Author Topic: Investment advice in addition to 401k/Roth IRA?  (Read 6788 times)

ajmers

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Investment advice in addition to 401k/Roth IRA?
« on: May 02, 2013, 08:18:09 AM »
Hi everyone,
I'm trying to decide what steps I should take to invest the money that is currently sitting in a .75% interest Capital One savings account.
-I have a company 401k that matches 3.5% (the first 1% and half of the next 5%) which I am contributing 6% to just to optimize the match. 
-I also have a Roth IRA that I contribute about 2.5% to (nothing, I know). It was first funded in 2011.
- Finally, I also have 10% of my income deposited into a savings account which makes .75% interest. At this point I have about 5 months of living expenses' worth in that account, which I guess would be my 'emergency fund'.
- I would like to buy a house within the next few years.

I'm wondering what other investments I should consider, if any, other than just putting more money in the retirement accounts. I know I could withdraw contributions from the IRA at any time to make a downpayment on a house, so should I just continue to increase my contributions to those accounts, or consider privately investing in some Index funds with the emergency money?
« Last Edit: May 02, 2013, 08:48:03 AM by ajmers »

GreenGuava

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Re: Investment advice in addition to 401k/Roth IRA?
« Reply #1 on: May 02, 2013, 08:54:20 AM »
I'm wondering what other investments I should consider, if any, other than just putting more money in the retirement accounts. I know I could withdraw contributions from the IRA at any time to make a downpayment on a house, so should I just continue to increase my contributions to those accounts, or consider privately investing in some Index funds with the emergency money?

First things first:  your emergency fund is for emergencies.  Until your stash is sufficiently large, you need your emergency fund to stay liquid.  You also need to look up what an index fund is - it isn't some magic investment.  Putting some of your emergency funds in, say, a short-term bond index can be fine.  Putting them into a stock market index is a terrible idea due to the volatility.  Yes, you're only getting .75% on it now - a negative real return.  But the emergency fund is insurance and insurance is expensive.

Once your stash is larger, you can consider a smaller emergency fund.  Some people with sizable stashes don't bother with an emergency fund at all, or only keep a month or two in cash total (as cash is a low-return asset).  But they have less of a need of emergency insurance than those of us who aren't there yet do.

The only other thing I can think of for it is that if you aren't maxing out your Roth IRA, you can put some emergency funds in a money market in said Roth IRA.  That way, you can withdraw it if necessary, but if you are able to replenish it from future savings, you haven't lost the tax-advantaged space.  If you do withdraw and use it, you haven't lost anything.  If you go this route, once you replenish your emergency fund from income, you can move the fraction in the Roth IRA from money market to whatever investment you're using.

Now, start allocating your savings.  When do you think you'll buy that house? 3 years?  5 years?  How big of a down payment will you need, and what are you doing to get there?  Depending, you might want to consider a bond fund that has a duration based on how long you think it will be before you get the house.  It's a little more volatile than a savings account, but might have higher returns.

ajmers

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Re: Investment advice in addition to 401k/Roth IRA?
« Reply #2 on: May 02, 2013, 09:40:38 AM »
Thanks GreenGuava.... that's a great starting point!

aj_yooper

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Re: Investment advice in addition to 401k/Roth IRA?
« Reply #3 on: May 05, 2013, 05:17:26 PM »
You are saving 18.5% (6+2.5+10) of your gross salary pretty much on autopilot.  Way good!  And your emergency fund is at 5 months.  I think six months of expenses would be fine.  Emergency money is just cash; at this point for you, keep it away from your checking account, but close by, like in a companion account at your bank.  Don't worry if it is not growing; these employee$ help keep you safe.  The employee$ in the 401K and Roth work on longer term gains.  But they need good directions from you.

Green Guava nails it on retirement accounts!  Remember to use low cost firms, like Vanguard, for a Roth or an investment account.  Go to their website and take some of their questionnaires and find out what type of investor you are.  Read investment books, like: 
Burton Malkiel, The Random Walk Guide to Investing, Taylor Larimore, et. al., The Bogleheads’ Guide to Investing, Andrew Tobias, The Only Investment Guide You’ll Ever Need, Thomas Stanley and William Danko, The Millionaire Next Door.  Stay away from the big firms, like Morgan Stanley, the bank brokers, insurance companies, and certainly, stay away from someone who comes to your home for your non-401K vehicles. 

I would fill the 401K before doing a Roth because it decreases your taxes at the highest marginal rate that you pay. That really helps in the long run.

Buying a house is nice; we have one, but remember, it is a housing expense which could be a wealth builder or a cash guzzler.  Bigchrisb writes about houses:   "My view is that my "home" should have the lowest operating cost that I'm prepared to live with.  I don't actually care if that is made up of  rent, interest, imputed rent of the opportunity cost of capital, or other outgoings such as land tax, HOA dues or rates.  I guess I view the cost of housing very much on the "consumption" side of my cash flow, rather than the "asset" side of my balance sheet.

As for what proportion of net worth should be property per-se, well that's an asset allocation question.  My personal view is 10-15% of net worth, between principal place of residence, investment residential property or commercial property/REITS. However I realise that for many, this is a mismatch against the aspirations people have for their home." 

And some thoughts.  A residence/property with a mortgage is a leveraged investment which may have significant upside and downside potential that legally requires consistent input of cash- principal, interest, taxes, HOAs, insurance, fees, and maintenance.  In the US real estate is bundled with education and other local services. Because a mortgage is a leveraged instrument, risks and benefits are magnified.  A 40% decline in home value, means, at least, a doubling of loss at liquidation, assuming an 80% loan, and conversely.  For me, this suggests a lower asset allocation to real estate if it is leveraged. 

Freeyourchains

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Re: Investment advice in addition to 401k/Roth IRA?
« Reply #4 on: May 06, 2013, 07:49:01 AM »
I'm wondering what other investments I should consider, if any, other than just putting more money in the retirement accounts. I know I could withdraw contributions from the IRA at any time to make a downpayment on a house, so should I just continue to increase my contributions to those accounts, or consider privately investing in some Index funds with the emergency money?

First things first:  your emergency fund is for emergencies.  Until your stash is sufficiently large, you need your emergency fund to stay liquid.  You also need to look up what an index fund is - it isn't some magic investment.  Putting some of your emergency funds in, say, a short-term bond index can be fine.  Putting them into a stock market index is a terrible idea due to the volatility.  Yes, you're only getting .75% on it now - a negative real return.  But the emergency fund is insurance and insurance is expensive.

Once your stash is larger, you can consider a smaller emergency fund.  Some people with sizable stashes don't bother with an emergency fund at all, or only keep a month or two in cash total (as cash is a low-return asset).  But they have less of a need of emergency insurance than those of us who aren't there yet do.

The only other thing I can think of for it is that if you aren't maxing out your Roth IRA, you can put some emergency funds in a money market in said Roth IRA.  That way, you can withdraw it if necessary, but if you are able to replenish it from future savings, you haven't lost the tax-advantaged space.  If you do withdraw and use it, you haven't lost anything.  If you go this route, once you replenish your emergency fund from income, you can move the fraction in the Roth IRA from money market to whatever investment you're using.

Now, start allocating your savings.  When do you think you'll buy that house? 3 years?  5 years?  How big of a down payment will you need, and what are you doing to get there?  Depending, you might want to consider a bond fund that has a duration based on how long you think it will be before you get the house.  It's a little more volatile than a savings account, but might have higher returns.

The above is the only advice you'll find on the "investor alley" forums on MMM's website.

Even though MMM recommends rentals, dividend growth investments, etc.

ajmers

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Re: Investment advice in addition to 401k/Roth IRA?
« Reply #5 on: May 06, 2013, 08:27:55 AM »
Things are still a bit hazy on the house-buying front. I am looking for a career change that would be more satisfying and lucrative - in any case I don't intend on staying at my current job. All of which obviously affects my home-location choice. The job I am waiting to hear from would be a 5.5-mile, easy bike ride on a paved bike trail OR one stop on the regional rail line, so it would also be a giant improvement over my current 8-mile, 40-minute drive through a dangerous area. Yay mustachianism!

At this point, my rent is so low (10% of gross income) and my living situation is great, so I'm just biding my time to build up as big a savings as possible for a down payment when I figure it out.

My Roth 401k and Roth IRA are through American Funds. Our company's financial adviser told us that he prefers them because of their low overhead and fees, but I was new to saving and investing and a stranger to Mustachianism when I started these. I need to look into what  I am actually losing to them in expenses.

GreenGuava

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Re: Investment advice in addition to 401k/Roth IRA?
« Reply #6 on: May 07, 2013, 09:57:35 PM »
First things first, don't buy a house (or condo, or any other form of livable property) unless you want to live there and intend to do so for quite some time - five years at the minimum

My Roth 401k and Roth IRA are through American Funds. Our company's financial adviser told us that he prefers them because of their low overhead and fees, but I was new to saving and investing and a stranger to Mustachianism when I started these. I need to look into what  I am actually losing to them in expenses.

The 401(k) you have no choice in the matter, other than selecting the least bad funds in it.  My current employer's 401(k) is through American Funds, too, although our fiduciary was able to get a few Vanguard funds in there.

Your Roth IRA does not have to be at the same company;  most American Funds things I looked into charge front-end loads (waived in the 401(k), probably not in the IRA).  That alone is reason enough to avoid them.  If you're paying anything as a "load", or anything 12b-1, or any fund with an expense ratio above .2%, consider moving it in-kind to Vanguard (do NOT withdraw and move it yourself - ask Vanguard to walk you through it).

Once you know what you're paying in expenses, we can look at the two combined and do some asset allocation for you.


The above is the only advice you'll find on the "investor alley" forums on MMM's website.

Even though MMM recommends rentals, dividend growth investments, etc.

I realize you're probably trolling (as you've done on many retirement investing threads in the past), but just in case ajmers sees this and thinks it might be accurate:  I don't think MMM - or anyone else - recommends rentals unless the person handling it would like to be a landlord.  The usual problems with being a landlord - having to fix things, for example - are hobbies of MMM's;  accordingly, he is a good candidate to be a landlord.  IIRC, he didn't set out to be one at first, either - isn't the house he rents out a former residence of his?

I don't think he stands by dividend growth investing after the fiasco from the guest writers on that issue.  While we're at it, it's also an inappropriate method for people who don't have the desire or time to be active investors (ignoring whether dividend growth investing is even a good idea if you have the desire and time).

ajmers

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Re: Investment advice in addition to 401k/Roth IRA?
« Reply #7 on: May 16, 2013, 12:14:18 PM »
Thanks Guava!

Yikes. According to the website, in my current Roth IRA portfolio, I have:
Bond Fund of America (42% of total value) - expense ratio .60%
Capital World Growth and Income Fund (28%) - expense ratio .82%
SMALLCAP World Fund® (growth fund) (29%) - expense ratio 1.14%.

Now I understand why our financial adviser is so charming and pleasant - so we feel bad taking our money away from his accounts!