Investment Advice From Y'all...
I received quite a few comments on my last post regarding my freaking out about losing $100+ on my Roth IRA and mutual fund investments. Thanks to goldnsilver, enoughwealth@yahoo.com, glenn, savingdiva, wanda, and hazygrey (and "anonymous") for your words of wisdom. Here are some highlights from the comments, and my responses...
hazygrey said...
"This is your IRA - you shouldn't be pulling out money for 40 years. Don't worry about it and leave it for now. I know it's easier said than done. Also remember that there have been double digit gains in the stock market for several years now, and a correction or crash could happen soon. When that happens, don't panic and don't touch the money!"
response: I'm less concerned about my Roth IRA and more concerned about my mutual fund investment. I'm terribly confused about what I should be investing in with my "extra" savings right now. I have $12,000+ tied up in average-rate CDs, which I consider my stable, low-risk investment. Then I decided to be somewhat(?) risky and put $4,500 into the Vanguard Mid Cap Growth Index Fund. While the thought of losing that $4,500 isn't exactly one of a happy sentiment, I could deal with losing the money. I don't want to lose the money. That $4,500 might be a long term investment. I'm only 23 now, so I'm hoping I'll make enough money in the coming years to keep at least $5000 away in a long-term, non-IRA investment account. But I also would like to save for a house and/or grad school. I'm not sure if that's a year out or ten years out. My life is rather in flux right now. Therefore it's hard to plan financially. My Roth IRA is fine. It's in the 2050 retirement account for a reason. I don't plan on touching it until then.
Wanda said...
Don't look at your investments every day or even every couple of weeks. Unless you are a day trader, there's no reason to. ...If a 2050 fund & a mid-cap makes you sick at night, then it's not the investment for you. Like goldnsilver said, pick something that pass the stomach test. Pick something with 20% bonds. You'll have less risk (of losing your money), but you'll be giving up the rewards (or potentially larger returns).
So what's the difference between "bonds," "money market funds," and "CDs." I get the index fund versus stock thing, but beyond that I'm lost. Is a CD a bond?
Anonymous said...
How much do need the money in the other [non roth] account? Were you depending on a quick gain to pay the rent this month? If not, give it atleast a year. These are supposed to be long term investments, not quick capital gains.
I'll gladly leave my money in the mutual fund account for a year or more. I just don't want to be losing $100 a week on this account. I guess that's unlikely, but looking at the performance thus far I'm just a tad bit nervous.
SavingDiva said...
I understand your frustruation with your loss. I don't like to lose any money. I've had to stop checking my retirement accounts every day because of market fluctuations causing fluctuations in my blood pressure! :)
Thanks for understanding. I probably should stop checking my accounts every day as well. I'm sure I'll be fine once my account starts to grow past my initial investment. It's just now I'm down $100. And that's not a good feeling.
Glenn said...
Take a step back and look at the big picture. If you are young and you will not need the funds for over 10 years don’t panic. You will be adding to your investments over time. If they funds are still lower when you make your next investment, you will be buying the same companies at a lower price. When you go shopping would you rather buy the same product at a lower price or a higher price? The same goes for mutual funds and stocks.
Good points indeed. As I noted above, my Roth IRA fund is for 2050. But the mutual fund account could be needed sooner. In 10 years I'll be 33 years old. I have absolutely no idea what my life will look like at 33. Maybe I'll already have kids. Maybe I'll have decided kids aren't for me. It's just so hard to plan when I can't figure out when I'm going to need this money. I'd like to invest so I can obtain enough cash for grad school in a few years. Or at least so I don't have to take out tons of loans, I really like the idea of paying up front for as much as possible. But it's also likely that I'll never go to grad school. How can I plan my finances based on a life I've yet to figure out?
enoughwealth@yahoo.com said...
If a drop of more than 10% would make you feel like liquidating your investment, then your current asset allocation doesn't match your risk tolerance. --- Enough Wealth
I'm not going to liquidate my investment, I'm just not all that comfortable with the idea of losing my money. But I doubt anyone is really comfortable with losing cash when it comes to investing. I mean, sure some people are more risk averse than others, but the way I see it is I'm young now and I have time for my cash to recover if the market gets wonky. If anyone should be making risky investments, it's people like me who are young with no debt. Right? I know I can survive without that $4,500. But it sure would be a shame to lose it.
GoldnSilver said...
Market fluctuation is normal. It has only been 2 weeks. Generally if you are investing for the long term, the advice is not to check your balance everyday. However, people have different habits, no one can make you do or not do something. Compare your funds to its peers or industry benchmark, that's how you can judge your funds performance. That being said, if you are risk adverse, (seeing a drop with turn your stomach upside down). CD or bond funds are not bad options. So many people focus on time horizion...if you are young you should invest more agressively. There's truth to it. However, just as important, one should know one's risk tolerance. There are many investment/savings vehicles out in the market place that can help achieve your goals. Pick one that you can stomach.
You know, I've never been a gambler. Maybe that's because I'm female. Maybe that's because I was raised by a risk adverse family. But I don't want to be dumb about it. If lots of people invest in somewhat risky mutual funds, they can't all be "wrong." Not that there's really a "wrong" in index fund investing, but, I mean, it's not like I'm rushing to trade individual stocks.
9 comments:
I'm about to start contributing to retirement funds too... its so stressful!!
A cd is not a bond. I think you would probably be more comfortable investing if you spent a bit of time reading up so you more or less know what you are doing with your money and whether what you are doing with it is likely to accomplish your goals. I like "The Only Investment Guide You'll Ever Need" by Andrew Tobias for a basic overview of the fundamentals; your local library might have a copy. You might also benefit from the free online personal finance course offered by UC-Irvine at http://ocw.uci.edu/courses/AR0102092/ and the basic information on a wide variety of finance topics found at http://money.aol.com/basics/index
Please keep asking questions and seeking out answers when you don't understand things; it isn't nearly as overwhelming once you grasp a few basics.
I'd suggest you pick up a copy of Suze Orman's Money Book for the Young, Broke & Fabulous .. there's a pretty easy-to-read and basic investing chapter in there.
Basically, there are 3 major asset classes: CASH (CD's, savings accounts, money market accounts, etc.), BONDS also known as fixed income (money you loan out to companies or government in exchange for a fixed rate of return), and STOCKS also known as equity (money you use to purchase a stake in a company, i.e. if you purchase a share of Disney, you are now an "owner" of Disney and have a claim on Disney's profits).
There are 2 main risks when it comes to investing: 1. risk of losing the principal (i.e. money you invested), and 2. risk of money not keeping up with inflation (i.e. your money is worth less and less as time goes on).
Cash is the "safest" investment in the sense that you will not lose the principal. Bond is the second safest, and stock is the most risky. In terms of long-term wealth building, however, stocks is the most effective because of the higher rate of return.
Your ASSET ALLOCATION is the percentage of your portfolio (or all the money you have to invest) in cash, bond, or stock. Adding cash & bond to your AA lowers the volitality, but also lowers the return in the long run. I currently have a 90% stock, 10% bond, 0% cash position.
When you purchase a share in a mutual fund, you are in effect purchase a portion of all the companies that is included in the fund. For example, if you invested in the SP500 fund, you are essentially buying a piece of all the companies that comprise of the SP500 (the 500 biggest corporations in the US).
What a mutual fund does for small investors is that it allows them to DIVERSIFY more easily than investing in individual stocks. Therefore the diversification lowers your risk of losing all your money. (When Disney is doing poorly, Johnson&Johnson might be doing well).
Mutual funds DO NOT, however, lower the risk of the individual companies themselves. For example, if you own ExxonMobil in a SP500 fund, and ExxonMobil drops 50%, that will impact your SP500 fund share prices. The difference is that because you are holding many companies OTHER THAN ExxonMobil, your share price probably wouldn't drop by 50%.(It might even go up depending on the other companies' performance).
Hopefully this gives you a little bit more of an idea on where to start. Good luck!
The Suze Orman book "young, fabulous and broke" is a great resource and a very easy read. I skimmed through most of the stuff and just read what was relevant. her only downside - she assumes ALL young people start out making low salaries (20-30K) and have piles of debt. Not sure for your case. But her book has a glossary.
I also read "the automatic millionaire," for more basic tips.
Bonds are not necessarily for young people in their 20s. they have low returns because it's a loan to a govt or entity at a FIXED rate of return. and those rates are terrible ... lower than high-yield savings accounts.
One of my favorite sites to read is www.investopedia.com to look up the glossary and terms.
On the volatility I came across this great post from another blogger:
http://moneyning.com/investing/be-bold-in-investing-like-my-boss/
Hope that helps!
I was the same way when I started investing.(many years ago) You have to fight human nature which is to feel good and add money to your mutual fund when prices are high then sell or cash out when prices are low. I agree with the comment that said you should ignore your account on a daily basis and think long term. I've been adding to my index and retirement funds since the market began to stumble a couple of weeks ago. This is money I was holding on to when the indexes were setting record highs.
In addition to what other commenters had already mentioned. There are many online resources you can check out. Fidelity/Vanguard or any respectable money management firm with have an investor education section. A good starting point to understand your different investment options.
I strongly advise against purchasing an investment without understanding what it is and how it fits with your financial goals. It will take you some time to look and digest all the information, but I think this is what a prudent investor should do.
If you have time, check out my blog, I just recently wrote a post on some tips on creating a invest. portfolio, maybe it'll be helpful to you.
I guess I didn't pay enough attention when reading your original post, so I was only considering your Roth IRA. If you are a risk averse investor and your investments are for the short - medium term (say 3 to 10 years) then your portfolio should reflect that, for example, by including high proportions of bonds and money market funds. Money market funds are very liquid and low risk. Bonds often move separately from stocks so are good to balance out the ups and downs of equity. But before you make any changes to your portfolio, you should definitely read a basic investment guide book as the other commenters recommended. I'm personally also a fan of Tobias.
Just a final thought - if you currently get "stressed" by fluctuations in the value of your investments BUT you want to develop more tolerance for such fluctuations (so you can continue to invest in high growth/high risk investments in the future) then perhaps it's actually a good thing to check your investment values each day. As long as you aren't panicked into selling out on a temporary dip in value, seeing the prices going up and down every day is a good way to get used to these normal fluctuations and eventually be able to view market dips as a buying opportunity (rather than sell) and booms as a time to rebalance (rather than get too greedy).
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