Hi Jeff, Without knowing the details of your financial picture, I cannot give you a specific suggestion. However, I have something better for you! There is an old saying, Give a man a fish, and you feed him for a day; show him how to catch fish, and you feed him for a lifetime. I am going to explain to you a new perspective or mindset on investing and show you how to start your investing process. I will start out with this statement! You cannot afford to leave money in a money market fund. The U.S. has an average inflation rate of 3.2% per year. [Inflation basically mean a continuous increase in the cost of living year-after-year]. For example, a stamp was 10 cents in 1975. Whats the cost of a First-Class stamp today? 49 cents .. thats about 400% increase! So if you leave your money in a money market fund (which generates essentially 0% return for the last few years) ... you will be losing 3% every year! If you do nothing for an entire decade, you will be down by more than 30% at year 10! In other words, if you have been diligently saving over $50,000 in your account and putting them in a money market fund ... that $50,000 is only worth about $35,000 in real money 10 years later ... thats a loss of $15,000! As a result, you need to target an average return of at least 3% to just maintain the value of your hard earned money! Of course, you we are expecting and demanding for more ... the key of building wealth is let your money work hard for you! Then, I have a good news for you! S&P 500 Index has an annual return of ~9.22% over the last 20-years, which is more than enough to cover the inflation and provides you a decent growth! Now here comes the bad news! The average stock fund investor only earns approx. 5% per year over the same period ... perhaps, you will ask .. What happened? I will explain to you now! There are probably 3 main factors: First one -- High fund fees. Active managed funds have an average expense of 1.5% per year. You might think that it is only 1.5%. However, you have to realize this. You are paying this 1.5% each and every year regardless your investment makes money or not ... Basically, if your investment goes up 3% this year (matches the inflation rate .. good news!), you still need to pay 1.5% or one-half of your total return to the manager. Why wouldnt you know about this? Simply, they only show you whats left to you ... you are never made aware that you are actually paying them 50% of your entire return! In a different scenario, if a 2008 type of event comes and your investment drops by 30% ... you still have to pay the same 1.5%. Does this sound fair to you? I have a real life scenario for you! You can read it at my website. waytomodernwealth/2014/08/09/i-just-made-a-disabled-flight-attendant-1950-in-just-10-minutes-and-heres-how-you-can-do-the-same/ Hint: 90% of active managed fund cannot beat a simple S&P 500 Index fund over a 10-year period ... which ironically, Vanguard S&P 500 Index fund only has an annual expense of ~0.20% which is about 87% lower than a typical active fund! Second one -- income taxes. Average middle-income family pays approx. 20% in federal income tax alone. If you invest in a typical brokerage account, you or your stock broker probably trades individual stocks consistently. Each time, you make money ... 20% goes to the government! How to minimize your income tax is crucial to your financial future. Third one (the most critical one) --it is YOU! Historically, individuals have been notoriously jumping in and out of the market ... at the exact WRONG TIME due to fear and greed! It is extremely important to understand your own investing style and preference. The key is to become an informed investor by expanding your comfort zone and learning about the history of investment (real world finance, what I will call) ... basically, what actually worked or did not work. Of course, nothing beats real life experience either good or bad ... the key is to learn and apply the lesson from it! True wisdom comes from experience. Now I have set the fundamentals for you. Lets get our hands dirty! I am going to show you how to start investing your 401k account! Lets first take care of the three enemies to our financial freedom (inflation, fund expense, and income tax). Inflation - you have to make your money work hard for you! Investing in equity market consistently outpaces the average inflation rate. You cannot afford to stay out of the market. Fund Expenses -- go with a simple S&P 500 Index type of funds in your 401K plan. If you read through the list of investment options, you should find one and make sure that the expense ratio is below 0.50%! Income Taxes -- congratulation! You have made contribution to your 401K. Thats a very smart move. Now is the time to make the money work hard for you! So here are some idea to get started! 1. Start small and slow -- start to invest 5 to 10% of your 401K into a S&P 500 Index fund. You just want to get the ball rolling and test your comfort level. You can then slowly increase the exposure to the market over time ... In the coming months, we will talk more on how to create a suitable investment portfolio at Way to Modern Wealth. 2. Learn about the investment history and expand your financial vocabulary. Learning the language is always the first step in acquiring a new knowledge. You can visit waytomodernwealth and click on Financial Term Made Easy section to get started. A great book on this subject is Against the Gods: The Remarkable Story of Risk by Peter Bernstein if you are interested ... Hopefully, you find your answer and value from my over-sized response! P.S. Way to Modern Wealth is a place to share and educate ideas on building personal wealth! We are not functioning as your investment, tax, or legal advisor! For specific advice to your unique situation, you should consult with professionals.
Posted on: Sat, 06 Dec 2014 00:38:49 +0000
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