Wednesday, February 29, 2012

And Now for Something Completely Different: Investing!

Update. (below)

I don't pretend to know a lot about investing, even though my own personal view is that I'm good at it. Or lucky, or a bit of both. If I've made some good decisions about where to put my money, it might have been driven by the fact that I was, for thirteen years, from 1996 to 2009, a weekly tech columnist. Always in search of new stories, I discovered online trading quite a bit ahead of the curve. I began trading stocks on the Internet when TD Ameritrade was called eBroker. Anyone remember that?

I also discovered early that I could buy into mutual funds online and even set up my own IRAs. But enough of my credentials. I maintain that I'm not an expert investor, but I'd rather do it myself than pay some suit to do it for me, a tendency that has led me to do all my own plumbing, electrical work, remodeling, car repairs, cooking, etc. since I enter adulthood a zillion years ago. I'm not a control freak, just someone who can take care of himself and save some bucks. Study a bit, do the best you can, and know when you're outnumbered. The Internet was invented for people  like me. Love the inner tubes!

I don't know what it's like having a 401(k), since I was a teacher in my late career, with money set aside for a pension. I did have 403(b) and 457(b) options, which I highly recommend to any teachers out there. Find yourself a tax-deferred annuity and fund it as close to the maximum you can afford. At retirement, you can roll 457s straight into rollover IRAs. My 403(b) will take up to six years to roll over. I was a little misled on the accessibility of that one, but it's mainly a waiting game to avoid early-withdrawal penalties.

Anyway, use annuities to defer taxes just as you should use IRAs to do the same thing, while also taking the IRA contributions deduction. Lower income folks should slip taxed money into Roth IRAs because they don't have as much taxable income to protect, but I could never see the value of paying tax before its time if you've got taxable income you can shelter. Now that I'm retired (less than a year ago), my income is WAY down, so distributing a little money in dribs and drabs has me paying less taxes than I would have twenty years ago. At least that's the theory until I hit 70 1/2 when minimum distribution requirements might force more taxable withdrawals.

It might seem that I've gotten off-topic, but actually this is the order in which you should approach investing. First, take advantage of setting up retirement accounts that defer taxes, as above. Second (or actually maybe first), pay off debt. This is huge. Don't carry credit-card debt or car loans while your savings in the bank are paying .5 percent interest. It's useless. I can't speak for the people barely hanging on after getting laid off -- too terrible to contemplate that pain! -- but if you're employed, can have a decent lifestyle, and can build for the future, don't finance an extra lifestyle boost with credit. More than one friend of mine used home-equity loans to pay for his pre-housing-bubble lifestyle only to find his home under water when it didn't have to be. So, please, save up and then go to Cancun.

Then, if you still have money to invest, the first step is to determine your risk/reward quotient. When you're young, risk is okay because you can often ride out the bumpy stretches. Later, go for more prudent investing. A good rule of thumb is more stocks early, more bonds later. Also, you need to decide the amount of work you want to do before making investment decisions.

I don't have the quotes handy, but over the years I've learned that the best investors only invest in what they can understand. Warren Buffett lives by this rule and has done quite well. In my case, as a tech writer, I felt safe in tech investments and even survived the tech bubble intact (more or less). If you don't have much personal confidence or time for research, just go to one of the great fund families and buy stock index funds. I like Vanguard. But Fidelity, SPDRs, and other low-cost fund families have a lot of options.

The Vanguard 500 Index Fund or Fidelity's equivalent, the Spartan 500 Index Fund, are good choices for stocks. Vanguard has a number of choices that automatically diversify, like their All-in-one funds or their core funds. They have newer products that have goals based on your probable retirement date, called Target Retirement Funds. They all look like they'd do the trick.

My approach, because I've taken it recently, has been to go for a few all-stock funds with high yields or dividends, such as the Vanguard Dividend Growth Fund and Vanguard Equity Income Fund. I've also grabbed some balanced funds, like Vanguard's Wellesley and Wellington funds. And, because I want to be in bonds, I bought some high-yield, investment grade bond funds, tax-free California municipal bond funds, and even the Vanguard GMNA Bond Fund, which contains mortgage-backed securities guaranteed by the U.S. government. I also slipped in some world market equity funds, like Vanguard International Value Fund and Vanguard International Explorer Fund, even though they're a little riskier than I'd like. Obviously, as a retired person, I'm going for safer funds that provide an income stream from dividends and high yields, while adding a little risk because I can take it. I'm hoping for a longer time horizon! I've always been an optimist...

Another great product that I gotten into that might not be good right now is a fixed-interest-rate annuity. I locked in a 5.35% rate five years ago, and it'll flip over to a 3% rate in July, which is pretty good these days. You might look into a variable-rate annuity because nowadays interest rates have nowhere but up to go. I was also careful to lock myself in for only five years because I wanted access to the money in retirement. If you think you can afford a longer term for a better payout, go for it.

Finally, I've used TreasuryDirect to buy a particular kind of savings bond from the U.S. Treasury called an iBond. This is an inflation-protected bond that matures in 30 years but can be cashed out without penalty after five years. It's also tax-deferred and exempt from state tax. I've been earning an average of 5-6% on these bonds, and I'll be able to cash a third of them per year starting this year, though I'm letting them ride because it's some of my most secure and profitable investments. BTW, the underlying rate is set twice a year in May and November, which is your fixed rate based on the Consumer Price Index, and then the rate adjusts twice a year for the non-fixed rate, again based on the CPI. In the end, inflation can never devalue these bonds. You can buy these through most banks, but I like buying them online.

I still have my brokerage account, in fact a couple of them, where I trade equities. More about that in another post, except to say I'm not a day trader! Buy and hold is the way to go for the vast majority of us (that excludes only the brave and the stupid...).

Update. When I say I don't know a lot about investing, I'm not being completely honest. I know something about it and know how to avoid many of the pitfalls the individual investor is prey to. So, rather than go into a long explanation, all of the suggestions and guidelines I talk about above are based on what I do know about safe, effective investing. What makes me think I don't know as much as I would like to comes from reading The Big Picture, Barry Ritholtz's excellent blog, which is dedicated to macro influences on the micro events of the markets. Also, Paul Krugman's writings at his The Conscience of a Liberal at the Times or Brad DeLong's Grasping Reality with the Invisible Hand keep me informed of macro developments, as do all the economic blogs in my blogroll to the right. To me, there's no sense in investing without having some idea of where the national and world economies are going. I'm not saying you should time the market, but waiting eight months for an equity-based annuity to go up by 10 percent before rolling it over to your IRA because you highly suspect the economy is going to go up based on in-depth study of the macroeconomic environment going forward is what I call a smart move. Doesn't always work, but when it does, you're happy you bothered to figure out the likely trends. So study what the big boys and girls in economics are thinking. It's better than going to a hack financial adviser on Main Street. Meaning no offense, none taken, I presume.

1 comment:

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