Posts tagged with: Personal Finance

Most 401(k) plans contain a variety of fund choices, so it can be hard to decide which ones to put your money into.  In this episode, I explain the best way to evaluate funds, separating the winners from the losers.  I also give my recommended asset allocations for the remainder of 2017, based on where we stand as of May.

 

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Section 1: Stock Funds

  • Domestic vs. international
  • Market cap (small/mid, or large)
  • Growth vs. value
  • Active vs. passive
  • Expense ratios

Section 2: Bond Funds & Fixed Income

  • Treasury bond funds
  • Corporate bond funds
  • Mixed bond funds
  • Bond fund duration: long-term, intermediate-term, short-term
  • Active vs. passive
  • Stable value funds
  • Money market funds

Section 3: Target Date Funds

  • How they work
  • Dangerously simple, and simply dangerous

Section 4: Alternative Funds

  • Commodities
  • Real estate
  • “Real value” funds
  • Should you invest in these?  When?

Section 5: My Target Long-Term Asset Allocation



Resources

401(k) statistics from the ICI

 

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If you’re totally new to self-directed investing, or you’re expanding beyond basic retirement accounts, now may be a good time to open a new account.  Here’s what you need to know to get started, including: where to go, how much to deposit, position sizing, and some investment ideas.

 

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Section 1: The Brokers I Currently Recommend


Section 2: Opening an Account


Section 3: Trading Ideas


Resources

Intro music by audionautix.com

 

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Wise investors know that it’s a good thing to keep a portion of assets in cash-equivalents at all times, but do we really have to settle for paltry interest rates like 0.01%?  Absolutely not.  In this episode, I teach you how to put your cash to work without taking too much risk.  With interest rates at historically low levels worldwide, you’ve got to work a little harder than usual to get a decent return and stay ahead of inflation.

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Section 1: Why You Should Never Be 100% Invested in the Markets

  • Cash-equivalent assets serve many purposes:
    • Emergency funds
    • Saving for big purchases
    • Taking advantage of buying opportunities in the market
    • Protecting against bouts of deflation in financial assets, ala 2008-2010
    • Avoiding costly margin debt
    • Reducing risk level of the portfolio
  • Three “buckets” of cash:
    • Emergency Cash
    • Structural Cash
    • Tactical Cash
  • The best way to deploy that cash?  It’s different for each bucket.

Section 2: What’s the Right Amount of Cash to Hold?

  • It’s different for every individual
  • Factors to consider:
    • Personal balance sheet
    • Are you primarily a: short-term trader, intermediate-term trader, or long-term investor?
  • My baseline suggestions for the three “buckets” of cash

Section 3: Emergency Cash

  • Top Priorities: Safety and Liquidity
  • Interest?  Forget about it!

Section 4: Structural Cash

  • Stable value funds in an employer-sponsored retirement account like a 401(k), 403(b), or TSA
  • Build a laddered portfolio of certificates of deposit (CDs) or corporate bonds
  • There’s a right way and a wrong way to do this!

Section 5: Tactical Cash

  • Higher liquidity and yields, but you can lose a portion of your principal in a downturn
  • Short-term bond ETFs and mutual funds
  • Some of my favorite funds for tactical cash

 

Resources

Bankrate Safe and Sound Ratings

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The mainstream advice on using 401(k), 403(b), IRA, and Roth IRA accounts to build wealth is flat-out wrong if you want to retire early or achieve financial independence.  I talk through the reasons why you should limit your use of these types of accounts if you want to achieve better results than ordinary investors do.  I also explain the limited exceptions to my advice on retirement accounts.

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Section 1: Background

  • Strengths and weakness of retirement accounts
  • Annual contribution limits

Section 2: The Uncomfortable Truth: They Own Your Money

  • Never forget: Taking control of your own money puts you on the path to financial freedom
  • Mandatory contribution schemes – it’ll happen sooner than you think
  • Politicians are always thinking of ways to put themselves between you and your money

Section 3: It’s Better to Pay off Debt First, Including Your House

  • Most investors don’t achieve a high enough return in retirement accounts to beat what they’re paying on debt
  • There are plenty of very good reasons to rent – Just be aware that if you’re renting, you’re paying your landlord’s debt, and the balance isn’t dropping
  • A prolonged period of low returns is coming – or something much worse

Section 4: Max Out Your Health Savings Account First

  • If you have a qualifying high deductible health plan (HDHP), you are eligible to contribute to a Health Savings Account (HSA)
  • Limits and conditions
  • If spent on qualifying expenses, the money will never be taxed.  That’s never, not ever!

Section 5: A Better Way

  • Contribute enough to your 401(k) to get the employer match, not a penny more
  • If not covered by a 401(k), 403(b), or 457 plan, contribute $5,500/year to an IRA instead
    • If you are covered, only contribute if you don’t already have an IRA or Roth IRA yet
    • There are limited circumstances that let you take penalty-free withdrawals
  • Be an active investor
  • Build a truly diversified portfolio
  • Develop a business, or invest in someone else’s quality business
  • Invest in real assets that produce cash flows

Section 6: Exceptions

  • You are certain you will be in a lower tax bracket for a period of time, starting soon
  • Your company has excellent fund options in its 401(k)
  • You are already doing all the things listed above, have a high income with extra money to spare, and understand all the downsides of traditional retirement plans
  • You plan to work until you drop
  • You hate investing, and will accept mediocre to poor returns just to not have to think about your money

 

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(Part 3 of ten-part series on Financial Truths)

 

Section 1: Why You Must Not Trade Until You Can Set Aside $15,000

Section 2: Constructing a Personal Balance Sheet

Section 3: Figuring Out How Much You Can Afford to Risk

Section 4: Your Road to $15K

Section 5: How to Develop Your Trading Skills While on the Road to $15K

 

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Section 1: Why You Must Not Trade Until You Can Set Aside $15,000

  • It’s way too tempting to use leverage
    • Many exchanges require as little as $2,000 to set up a new margin account.
    • Margin debt carries an interest rate almost as high as credit card debt.  E-Trade: 9.25% on balances below $10,000
    • Buying options?  This is another form of leverage, and often even more expensive than margin.  With more capital, you can sell options instead.
    • Futures have MASSIVE leverage: e.g. 18-to-1 for crude oil on the CME – you’ll blow up your account unless you’ve got a long track record of successful trading, either in a real money or paper account
  • Commissions and fees will eat you alive

 

Section 2: Constructing a Personal Balance Sheet

  • Assets
    • Bank accounts, investments, retirement accounts, businesses, home equity, vehicles, other property, etc.
    • Contra-Assets (reduction to assets): Example – taxes on tax-deferred retirement accounts, like 401(k) and IRA accounts.  Could be as much as 30% or more depending on tax rates when you retire
  • Liabilities
    • Home mortgage, auto loans, student loans, credit card debt, business debt, medical debt, personal loans, etc.
  • Net Worth = Assets – Liabilities

 

Section 3: Figuring Out How Much You Can Afford to Risk

  • Establish an emergency fund
    • Think of a scenario that would be devastating for you financially (but nothing far-fetched/crazy like the end of the world!).  For example, being out of work for 6 months and your family facing $3,000 of extra medical bills during the same time period
    • Account for ALL costs you’d face, including staying current on debt
  • Don’t plan to rely on outside sources of funding like credit cards, cash advances, personal loans, etc.
  • Consider going further – perhaps a 12-month emergency fund, or keeping a year’s worth of mortgage payments or rent set aside on top of a 6-month emergency fund
  • Keep all emergency funds safely invested in cash-equivalents
  • If you’ve got $15K left over to deposit, then go forward.  But be sure to establish a risk management plan and limits in advance.  I introduced this topic in Episode 2.
    • What is a “significant loss” to you?  10%?  20%?  Don’t mind if you lose it all?
    • Over what timeframe?
    • How often can you accept this loss?  1 in 10, 20, 30 years?  Or more often?  To determine this, imagine that loss occurred just now.  Think about what you would do.  A big reaction, like selling lots of assets or closing an account – or small reaction, just watch things a little more closely?

 

Section 4: Your Road to $15K

 

Section 5: How to Develop Your Trading Skills While on the Road to $15K

  • Absorb knowledge
  • Follow the financial news for 15 minutes a day: Start with Reuters
  • “Paper trade”, but pretend the numbers are real – celebrate wins, feel the pain of losses

 

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