The financial world is full of clever, attractive, and highly dangerous gadgets, operations, and toys that the average investor shouldn't touch with a ten foot polearm.
Andrew Tobias, financial writer (and current Treasurer of the DNC, FWIW) starts out his book, The Only Investment Guide You'll Ever Need. by saying that. He's right. Not a bad book to read, either. Probably not quite true to its title, but not a bad start, if you know zero about the markets.
I am not a financial analyst. (IANAFA). However, I've been thinking and reading about this stuff for decades, and have messed with the markets in good times and bad, made money and lost money. FWIW, here's my advice about what to do with all that excess cash your new job is throwing off.
- 99% of people should be buying mutual funds, not trading.1 Only trade stocks with money you don't mind losing.
- Invest X% of your income every paycheck, for some constant value of X. Make X as large as you can. Don't cheat. Don't invest more when the market is up and you're feeling optimistic about the future. Don't invest less when the market is down and you're feeling pessimistic about the future. You will want to do these things. To resist those siren songs of greed and fear will take more willpower than you can imagine. Nonetheless, if you do resist, in twenty years you'll be happy you did. (The fancy name for investing the same amount in good times and bad is 'dollar-cost averaging'.) In other words, DON'T TRY TO TIME THE MARKET. You will be unsuccessful.
- Sock as much into an IRA every year as the law allows. Don't touch it until you retire. If your job provides for a 401(k) or 403(b), do the same.
- Buy mutual funds. Hold them. Don't raid them for the new car, or the house down payment, or the kids' college. If you need money for this stuff, make a separate account.
- Buy stock mutual funds. Over decades, nothing beats common stocks. Not bonds, not real estate, not gold, not nuthin'.1 The motto of the House of Rothschild is said to be, "When blood runs in the streets, buy common stocks." I would add, especially when blood runs in the streets, but other times aren't bad either.
- Buy stock mutual funds that are index funds. Hold them. Very few actively managed mutual funds are able to beat the indexes.
- Buy stock index mutual funds that are 'no-load', i.e., have no sales charge.
- Buy no-load stock index mutual funds that have low expenses. How low is 'low'? Morningstar will be able to guide you. Vanguard is one highly reputable company that offers index funds, and has very low expenses.
- Don't put all your eggs in one basket. If you work for Enron, don't put your retirement in Enron stock. Yeah, yeah, this is obvious now... but how many Google employees have their retirement socked away in Google stock? How many Microsoft employees have a large portfolio of MSFT? DON'T DO THIS. Buy some of your company's stock if you believe in the company, but make sure you can retire comfortably even if your employer falls asleep at the throttle and slams into a mountainside. (If stock options are part your compensation package, consult a qualified investment advisor: that's more complicated that what I'm talking about.)
- If you want to make it simple, buy an S&P 500 index fund. If you don't mind a little less simple, also buy a Russell 2000 index fund (smaller companies than the S&P), and a foreign stock index fund. This is technically called 'asset allocation'. Don't try to get too fancy with it.
- For god's sake, don't screw around with penny stocks, options, or futures.1 Any penny stock you are likely to hear about is almost certainly a rig job, futures are a negative sum game (common stocks are a net positive sum game over the long term), and the mathematics behind valuing options is non-trivial. (In playing with these toys you will literally be competing against the rocket scientists and Nobel prize winners who are employed by investment houses.) There are many people out there who would love to sell you these things. It is NOT in your interest to buy these things.
- Don't say, "Screw all this, I'll just put my money in a savings account." A savings account, despite appearances, is not safe. It is exposed to inflation, currency, and interest rate risk. Savers were ripped to shreds by inflation in the 1970's, for example. If your time horizon is six months (e.g., you need some place to put the down payment for a house), by all means keep your money in a savings account. But if you are saving for the long haul, buy stock index mutual funds and hold them.
- Don't believe what anyone on TV says. Believe the opposite of what any infomercial or any direct mail says. If someone is trying very hard to sell you a financial product or 'investment opportunity', RUN AWAY.
To make it simple as possible:
- Buy index mutual funds.
- Invest as much as you can on a regular basis your entire working life.
- Buy your funds and hold on to them until you retire. Don't try to anticipate stock market movements. Ignore your emotions. Ignore the headlines. Ignore your co-workers. Ignore the TV.
1. Footnote: You can do better than index mutual funds by actively trading stock, real estate, bonds, futures, and so on—but only if it is your life's work. To learn how to beat the market takes years. Doing it successfully is a full time job, like anything else. Unless playing the market is your full-time job, you are likely to lose money, and even if you are successful, the amount you make over a lifetime in excess of what you could have made in a stock index mutual fund is unlikely to repay the effort you put in. If you want to spend your life as a stock trader, god bless you, and godspeed. But if you want to be a teacher, programmer, writer, lawyer, or whatever, don't expect to be successful trading stocks by spending a couple of evenings a week studying the market.
絞首刑 == koushukei == (noun)
death by hanging
|Left radical is 'thread' (糸), here meaning 'cloth'. Right radical is 'mix/cross/exchange' (交), which acts phonetically to express 'twist. Thus, 'to twist cloth'. Henshall suggests as a mnemonic: 'Strangled with mixed threads.'|