Tuesday, August 30, 2011

Festers financial advice part 3

The first rule of investing is don't lose money.

A co-worker asked the other day what to do with his 401k. This is a very tricky question and a lot depends on your circumstances, the choices you have in your 401k, when you plan to retire, etc. However, I can tell you what I have done and I decided to go this way after much trial and error. The company I work for matches up to the first 4% of your contribution. There are limited choices and the two main choices we are offered are stock funds and bond funds. The choices don't really seem to be all that diverse, there are several choices but they all seem to be really similar in composition for their group (i.e. stocks, bonds). If given any choice to invest in I recommend the Permanent Portfolio, which is outlined in Harry Browne's book Fail Safe Investing. However, for the 401k this was not anywhere near an option. So what I have done is contribute the 4% that gets matched (and in my case the match is 100%) I invested it in a low yield, but stable bond fund. Technically inflation is growing at a faster rate than the return on the bond fund I am invested in, but because of the company match for every $1000 I put in the company matches $1000, and the yield is 3% or so. I am not losing any money in actual dollars and compared to my counterparts who invested in stocks that have seen negative yields over the years even after the matching funds, and after the company match I am making about a 103% return on investment, this has got to be a win. Where my co-workers have seen declines in the total dollar value of their 401k, I have only seen gains in recent years (at one point I was more foolish and lost a lot of money trying to win at the rigged game of the stock market, you live and learn sometimes).

Here is what you need to know about mutual funds, almost none out perform the market over the long run. The manager of the fund always gets paid, even when the fund loses value. The stock market has reached a point where smart people have become very good at being vultures using its ups and down to get rich at other peoples expense and you are part of the “other people” group. I say no more than 25% of your saving should be in stocks, and that 25% should be in a fund like the vanguard 500 fund where they do very little active management and have a low expense ratio, forget about these supposed “experts” who suck, and forget about thinking you are the next Warren Buffett, if you are then you don't need my advice.

One last thing, NEVER, EVER, EVER, put all of your money into one stock. The co-worker that brought me to write this post had a large percentage of his 401k in the stock of the company we work for. This is the worst possible idea. If the company goes belly up or suffers some major downfall (think Enron) then you are not only out of a job, but your entire savings has been wiped out as well.

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