Investing Starts Here
Q: How can a lower- or middle-income couple invest? We don't have much money.
A: Investing doesn't have to be a big bucks endeavor, and you don't need a Ph.D. in Wall Street.
Let's take one step today. In some ways, it's wiser to get moving and establish even a super basic investment or retirement account—than to wait until you Know Everything.
None of this is set in stone. You can—and should!—change your mind as you learn more.
First, decide how much you can invest each month. How about $50? Making a monthly commitment enables you to open accounts that might otherwise have high minimum investment requirements.
Feeling confident? T. Rowe Price and TIAA-CREF allow you to open an IRA or investment account by setting up an automatic contribution of just $50 per month.
If you open a High Yield Investor checking account with Charles Schwab, you automatically get a brokerage account that allows you to start investing, and waives the minimums on most investments.
A tad nervous? Consider a "savings account IRA" with Sharebuilder, now a part of ING Direct. This hybrid account follows IRA rules (i.e. contributions are tax-deferred, and it's hard to withdraw them before age 59 1/2 without a penalty)—BUT your account would be FDIC insured, like a regular savings account.
Investment IRAs (i.e. not FDIC insured) are available through ING's investment arm, Sharebuilder.
Best of all, Sharebuilder and ING have no minimums to open an account. You're not even required to make regular contributions.
For now, as you get to know the world of investing, park your money virtually risk-free in a money market mutual fund. And revisit DailyWorth's more detailed Investing 101: Why, What and How by personal finance expert Manisha Thakor.
How did you get started investing? What would you do differently, if you could do it over again?
Note: The companies referred to are based on our editorial research. They are not sponsored, i.e. paid, references, nor are we endorsing these companies or products.
ATPT, Episode 5 - Julie Takes Control
After her night cap with Mr. Bond, Julie returns home and Skypes with her best friend, Cristina. Cristina: But who IS this guy? And why are you letting him tell you what to do with your money?
Julie: I'm not 'letting him' do anything! He works in finance, and I think he's right that the markets are too volatile right now.
Cristina: Yeah, try telling that to Aaron. God knows what Mr. Day Trader is doing with our money
Julie: You mean, you don't know where your retirement is invested?
Cristina: Well, Aaron always says he has it under control.
Julie: Wait, weren't you just warning me not to let someone else—
Cristina: That Bond guy is a stranger—at least Aaron is my husband!
Julie: So what? Look what happened when I let Jack run the show all those years.
During her lunch break, Julie is filling out forms. Her boss, Karen, peeks over her shoulder.
Karen: So you're throwing your money down the company pit.
Julie: [furious] Karen, excuse me while I set up my retirement plan?
Karen: [snatches the form] Oh my God! An emerging markets bond fund! What did you do, close your eyes and point?
Julie: [snatches it back] FNMIX is a four-star fund from Fidelity. And I think investing outside this country is smart right now!
Karen: You have four more hours. Don't make a rash decision!
The End? Not quite. In fact, we want you to tell US how the final episode of ATPT will go. The winning plot will become next week's conclusion.
| New to DailyWorth? Get caught up on back episodes of ATPT: Episode 1 Episode 2 Episode 3 Episode 4 |
Put a Cap on It
Investing pros have a number of criteria they use when choosing their investments. An important one to know is the difference between large-cap, mid-cap and small-cap companies. Cap means capitalization
The secrets of the investing world can be yours, once you make like Matt Damon and crack all the dang code. "Cap" refers to market capitalization. Or, in people talk, what a company is worth, i.e. the market value of its outstanding shares.
So, according to Investopedia:
Large Cap = companies with a value of $10 billion plusTo cap or not
Mid Cap = those worth $2 billion to $10 billion
Small Cap = those worth less than $2 billion
Investing, as we've discussed, is about balancing risk and return.
When you buy a mutual fund for your retirement or investment account, you need to evaluate not only whether it's comprised primarily of, say, large- or small-cap companies, but whether the fund is a growth fund (more risky, but potentially higher returns); a value fund (less risk, but potentially lower returns); a blend fund (a mix of asset classes).
Here's the grid that Morningstar uses to pinpoint where mutual funds fall. MYIFX is an example of a large-cap growth fund.
Pop quiz. Plug the ticker symbol of a fund you own into Google finance. Tell us about it.
ATPT, Episode 4 - The Return of Mr. Bond
Julie returns home after a disappointing date with Karl, but determined to research investing options for her 401k. Julie: [sobbing at her computer] I'll never understand it all! What's a front-end load? Who is Wilshire? Oh my god—I have until tomorrow at noon to set up my 401k.
Julie's cellphone rings. Oh! [wipes face] Hello, Mr. Bond. I was, um, just sort of thinking of you.
Bond: What a coincidence. If it's not too late, perhaps we could meet for a quick night cap? Perhaps a small cap. Ahaha. A bit of investing humor.
[Julie agrees to meet Mr. Bond; they sit at a candlelit table.]
Julie: ...So maybe Karen is right and I shouldn't join the plan...?
Bond: [takes her hand] My dear, these choices aren't set in stone. May I offer some advice?
Julie: Why not? Everyone else is!
Bond: The market is so volatile, set up the contributions to go into your 401k's money market fund for now. That way, you're saving automatically—with no risk. We'll discuss where to invest when we meet next.
Julie: [leans forward to squeeze his arm] That's brilliant—thank you for buying me some time. May I buy you another drink?
Bond: Not at all, this is my treat.
On the money. How did you choose your current investments? Did anyone hold your hand?
| New to DailyWorth? Get caught up on back episodes of ATPT: Episode 1 Episode 2 Episode 3 |
Make 7-10% on Your Investments
The third installment of "As the Portfolio Turns"—in which Julie argues with Karl about the merits of investing in the stock market—sparked quite a debate about the stock market's profitability: How much can you expect to gain over the next 20-30 years: 4%, 7%, 10%? How much could you lose?
Ask your Magic 8 ball
We wish we had the magic formula. But no one does. No matter what rosy returns a stock, advisor or firm has delivered until yesterday, nobody knows what tomorrow will bring.
So, why invest at all, as Karl was arguing?
Historically the average return of the S&P 500 index over the last 30 yearswas 11.27%, according to Standard & Poor's. (The S&P tracks 500 of the biggest U.S. companies, and is considered a U.S. market indicator.)
But during the so-called "lost decade" of 2000-2010—the S&P's average return was –0.30%.
What does that mean? It means that putting your money in the market will always involve some risk (witness the drop this week!).
Risky business
Yet even now, most experts believe that over the long-term, and by making smart choices—i.e. understanding your asset allocation, managing and rebalance your portfolio, minimizing the fees you pay—most investors will gain more than if they didn't invest at all.
There are extremely conservative ways to invest, which minimize your exposure to the roller coaster of the stock market: e.g. bonds or bond funds, treasuries, and others. These are called fixed-income investments because they provide a steady return. A 10-year Treasury bond yields about 3%, and it's backed by the U.S. government.
You can invest with caution, you can take some risks. It's up to you to learn your investing style.
As the Portfolio Turns, Episode 3
Julie is torn about how to handle her retirement. Mr. Bond's conservative approach (Episode 1) sounds wise, but her boss Karen's DIY strategy (Episode 2) has an off-road appeal. She meets Karl at a café, after work. Karl: You know, I'm not sold on this whole stock market thing.
Julie: Well, your money won't grow if you're not in the market.
Karl: Yeah, that's what those greedy investment banks want you to believe. Look where that got us in 2000-2010—The Lost Decade for investors! My money is in my business.
Julie: Nice for you, Mr. Entrepreneur. Actually, I've been doing my homework—did you know the stock market's average return, over the last 30 years, is like 11 percent?
Karl: Did you know that my business grossed almost $900,000 last year? Not bad for a guy with a storage franchise.
Julie: Yeah, and I bet your savings is in some basic bank account that yields .025%.
Karl: I don't save, I reinvest in the biz. That's how it grows.
Julie: That's crazy—putting all your eggs in one basket! I'm trying to figure out how to diversify—that's the key.
Karl: Eh, you just need a smart guy to handle it for you.
Julie: Ugh. That's what Jack said—and that's why I'm pushing 35 with no retirement plan!
I'm going home to read up on lazy portfolios. There's some investor out of Philadelphia who beats the market by sticking with low-cost, no-load index funds. Tonight, I'm going to check out the Coffeehouse Portfolio, by this former Smith Barney guy in Seattle.
Karl: (groaning) Thanks. I need to reorganize my sock drawer. Ciao!
Your turn
Have any of you tried the simpler investor methods?
This new series was made possible by DailyWorth expert and financial planner, Galia Gichon, creator of the "My Money Matters" kit, featured in the New York Times.
As the Portfolio Turns, Episode II
(Missed last week? Catch up on Episode I) Still pondering her encounter with the mysterious Mr. Bond, the next day Julie is confronted by her new boss, Karen, a single mom, who is head of the physical therapy department at the hospital.
Karen: What a morning! Too many knee injuries. Let's grab some lunch.
Julie: I wish—I have to finish up this paperwork for my retirement plan.
Karen: What, for that lame company plan?
[Dr. Pogue, the hospital administrator, appears suddenly.]
Dr. P: Ladies! I hope you're not whispering about that cute gymnast in Room 5? No dating the patients—hahaha!
Julie: Actually, we were just discussing the 403b plan.
Dr. P: (pulling charts) Is that the new highway initiative?
Karen: (rolls her eyes) If I were you, Julie, I'd look into Vanguard. Right, Dr. P?
Dr. P: (departs) Couldn't say—I'm independently wealthy!
Julie: But the hospital matches 50% of what I contribute, up to 6%. That's free money. And it's not like they're charging me to join.
Karen: That's the point—they are! Didn't you see that article in SmartMoney? Who knows what kinds of fees you're really paying.
Julie: (confused) What fees?
Karen: Investments cost money, baby doll, but almost no one ever asks about the fees they're paying—because you want to trust the company plan. Then they nail you. Matching, my a**. (walks away)
Julie: (rifles through her purse and pulls out a card) OK, Mr. Bond... you're on.
Tune in next week: Will Julie blow her chance to join the 403b plan? Can Mr. Bond help? What's Karen's beef with company retirement plans?
Your move
What would you tell Julie to do now?
This new series was made possible by DailyWorth expert and financial planner, Galia Gichon, creator of the "My Money Matters" kit, featured in the New York Times.
As The Portfolio Turns
Meet Julie, a 34-year-old physical therapist who is trying to set up a retirement account for herself. She goes to a party and meets Jim Bond, an older gent with an air of mystery about him.
Julie: Do you think that dip has sour cream in it? I'm allergic to dairy Maybe i should try the hummus...
Mr. B: I would—to be safe.
Julie: I was thinking that myself.
Mr. B: Why take the risk, that's my motto.
Julie: In your diet, or just in general?
Mr. B: Why don't we sit down. The name's Bond. I come from a large family that, with a few exceptions, is known for its reliability in financial matters.
Julie: Nice to meet you, I'm Julie. I'm a physical therapist.
Mr. B: Ah, you must work at the new hospital?
Julie: I just started. What a hassle, setting up my retirement and benefits. All I see are brochures dancing before my eyes.
Mr. B: We Bonds specialize in investing matters. Perhaps I can be of help.
Julie: That's so kind of you, but I don't even remember what I signed up for. I think it was a balanced something-or-other.
Mr. B: (coughing) Ah, yes. All things in moderation, as they say.
Julie: (relieved) So that sounds like a reasonable investment strategy?
Mr. B: Well, balance is important. The idea is that stocks, or equities, provide a higher return—but at greater risk. Bonds, generally, offer a lower yield, but less risk. Having both in your portfolio is a way to balance risk and return so that, one hopes, your gains are steady.
Julie: You know, the hummus is really good.
Mr. B: It looks quite fresh.
Julie: To be honest, I get how stocks work, but bonds are beyond me.
Mr. B: A bond is essentially a loan. You loan, say, $10,000 of your money to a city or state, or to the federal government—or to a corporation—for 10 years. If your bond pays 3% interest, you would get $300 per year on top of your $10,000.
Julie: Got it. Stocks are always going up and down, but bonds stay the same?
Mr. B: It's complicated, but yes, generally speaking. That's why bonds are often called fixed-income investments, because the return is steady.
Julie: (looking at her cell) Oops, that's Karl. I'm late for our movie date, so I'd better hop. But I've really enjoyed talking to you.
Mr. B: Delightful. Here is my card, if you'd like to talk again
Will Julie call Mr. B? Will she change her asset allocation? Who the heck is Karl? Stay tuned for the next episode of "As the Portfolio Turns."
This new series was made possible by DailyWorth expert and financial planner, Galia Gichon, creator of the "My Money Matters" kit, featured in the New York Times.
Wall Street Charmer
Worth a second look You know that low-key guy—the one in the next cubicle, or down the street—who's not exactly a hottie, but... he has something going on?
In the investing world, that quiet charmer would be the exchange-traded fund—known by his varsity nickname: ETF.
Profit in your pocket
We've talked about mutual funds (a basket of stocks, bonds, etc.). We've talked about index funds (which track a certain market sector). And you've heard of stocks. Wink.
ETFs are an agile hybrid of all three.
- They're built like mutual funds—to carry a load of investments.
- They trade like stocks, which means you have more control over your buying and selling price.
- More important: ETFs have the internal combustion engine of an index fund: They track a certain sector (U.S. stocks, big companies, real estate, etc.)—and they do it without live managers, so their expense ratios are loooow.
Bottom line
Many investors don't realize the fees they're paying for the mutual funds in their retirement or investment accounts. Do you? Call your fund company and ask. Or grab the ticker and look it up on Morningstar.
$50/Week x 45 Years = $1 Million
Sophia Bera is an associate planner for a fee-only financial planning firm in Minnesota. She just passed the exam to become a Certified Financial Planner and will get her CFP designation in August. Here's the math
Many people think: “I’ll never be a millionaire!” But with the power of compound interest, and time, you too can have a million bucks. Here’s how:
Let’s say you’re in your twenties and you have about 45 years until you want to retire. (If you're older, keep reading—the basic math still applies.)
If you invested $50 a week, in one year you would have put away $2,600 ($50 X 52 weeks = $2,600).
But in 45 years, those cash deposits alone would only add up to $117,000 ($2,600 X 45 = $117,000). How does that turn into a million?
Just add water
Every day that your money is invested, it gains interest, then your interest earns interest—and your savings begin to snowball.
Assuming your money earns about 8% per year, on average—a reasonable assumption—here's how your savings would grow:
- In 10 years you’d have $40,000
- In 20 years you’d have $128,000
- In 30 years you’d have about $325,000
- In 40 years you’d have over $764,000
- By year 45, you'd have $1,001,605
You take it all
The best part: When you contribute money to a Roth IRA, you've already paid tax on it—and you don't have to pay tax when you withdraw the money. That means you can withdraw $1,000,000 entirely tax-free!
So how can you start? Open a Roth IRA at a discount brokerage firm such as Fidelity, Vanguard or T. Rowe Price. Just call them. They're nice. (They want your money!) You can set up automatic contributions from your bank account to your Roth IRA easily, usually by filling out and faxing or mailing a form.
You don't need a lot to start. Fidelity will waive its $2,500 account minimum if you set up an automatic deposit of at least $200 per month. If that’s too much, T. Rowe Price will allow you to set up a Roth IRA with monthly contributions of only $50 per month. (Vanguard requires a $3,000 initial deposit.)
Then, once your Roth is open, you have to choose your mutual funds. I recommend very low-cost funds called exchange-traded funds (ETFs) and index funds, which many of you have read about here.
If you’re a new investor, I recommend that you start with a fund that tracks the U.S. stock market. That means you get the overall market return, which tends to rise steadily over time. You can go with an exchange-traded fund like iShares S&P 500 index (IVV is the ticker symbol), or Vanguard's Total Stock Market Index fund (VTSMX).
The advantage of ETFs is that they operate like index funds, i.e. they track a certain segment of the market, but they trade like stocks. What does that mean? Any time you want to sell your shares and get into something else, it's a snap. There's no penalty, only the commission fee you'd pay on any trade.
If you have $10,000 or more saved already, I recommend that you diversify your investments. A balanced portfolio might look like this: 25% in iShares S&P 500 Value (IVE), 25% in iShares S&P 500 Growth (IVW), 25% in iShares MSCI EAFE (EFA)—this is an international index ETF, and 25% iShares iBoxx Investment Grade Corporate Bond (LQD). This is what is known as a 75/25 portfolio. That means the portfolio is invested in 75% stocks and 25% bonds.
All of the funds I listed have an expense ratio of less than 0.40%. This is roughly half of what you’d pay to invest in a managed mutual fund. The lower the expense ratio, the more of your money you get to keep. So choose a few low cost index funds to invest in, and you’re on your way to becoming a millionaire!
 |
Sophia Bera is an Associate Planner for a Fee-Only financial planning firm in Minnesota. She recently passed her Certified Financial Planning exam and will have her CFP® designation in August 2010. In her free time, she does math for fun, performs at various theatre companies around the Twin Cities and travels to exotic places with the love of her life, Jake. |
Saving Your Retirement
Be calculating How much money do you need to save for retirement? That's a good—and complicated question.
Let's keep it simple. For now, you're going to nail down a ballpark figure.
Goose egg or nest egg?
Use online calculators with caution. They tend to be crude, because they assume or leave out key details.
We recommend the CNN/Money calculator to jump-start your planning process. It shows you where you're headed at your current rate of savings; where you'd be if you made certain adjustments, and how inflation plays into your plan.
To maximize this or any online calculator, do some prep work so the details you enter are as accurate as possible:
- Add up the balances in your 401k and IRA accounts.
- Figure out how much Social Security you're likely to get (read a recent statement or use this government site).
- Calculate your home equity and other saving/income sources.
Bottom line
While your ultimate retirement plan will be comprised of multiple moving parts, getting a ballpark for your target nest egg is a vital first step. We hope it will inspire you to save regularly and invest wisely.
| Note to Readers: We appreciated the heated debate sparked by yesterday's post on haggling. Read our thoughts here. |
Poll
Please pick the statement that best reflects your views. (Sorry, you can only pick one.)
What is your retirement status?
Total votes: 190
A Mortgage that Pays
Easy money Reverse mortgages sound like a godsend for older folks who need cash. But if your mom and dad are considering one, pay attention.
Seniors who qualify can "reverse" their mortgage and withdraw a wad of home equity in the form of a loan—as a lump sum, monthly payouts, a line of credit.
They no longer make monthly mortgage payments, but they essentially surrender the rights to their home.
Pros and cons
Weird? Yes. But for some people it makes sense. Some pros:
- People can withdraw up to $625,000 tax-free in home equity without taking out a home-equity loan (which requires monthly payments)—or selling the home, which means moving out.
- If your folks get, say, $100,000 from their reverse mortgage, but after they die the house sells for $200,000, the bank gets $100,000 and the heirs get the rest.
- If the market dips, and the loan ends up being more than the home is worth—that's the bank's problem. Your folks owe nothing.
Reverse mortgages are expensive and it's not easy to qualify. Typically, the fees and closing costs eat a chunk of the homeowner's equity. When your folks die or move out, the home is sold to pay off the reverse mortgage.
Bottom line
Reverse mortgages can have enormous financial ramifications for your parents' financial plans—and maybe your own. Read more at ReverseMortgageGuides.org.
Tell us whether you've had any reverse mortgage experience.
The Gymnastics of Investing
Gotcha!
Deep in DailyWorth headquarters, we are preoccupied with one thing: Building your worth.
So when it comes to investing, we look for any way—including standing on our heads—to grab your attention.
Pathetic? No. Cunning! Be honest: If you knew this email was about asset allocation, you might not open it.
And that would be a blow to your net worth. And we can't have that.
Wow, that was a lot of build-up
So, what is asset allocation?
Think about your closet. Some people invest more in casual clothes; others in dresses or suits. You "allocate" your wardrobe to reflect your lifestyle, needs and aspirations.
It's similar when you pick the investments in your portfolio or retirement account. What guides your choices are:
- your goals (retirement, down payment, Ph.D.?)
- your tolerance for risk (high, medium, no thanks)
- how long you plan to keep the money invested
It takes a while to develop an asset allocation strategy (or a versatile wardrobe). Once you know your preferences, you then purchase investments—usually mutual funds—that balance your different needs. And…a balanced portfolio helps your money grow steadily over time.
Coming soon... investing expert Galia Gichon's asset allocation boot camp. You're breathless, we know.
Tell us: Do you have an asset allocation strategy already? Do you wish it had a catchy nickname, like assy-allo? We do.
Your Move
Pop quiz: Which fund comes with the assets already allocated?
Do Green Funds Yield Greenbacks?
For love, not money For years, investment pros looked askance at so-called socially responsible investing options (SRIs).
Sure, investing in green causes was fine for tree-huggers. But nobody with an ounce of financial sense would pick values over... value.
Now that's changing, as a crop of successful green funds has been showing real growth for several years now.
Let's look at one of the leaders: Portfolio 21.
A fund grows on Wall Street
Portfolio 21 is a mutual fund, one that you can check out on Morningstar, using the ticker symbol: PORTX.
Like other funds, PORTX is invested in many different stocks. You can look at the Morningstar snapshot here. The difference is, the fund managers have made an effort to choose companies that reflect the basic principles of responsible investing.
As fund founders and managers Leslie Christian and Carsten Henningsen explain in this recent interview in Green Money Journal, their primary concern was to focus on ecologically sustainable industries.
And as the Morningstar analysis notes, this four-star fund has been pretty successful: "Portfolio 21 has the makings of a fine portfolio centerpiece for socially responsible investors."
Bottom line
As we all decide where to put our money, it's exciting to know that there is a world of investment options beyond the financial behemoths on Wall Street.
Happy Earth Day!
Do you know where your money goes? Share your thoughts on socially responsible investing here.
Your Retirement: On Target
Fairytale gone wrong Once upon a time, about 15 years ago, a fierce dragon was terrorizing a small village...
Wait, sorry! Wrong story.
Back in the 1990s, a terrible retirement problem was looming. Traditional pension plans were disappearing, 401k plans were taking their place. But few people understood how they worked (or wanted to join them). So companies began enrolling employees into retirement plans automatically—which solved one problem and created a bigger one.
Where do you invest all that cash?
A happy-ish ending
Along came band of sorcerers—um, investment companies—who worked their magic and created... insert tingly music here... a self-contained retirement portfolio that, like a TV dinner, would provide all the financial basics in one package.
Target date funds were designed so that average investors could park their money for 10, 20 or even 30 years—depending on the target retirement date—and a team of professional managers would safeguard their money and help it grow.
And it’s not a fairytale. While still imperfect, target date funds are proving to be a long-term investment solution for millions of people who otherwise might be too intimidated to manage their own money.
Bottom line
No one can cast a spell to make your money grow, but there are ways to make managing your nest egg easier. Learn, explore, ask lots of questions. Your net worth starts here.
MP is on hand to answer your basic investing queries today. Bring it on!
1 Hour to Big Savings
Small things considered We love small steps here at DailyWorth. Money can be arduous and complicated—but who needs that?
Rather than attempt a massive lifestyle overhaul (way too much effort!), it's smarter turn your financial life around with a series of small tweaks and improvements.
And we've found that series.
Invest an Hour
The One Hour Project consists of 30 simple projects you can do any day of the week, in any order.
"And every single one will put you in a better financial state than you were before the hour," writes Trent, the founder of the Simple Dollar site and creator of the project. (It's free to click and read, or you can download the PDF for $2.)
Some are obvious (like asking for a lower rate on your card), but there are a number of gems:
- Create a visual debt reminder—Find a photo of the Tuscan vacation you want take, the house you'd like to buy, and keep in your wallet or near your computer to prevent impulsive spending and reduce debt.
- Mine your job benefits—Are you up on all the new perks? Take advantage of every dime of corporate largesse.
By doing a couple of one-hour tasks each week, you could be looking a whole new financial picture by fall. You're worth it. Taken a step toward healthier finances recently? Share your small change here.
Tickle Your Ticker
Many of you have been following the Invest-Along-With-Ashley series, and we have a key update on the situation. As you may recall: - Ashley was eager to start a retirement account—and learned her mom had opened a Roth IRA for her a few years ago.
- Next, Ashley committed to contributing $25 per month into her Roth. Excellent.
The key question now: Where is her money going?
In Ashley's case, her mom's financial planner picked a mutual fund for her Roth IRA (normally, you'd have more than one fund to balance your portfolio). Which fund was it?
Ashley did her homework and learned the fund's ticker symbol: AWSHX
Every investment—be it a stock, bond, mutual fund—is known by its ticker symbol. These codes look funny (Ashley's looks like, "Aw, shucks"), but they are just abbreviations.
Coca Cola Company stock = KO
Walmart Stores stock = WMT
Vanguard 500 Index fund = VFINX
AWSHX stands for the American Funds Washington Mutual fund. To learn more, enter any ticker symbol into any financial site (or Google it). If you go to Morningstar.com, a top research firm, and look at a snapshot of Ashley's Aw, Shucks fund, You'll see a chart of its performance, and you can scroll down to see a list of its holdings. (Remember, a mutual fund holds many stocks and/or other investments.)
Now, it's your turn! Look up the ticker symbol of an investment you own—and tell us what it is, and what you like or don't like about it.
MP owns FFFFX, a Fidelity target date fund.
Amanda owns a few Calvert and Oppenheimer funds, including the Oppenheimer Value Fund - CGRBX.
The Sexy Side of Investing
Investing has a sexy side? Well, it's not Lady Gaga sexy, but pretty close as far as the stock market goes. Meet Mr. Strong, Silent and Profitable—a.k.a. the index fund.
What's so seductive about index funds? Pour yourself a cool beverage and we'll explain.
Most of the 8,000 or so mutual funds out there are "actively managed." That means, a team of Wall Streeters are at the helm of each fund, deciding what investments to buy, etc.
An index fund, by contrast, quietly mirrors a broad swath of the market, or a certain market sector. (Several index funds track or follow the ups and downs of the S&P 500, for example.)
Index funds offer several advantages to ordinary investors, as contributor Galia Gichon wrote here.
- They're a cheap date. Meaning: All mutual funds charge management fees, called the expense ratio. Index fund fees are far lower than managed funds. That means a lot more money in your pocket over the long haul. How much?
A 45-year-old with $20,000 in her retirement account would end up with about $70,500 at 65, assuming 7% in annual returns and 0.5% in fees. But if she paid 1.5% in fees during that time, she'd end up with only $58,400—17% less. Ouchy. - They deliver the goods. Assuming you own an index fund for many years, you're likely to see swings in its performance, but on average you'll reap a steady profit, lower taxes (with no sweat on your part) and—after taking fees into account—most studies show that index funds deliver bigger returns, compared to managed funds.
Diving Into Mutual Funds
You may have heard the phrase, "A mutual fund is a like a basket of stocks." (Here, we compared a mutual fund to a box of wines.)
Now it's time to explore what that really means, as part of our new Investing 101 series.
When you buy shares of a particular mutual fund, you're pooling your money with thousands of other investors (that's the mutual part).
All that money—typically millions or billions of dollars in a single fund—is then used to buy stock in different companies, bonds, real estate or other investments.
Most mutual funds are "actively managed," which means that a team of investment experts decides what goes into the fund. Index funds are "passively managed", and simply mirror what a segment of the market does.
You probably chose certain mutual funds for your 401k account or IRA. While the amount you contribute each month may be small, say $200, you are actually buying a tiny fraction of all the investments (stocks, bonds, etc.) within those mutual funds.
How do you know what's in your mutual funds? (For those of you into the Invest-Along-With-Ashley, she's working on this, too.)
According to Morningstar, Inc., a top investment research company, there are about 8,000 different mutual funds. Each one, you might say, is a different flavor, because each contains different ingredients. Think Ben & Jerry's, but on a very large scale.
There are mutual funds that are invested primarily in stocks, bonds, overseas companies—or some combination of the above, plus a few things we haven't mentioned yet. Everything except pistachio.
To learn where your money goes in each fund, get your funds' ticker symbols (the code used to look up all investments), and plug it into the search box on Morningstar.com.
Tell us what you find! We're all about swapping investing adventures.
Inflation Translation
Remember when a slice of pizza was $1.00 or a cup of coffee was 50 cents? (If that was before your time, bear with us.)
These days, depending on where you live, a slice is about $2.00 and a cup of ordinary non-designer coffee is about $1.25.
That's inflation. It's not a surprise. But it's common to think of inflation retrospectively: "God, remember when it was only $4.50 to see a movie!"
When it comes to money, you have to cast your eyes and your wallet forward: What impact will inflation have on your savings in years to come?
Assuming inflation increases at the rate of 3% per year (historically, the average is about 3.4% per year), by 2040 you would need about $4.85 to buy a slice. Yep, five bucks for a scant triangle of tomato sauce, crust and cheese.
Now imagine similar, inexorable price increases across the board. How much more is your life going to cost in 10, 20 or 30 years?
That's why it's vital to save, save aggressively, and to learn how to invest your money. Ideally, the return on your investments will help your savings grow, and protect your cash from inflation.
Because you want to eat more than pizza when you're 65.
Questions about inflation? We had fun comparing past prices to the present here, and learning more about inflation here.
How to Open an IRA
When we met Ashley on Monday, she was pacing the floor, worried about her future savings—when suddenly she got the news that her mother had already opened a Roth IRA in her name.
This raised several questions for Ashley, and a particular one for many readers, who asked: How do you open a dang IRA anyway?
Because we don't want you to miss a single step in this invest-along-with-Ashley, here's the answer.
- A common misconception. Many people assume that when they open any sort of IRA or 401k, that this IS the investment. It's an easy mistake to make, because people always say that you "contribute to your IRA or 401k." Not quite.
- To open an IRA, call Fidelity, Vanguard or another low-cost or discount brokerage and tell them that you want to open an IRA or a Roth IRA, if you prefer.
The IRA or 401k is just a vessel: an empty egg carton, a truck with no cargo. You select mutual funds (usually) to put onto your truck or into your egg carton. The money you deposit grows inside these investments.
If you're not sure which mutual funds or investments to pick yet, that's fine. Get started simply by depositing cash into a money market account, in the IRA—which is like a savings account—and later, when you know more, you can transfer that cash to the investments of your choice without incurring a penalty. This is a first step! We won't let your new IRA languish, uninvested. Keep following Ashley's story here on DailyWorth.
Note: If you're calling HR to open your 401k, the rules and options may be quite different, but there is often a money market option you can pick.
The point is to start investing regularly, we hope immediately, so that it becomes second nature.
Helping Ashley Start Her IRA
We recently heard from Ashley, 25, a documentary filmmaker in Seattle: "How do I get started on an IRA? Or a Roth? I want $340,000 in 30 years!"
We offered to help Ashley launch her retirement account, and she agreed to share her saga, as it unfolds, right here.
In addition to that all-important decision to get started, Ashley also had an initial savings goal: $340,000 in 30 years.
To meet that target, Ashley would need to save $3,000 per year, or $250 per month.
There was drama from day one: Unbeknownst to Ashley, her mom had already opened a Roth IRA for her. The Roth was at a bank in Ashley's hometown in Oregon. There was about $400 in the account, in a mutual fund.
Ashley had about 12,000 questions—which is the standard amount. Here are three:
Where exactly is the money? Is it invested in the bank or the Roth IRA?
All retirement accounts (401ks, IRAs, 403bs) are like big, empty trucks. You drive your truck to the loading dock (i.e. bank or brokerage house) and say: "I'd like to put in the following mutual funds and other investments."
You hand over some money; they stack some boxes on your truck. That's your retirement account.
Mom already put one mutual fund in my account. What is it?
You need the ticker symbol to look at the information.
What's that?
Any investment (stocks, bonds, mutual funds, etc.) is abbreviated with a ticker symbol, which resembles the call letters of a radio station: JABAX, FFFFX, WNEW-FM (kidding). You need the ticker to learn about each investment product, and decide which you like or don't.
Tune in next time to find out... What mutual fund did Ashley's mom pick? What is the ticker symbol? Did Brett sleep with Adrianna?