investment http://www.wisebread.com/taxonomy/term/8847/all en-US If You Want Your 401K to Grow, Stop Doing These 6 Things http://www.wisebread.com/if-you-want-your-401k-to-grow-stop-doing-these-6-things <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/if-you-want-your-401k-to-grow-stop-doing-these-6-things" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/401k-savings-452996721-small.jpg" alt="401k savings" title="401k savings" class="imagecache imagecache-250w" width="250" height="156" /></a> </div> </div> </div> <p>Are you counting on your 401(k) to fund your dream retirement? If so, make sure you're not making the following common mistakes. By avoiding these pitfalls, you'll ensure that you end up with the most money possible. (See also: <a href="http://www.wisebread.com/optimize-your-ira-and-401k?ref=seealso">Optimize Your IRA and Your 401(k)</a>)</p> <h2>Stick to the Default Contribution Percentage</h2> <p>If your employer automatically enrolls you in your 401(k), that's a great thing. More employees usually end up participating in the plan than if they had to sign up on their own. Sticking to the default contribution rate, however, is not that good. The <a href="http://money.usnews.com/money/retirement/articles/2013/11/18/the-downside-of-401k-automatic-enrollment">average default contribution rate</a> for plans with automatic enrollment is just 3.4%.</p> <p>There are two reasons why this won't help your 401(k) grow.</p> <h3>1. Too Low to Earn the Full Employer Match</h3> <p>This may not be the amount that'll get you the full matching contribution from your employer. On average, most workers would need to contribute an average of 5.1% of pay to get the full match their employers are offering. The employer match is extra money your employer will give you for free, as long as you contribute your own money first. Since you're entitled to this money as part of your compensation package, it wouldn't be wise to pass it up.</p> <h3>2. Falls Short of the Contribution Limit</h3> <p>This may not be the amount that'll get you contributing up to the full <a href="http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---401%28k%29-and-Profit-Sharing-Plan-Contribution-Limits">IRS contribution limit</a>. The contribution limit is the most amount of money you can invest in a single year. And the more money you put in now, the more money you'll have later. In 2014, you can contribute a maximum of $17,500. If you're age 50 or over, this amount increases to $23,000.</p> <p>In order to contribute at the 3% rate and still reach the maximum of $17,500, you'd need to be making about $590,000 per year. So if your salary is less than that, find ways to contribute more than 3%. Because the more money you invest now, the more you'll have later.</p> <h2>Stick to the Default Fund Choice</h2> <p>If your employer automatically enrolls you in your 401(k), they may also choose the fund you're invested in. Sometimes, this isn't the best choice.</p> <p>Check to see if the default fund is either a money market or stable value fund. If it is, you may want to switch to another fund. These funds aren't designed to really grow your money. Instead, their purpose &mdash; as their name suggests &mdash; is simply to keep the value of your money stable.</p> <p>Better investment choices include stock and bond index funds. For more help on choosing the best fund, check out <a href="http://www.amazon.com/gp/product/0470067365/ref=as_li_tl?ie=UTF8&amp;camp=1789&amp;creative=390957&amp;creativeASIN=0470067365&amp;linkCode=as2&amp;tag=wisbre03-20&amp;linkId=V3ISWB6EAGPEJZLJ">The Bogleheads' Guide to Investing</a>.</p> <h2>Put Too Much Money in Your Company's Stock</h2> <p>Professionals recommend no more than 5% to 10% in a company's stock. And there's a good reason why.</p> <p>Remember what happened to Enron? Employees who put most of their retirement funds in their company stock not only lost their jobs &mdash; they also <a href="http://www.wsws.org/en/articles/2002/01/enro-j14.html">lost their retirement money</a>.</p> <p>Rather than investing most of your money in your company's stock, it's better to ensure that your money is properly diversified.</p> <h2>Borrow From Your 401(k)</h2> <p>The main reason not to do this is because if you take out a loan from your 401(k), then that money is no longer working towards your retirement needs. In other words, you lose the power of <a href="https://personal.vanguard.com/us/insights/saving-investing/power-of-compounding">compounding</a>.</p> <p>Also, if you leave your job, you'll generally be required to repay the loan balance <a href="https://guidance.fidelity.com/viewpoints-workplace/borrowing-from-your-retirement-sv">within 60 days</a>. If you don't, the unpaid balance is considered as defaulted. This means you'll need to pay a 10% penalty on top of owing income taxes on the defaulted amount if you are not at least age 59 &frac12;. (See also: <a href="http://www.wisebread.com/this-is-when-you-should-borrow-from-your-retirement-account?ref=seealso">This Is When You Should Borrow From Your Retirement Account</a>)</p> <h2>Cash Out If You Leave Your Job</h2> <p>By cashing out, you not only get taxed and penalized, but similar to borrowing, you also lose the earnings that money could have generated.</p> <p>Worst of all, you probably <a href="http://www.forbes.com/sites/fidelity/2014/04/17/the-risks-of-cashing-out-your-401k-early/">won't even get all of your money</a>: If you haven't reached age 59 &frac12;, your employer is required to withhold 20% for the IRS. On top of that, you'll need to pay a 10% early withdrawal penalty.</p> <p>So for every $1,000 you cash out, you would only receive about $700. The other $300 would go to the IRS.</p> <h2>Settle for High Fees</h2> <p>Most employees don't realize it, but there are costs associated with investing in your 401(k).</p> <p>These include fees to pay brokers, accountants, administrators, and fund managers just to name a few.</p> <p>How much can all of this add up to?</p> <p>In <a href="http://www.amazon.com/gp/product/0767929845/ref=as_li_tl?ie=UTF8&amp;camp=1789&amp;creative=390957&amp;creativeASIN=0767929845&amp;linkCode=as2&amp;tag=wisbre03-20&amp;linkId=27ZD3XFCFMBL4UQV">Fight For Your Money</a>, David Bach found that when you add in these fees and hidden charges, the average 401(k) plan actually costs employees between 3% and 3.5% of what they've got invested each year.</p> <p>So what should you do?</p> <p>Ask your company or 401(k) provider for a breakdown of the fees you're being charged. If they are much more than 3%, <a href="http://www.bogleheads.org/wiki/How_to_campaign_for_a_better_401%28k%29_plan">complain</a>.</p> <p>By ensuring that you don't make these mistakes, you'll increase your chances of building a nice, large nest egg for your retirement.</p> <p><em>Are you making any of these 401(k) mistakes? Any others we should be aware of? Please share in comments!</em></p> <a href="http://www.wisebread.com/if-you-want-your-401k-to-grow-stop-doing-these-6-things" class="sharethis-link" title="If You Want Your 401K to Grow, Stop Doing These 6 Things" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/darren-wu">Darren Wu</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Retirement 401(k) investment IRA retirement taxes Mon, 30 Jun 2014 09:00:05 +0000 Darren Wu 1150361 at http://www.wisebread.com A Lot of People Don't Understand What an Investment Really Is. Do You? http://www.wisebread.com/a-lot-of-people-dont-understand-what-an-investment-really-is-do-you <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/a-lot-of-people-dont-understand-what-an-investment-really-is-do-you" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/financial-planning-148173128-small.jpg" alt="investment" title="investment" class="imagecache imagecache-250w" width="250" height="151" /></a> </div> </div> </div> <p>We recently covered <a href="http://www.wisebread.com/a-lot-of-people-dont-understand-what-money-really-is-do-you">what money really is</a>, and how you can harness it to suit your needs. Now it's time to take a look at investing. What is an investment, exactly, and how can you make an investment strategy work for you?</p> <p>First, let's start with a definition. An investment is something bought with the expectation that it will rise in value or generate income, like stocks, bonds, real estate, or precious objects (I don't recommend the later, by the way). Let's start with rise in value.</p> <h2>An Investment Will Rise in Value</h2> <p>It's important to understand that the value of an investment is expected appreciate or rise in value over time. It's a tried and true sales technique to convince a buyer that what's being sold is an investment when really, it may not be. Here's the rule of thumb: If the item is expected to depreciate or lose value over time, it is a <a href="http://www.investopedia.com/terms/c/capitalexpenditure.asp">capital expenditure</a>, not an investment.</p> <p>That doesn't mean there aren't useful reasons to buy an expensive suit, a new car, or updated kitchen appliances. Those types of purchases will lose value over time, but they make life enjoyable or could even enhance a professional reputation (because in some industries clothes really do make the man). However, a buyer should know if they're purchasing with the intent to make money in the long run, or if they're splurging because they want to enjoy the utility of the item.</p> <p>Examples of investments that one could expect to rise in value over time include corporate stocks, mutual funds, real estate, and precious objects like art, jewels, or collectibles.</p> <h2>An Investment May Also Generate Income</h2> <p>Sometimes an investor is less interested in the capital appreciation of an investment and more concerned with the <em>income</em> potential it can provide. That doesn't mean that income generating investments won't rise in value over time (the most attractive investments do both).</p> <p>Examples of income generating investments include corporate stocks that offer a dividend payment, bonds (corporate, government, or municipal), and real estate bought for rental income.</p> <p>Most important, though, is how you can use an investment strategy to get what you want out of life, or to get where you want to go. Here's how to use an investment strategy to build the life of your dreams.</p> <h2>1. Determine Your Goals</h2> <p>When it comes to investing, it's easy to put the cart before the horse. Many people start an investment plan without stopping first to think about why they're putting their money away in the first place. Knowing what you want can help you develop focus and focus leads to increased productivity and drive.</p> <p>When many people think about setting up a savings and investment strategy, they focus on all the ways they'll have to deprive themselves to reach their goals. Sure, you may give up some small luxuries along the way but a look at the bigger picture can be truly liberating. Saving and investing can help you achieve your long term goals and give you the <a href="http://www.wisebread.com/this-one-financial-trick-lets-you-buy-happiness%20">freedom to live your life</a> the way you want to live it.</p> <p>Whatever you want &mdash; a boat, <a href="http://www.wisebread.com/10-easy-ways-to-supercharge-your-retirement">a happy retirement</a>, a <a href="http://www.wisebread.com/6-great-reasons-for-paying-off-the-mortgage-on-your-home">paid-off mortgage</a> &mdash; figure it out first, before you start saving a dime. Sit down and write down exactly what you want out of life. Writing it down will set an intention, which will help get your plan into motion. Once you've penned your life's goals, think about how much each goal will cost. Use an <a href="http://www.bankrate.com/calculators.aspx%20">online calculator</a> for help. Only once that information is all down on paper can you start mapping out your investment strategy. (See also: <a href="http://www.wisebread.com/6-steps-to-achieving-all-your-goals?ref=seealso">6 Steps to Achieving All Your Goals</a>)</p> <h2>2. Know How Much Time You Have</h2> <p>Short-, medium-, and long-term goals should be treated differently when planning a money strategy. The more time you have to invest, the more risk you can take on. This is because you'll have more time to recover from any market losses. The options for a 50-year-old who wants to retire in 15 years are different from those of a 25-year-old who has 40 years left until retirement.</p> <h3>5 Years or Less</h3> <p>Don't mess around with money you're going to need in the short term. No one can predict when the market will tank (or boom) and short term investors could find themselves with a fraction of what they expect if they find themselves on the wrong side of an economic cycle. If you expect to use the money within the next five years, it's better to forego potential market gains. Instead consider safer investment options like a savings or money market account or a Certificate of Deposit. (See also: <a href="http://www.wisebread.com/the-basics-of-cd-laddering?ref=seealso">The Basics of CD Laddering</a>)</p> <h3>5 to 10 Years</h3> <p>An intermediate time frame allows for some time to recover from market volatility. A <a href="http://money.usnews.com/funds/mutual-funds/balanced">balanced portfolio</a> of stocks and bonds can leverage equities to take advantage of a rising market while using fixed income securities to safeguard against a market in decline.</p> <h3>10 Years or More</h3> <p>A longer time frame can give investors more time to recover from a falling market, making a stock-heavy portfolio safer for those with plenty of time until they'll need access to their money (like for retirement planning). (See also: <a href="http://www.wisebread.com/using-time-horizons-to-make-smarter-investments?ref=seealso">Using Time Horizons to Make Smarter Investments</a>)</p> <h2>3. Assess Your Tolerance for Risk</h2> <p>No matter your available time frame, it's important to understand how you personally react to market volatility. Even a well-planned, diversified portfolio can lose 20% or more of its value in a given year, depending on the broad economic environment.</p> <p>What would you do if your portfolio lost 25% of it's value over a four month span? What would you do with an unexpected $200 lottery winning? What is your general opinion of the stock market? It's important to know the answers to these questions and more like it before you plan an investment strategy.</p> <p>There are many online calculators available to help you figure out your risk tolerance but <a href="https://personal.vanguard.com/us/FundsInvQuestionnaire">here's one I've used</a>.</p> <h2>4. Figure Out How Involved You Want to Be</h2> <p>Are you DIYer, or do you prefer a set-it-and-forget-it approach? You don't need to pay pricey advisor fees for either strategy (although there are plenty of great financial planners out there, if you <a href="http://www.wisebread.com/do-a-background-check-before-hiring-your-financial-advisor">do your reserach</a>). Knowing how much time you want to spend learning about investments, monitoring your portfolio, and planning your short-term market moves will have a major impact on how you develop your investment strategy.</p> <p>For those who want minimal involvement, there are plenty of <a href="http://money.usnews.com/funds/mutual-funds/target-date%20">target-date investment options</a> available for a variety of goals including retirement and college tuition. A target-date fund takes care of all the heavy lifting for you. A portfolio manager selects the asset allocation (how much is invested in the different investments) and takes care of rebalancing as the portfolio grows and as you get closer to your goal. It's the most turn-key financial solution available today, and there are many low-cost options available. (See also: <a href="http://www.wisebread.com/easy-personal-finance-for-lazy-people?ref=seealso">Easy Personal Finance For Lazy People</a>)</p> <p>If you like to get your hands dirty, there are plenty of places to dig in and start learning. Start by learning about securities (stocks, bonds, mutual funds) and how to <a href="http://www.wisebread.com/the-basics-of-asset-allocation?ref=seealso%20">develop an investment portfolio</a> or get the inside scoop on <a href="http://www.wisebread.com/real-estate-investing-is-cheaper-and-easier-than-you-think">real estate investing</a>.</p> <h2>5. Get Into the Habit</h2> <p>If you want to be a successful investor, you need to make a habit of funneling money into your investment accounts. You can set up an automatic payroll deduction for most accounts or you can retrain your brain to get excited about the goal you're working toward. (See also:<a href="http://www.wisebread.com/the-surprisingly-easy-way-to-change-your-habits-and-your-life?ref=seealso"> The Surprisingly Easy Way to Change Your Habits and Your Life</a>)</p> <p>Many investors get excited to save more once they have their goals laid out and firmly in place. It can become a game to find new ways to cut expenses and pad an investment account instead. (See also: <a href="http://www.wisebread.com/how-to-save-26000-in-5-years-or-less?ref=seealso">How to Save $26,000 in 5 Years or Less</a>)</p> <p>While planning your investment strategy, remember that amassing a fortune is not the end goal. Your investments are a tool to help you reach your life's goals, whatever they may be.</p> <p><em>What are your life's goals and how are you using an investment plan to help you reach them? Tell us about it in the comments!</em></p> <a href="http://www.wisebread.com/a-lot-of-people-dont-understand-what-an-investment-really-is-do-you" class="sharethis-link" title="A Lot of People Don&#039;t Understand What an Investment Really Is. Do You?" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/alaina-tweddale">Alaina Tweddale</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment investing investment saving Thu, 26 Jun 2014 13:00:06 +0000 Alaina Tweddale 1148483 at http://www.wisebread.com The Surprising True Source of Wealth Creation (That You Probably Already Have) http://www.wisebread.com/the-surprising-true-source-of-wealth-creation-that-you-probably-already-have <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/the-surprising-true-source-of-wealth-creation-that-you-probably-already-have" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/piggy-bank-481390385.jpg" alt="piggy bank" title="piggy bank" class="imagecache imagecache-250w" width="250" height="180" /></a> </div> </div> </div> <p>What is the first thing that comes to mind when you hear the word &quot;wealth&quot;?</p> <p>I may not be able to guess what that &quot;thing&quot; is, but I can tell you what it isn't&hellip; &quot;save&quot;&hellip; or any variation of the word.</p> <p>We have done a great job in this country of hiding the true facts about how people really grow their wealth. And the reason is obvious. Saving is boring. Plus, it certainly doesn't make big retailers and other companies any money. So, from a purely profit driven standpoint, why would anyone want to show you how good saving habits might actually help you financially?</p> <p>Let's take a look at some simple math for a minute.</p> <h2>Some Simple Savings Math</h2> <p>Do you know how long it takes an investment to double with a guaranteed 10% compound rate of return? It takes over seven years.</p> <p>So how long does it take your money to double if you have been saving $100 per month for seven years (you now have $8,400) and you continue to do so? Seven years.</p> <p>Hmm&hellip; that's interesting.</p> <p>If you invest $8,400 today at 10% compounded annually, you will have $16,369 in seven years. However, if you have $8,400 in the bank making 0% and continue to save $100 per month for the next seven years, you end up with $16,800.</p> <p>Now there are certainly other factors to consider before you choose to pull all your money from the stock market and stick it in a bank account, but for now let's keep this simple. The truth is that you won't find a &quot;guaranteed&quot; return of 10% anywhere these days. But, if you are capable of saving just $100 every month, you are guaranteed to grow your assets, and therefore, your <a href="http://www.wisebread.com/its-10-pm-do-you-know-where-your-net-worth-is">net worth</a>. (See how saving grows your net worth using this <a href="http://cgi.money.cnn.com/tools/networth/networth.html">simple net worth calculator</a>.)</p> <h2>The Rule of 72</h2> <p>Let's put this into perspective. Investments follow a very simple rule. It's called the rule of 72.</p> <p>This rule states that you can figure out how long it will take an investment to double by simply dividing 72 by the expected rate of return. For example, if you expect to receive a 7% rate of return on your money (compounded annually), then your money will double in 10.3 years (72 divided by 7 = 10.3).</p> <p>This also works the opposite way. If your goal is to double your $20,000 in 10 years to make a down payment on a home (and not adding any additional savings), then you need to find an investment with an expected rate of return of 7.2%. (Still not getting it? Check out this short <a href="http://www.investopedia.com/video/play/rule-of-72/">Rule of 72 video</a> for further explanation.)</p> <p>Although the rule is simple, finding a decent rate of return is the challenge. You don't really have much control here. However, what you do have complete control of is your spending and savings habits. It's this often-overlooked area that is the source of growing wealth over time.</p> <p>One reason that people may not focus on saving is because it's not sexy, and it cuts into their spending. Clearly, if it was simply a choice of choosing to invest your money and letting it grow on its own or using your own income to save $100 a month, the answer would most likely be to take the investment route.</p> <p>The problem is that when the stock market does well, people start letting their investments do <em>all</em> the work, forgetting that good savings habits can have a huge positive impact on personal finances. Plus, everyone likes the instant gratification of being able to make purchases with their hard earned money. Saving doesn't quite create that same feeling.</p> <h2>5 Easy Ways to Save More</h2> <p>Unfortunately, the stock market and other investments don't always rise. So, rather than sit back and complain that the stock market isn't growing your money, why not set up a system for saving each year? Here are five ways to do just that! (See also: <a href="http://www.wisebread.com/6-ways-to-get-paid-for-saving-money?ref=seealso">6 Ways to Get Paid for Saving Money</a>)</p> <h2>1. Use Your Tax Refund</h2> <p>Your tax refund is a great place to start. Although not guaranteed, the <a href="http://www.usatoday.com/story/money/personalfinance/2014/03/06/irs-tax-refunds-returns/6125597/">average IRS refund</a> so far in 2014 is over $3,000. Even if you just take a third of that money and save it, you'll have $2,000 right now!</p> <h2>2. Make a Plan for Your Company Bonus</h2> <p>Company bonuses typically come but once a year, and when they do, they hit your paycheck all at once. How about taking some of that hard-earned money and moving it into a savings account before it &quot;accidentally&quot; gets gobbled up by the gremlin that lives in your checking account?</p> <h2>3. Take Advantage of Your Company's 401(k) Match</h2> <p>Your company may be willing to give you extra money just for contributing to your 401(k). Check with your HR department to see if your company offers this match. If you are not currently taking advantage of this, do it immediately. Here's why: Let's say you make $75,000 per year in salary. If your company matches 100% of your contribution up to 3% of your salary, all you have to do is contribute $2,250 this year and you will receive another $2,250 for free! That's 100% gain on your money&hellip; unheard of!</p> <h2>4. Sell Your Stuff Online</h2> <p>Sure, this one sounds complicated if you haven't done it before, but it really isn't that bad. You may have a ton of quality items in your attic that you just don't need. You know what they say, &quot;one person's junk is another person's treasure!&quot; Do you have an extra Apple product lying around? Check out <a href="http://www.gazelle.com/">Gazelle</a> to see what you can get for it. Getting rid of just a few things might just add up to a decent chunk of money to&hellip; yes&hellip; save!</p> <h2>5. Set Up an Auto-Transfer</h2> <p>One great thing about technology is that it makes monotonous tasks quite simple. By simply logging into your bank account online, you can set up an auto-transfer from your checking to your savings account each month. This way, you don't get tempted to spend that extra cash sitting in your checking account, because it has magically disappeared and reincarnated as money you have saved for the future!</p> <p>The bottom line is that it isn't up to the stock market to make you wealthy. Sure, it can help support the growth of your money over long periods of time, but it all starts with you and your saving habits. Take advantage of your working years by setting up specific annual savings strategies. This, combined with an appropriate investment plan can take your finances to the next level!</p> <p><em>Have you seen your net worth increase because of your efforts to save more? Please share the wealth in comments!</em></p> <a href="http://www.wisebread.com/the-surprising-true-source-of-wealth-creation-that-you-probably-already-have" class="sharethis-link" title="The Surprising True Source of Wealth Creation (That You Probably Already Have)" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/eric-roberge-cfp">Eric Roberge CFP</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Personal Finance Frugal Living investment saving wealth Fri, 09 May 2014 09:12:18 +0000 Eric Roberge CFP 1138501 at http://www.wisebread.com 4 Reasons Why You Must Open a Roth IRA Before April 15 http://www.wisebread.com/4-reasons-why-you-must-open-a-roth-ira-before-april-15 <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/4-reasons-why-you-must-open-a-roth-ira-before-april-15" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/cash-469987685.jpg" alt="cash" title="cash" class="imagecache imagecache-250w" width="250" height="164" /></a> </div> </div> </div> <p>It's that time of year again. While tax season can bring a lot of stress, there are some things you can do to make it pay off for you.</p> <p>One of them is to open a Roth IRA, which is a little <a href="http://www.irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs">different than a traditional IRA</a>. The key difference is that contributions to traditional IRAs are pre-tax, while Roth IRA contributions are after tax. There are a few other differences with respect to withdrawals, but rather than focus on all of that, let's look at four reasons you should consider funding a Roth IRA this year. (See also: <a href="http://www.wisebread.com/how-to-set-up-an-ira-to-build-wealth?ref=seealso">How to Set Up an IRA to Build Wealth</a>)</p> <h2>You Can Double Your Annual Contribution</h2> <p>If you open up a Roth IRA by April 15, you get a great opportunity &mdash; you're still allowed to make a contribution for the previous (2013) tax year.</p> <p>How much?</p> <p>The most you can contribute in 2013, depending on your income and filing status, is $5,500 if you're 49 years old or younger in 2013. But if you're 50 years old or older in 2013, then you're allowed to contribute an additional $1,000, bringing your total to $6,500.</p> <p>But that's just for 2013.</p> <p>In 2014, you can contribute another $5,500 if you're 49 years old or younger in 2014. Similarly, if you're 50 years old or older in 2014, then you're allowed to contribute an additional $1,000 &mdash; again bringing your total to $6,500. (Check out the<a href="http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits"> IRS page</a> for more details on contribution limits.)</p> <p>This means that this year, you can potentially put a total of $13,000 towards your Roth IRA to build a financially secure retirement.</p> <p>Don't think that the extra $5,500 for 2013 will make a big difference?</p> <p>If you put the $5,500 in an investment that grows 7% each year, then in 30 years it'll be worth over $41,800. Best of all, if you obey the rules in withdrawing the money, you get to keep all of it and won't have to pay any taxes.</p> <p>What could you do with an extra $41,800?</p> <h2>You'll Have Better Investment Options</h2> <p>A lot of people have employer-sponsored retirement plans, such as a 401(k). Many, however, complain that the investment fund options available to them are poor. Specifically, these funds tend to have high expense ratios, which are the fees that go toward managing the fund. (See also: <a href="http://www.wisebread.com/4-reasons-why-a-roth-ira-may-be-better-than-your-401k?ref=seealso">Why a Roth IRA May Be Better Than Your 401(k)</a>)</p> <p>Even though all funds have these fees, they tend to be much higher in employer plans. With a Roth IRA, on the other hand, you can invest with a company that offers funds with much lower costs.</p> <p>For instance, it's not uncommon that funds from employer plans cost around 0.9% each year. If you open up a Roth IRA, however, you can invest with a company that offers funds that cost about 0.2% each year.</p> <p>That small amount makes a big difference over time.</p> <p>Let's say you invest $5,500 each year in a fund that grows by 7% each year. If the fund costs 0.9%, in 30 years you'll have just under $439,000. That's not bad.</p> <p>On the other hand, what if you invest in a lower-cost fund? If you invest $5,500 each year in a fund that grows by 7% each year, but that fund costs only 0.2%, then in 30 years you'll have over $499,000.</p> <p>In other words, a difference of over $60,000. How much would it hurt you to lose $60,000?</p> <h2>You'll Have Tax-Free Money</h2> <p>With a Roth IRA, you contribute money that's already been taxed. But if you follow the withdrawal rules (the main one being to wait until you're 59 &frac12; years old), then you get a huge benefit. That benefit is the pleasure of spending the money &mdash; including the money earned via investments &mdash; without paying taxes. (See also: <a href="http://www.wisebread.com/one-simple-trick-to-get-the-best-tax-benefit-from-your-retirement-portfolio?ref=seealso">Get the Best Tax Benefit From Your Retirement Portfolio</a>)</p> <p>Let's say you invest $5,500 in a regular, taxable investment account each year, and your money grows by 7% each year. If you're in the 25% tax bracket, in 30 years you'll have just under $402,000.</p> <p>But if you contribute $5,500 in a Roth IRA each year, and your money grows by 7% each year, in 30 years you'll have over $555,000. (Check out<a href="http://www.retiresimply.com/roth-vs-taxable.html"> this calculator</a> to run your own numbers.)</p> <p>In other words, taxes would eat up over $154,000 of your retirement money.</p> <h2>You'll Have Emergency Access to Your Money</h2> <p>Lastly, your contributions (that is, the money that you put into your Roth) can be taken out at any time, free of taxes and penalties. This is not true, however, of earnings on your contributions, which have more complex rules. (See also: <a href="http://www.wisebread.com/how-to-balance-saving-for-retirement-emergency-fund-and-paying-off-debt?ref=seealso">Balancing Retirement Savings, Emergency Fund, and Paying Off Debt</a>)</p> <p>Of course, since this a retirement account, you should only do this in the event of a true emergency. But it's nice to know that some of your money is available if you really need it. This is not the case for most other retirement investments you could put your money in.</p> <p>Remember, tax time doesn't have to be associated only with stress. With opening a Roth IRA, there's a bright side to the season.</p> <p><em>What other reasons for opening up a Roth IRA can you think of?</em></p> <a href="http://www.wisebread.com/4-reasons-why-you-must-open-a-roth-ira-before-april-15" class="sharethis-link" title="4 Reasons Why You Must Open a Roth IRA Before April 15" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/darren-wu">Darren Wu</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Retirement investment IRA Roth IRA taxes Tue, 25 Mar 2014 09:36:14 +0000 Darren Wu 1132830 at http://www.wisebread.com 5 Investing Basics That Can Make You Rich http://www.wisebread.com/5-investing-basics-that-can-make-you-rich <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/5-investing-basics-that-can-make-you-rich" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/finances-152173891.jpg" alt="finances" title="finances" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p>So you want to become a better investor, build more wealth, and gain financial freedom?</p> <p>Great!</p> <p>Where do you begin? There&#39;s tons of advice out there about how to make money in the market. And sadly, not all of it is <em>good</em> advice. In fact, some of it is downright <em>damaging</em>. (See also: <a href="http://www.wisebread.com/10-investing-concepts-to-ignore-and-10-to-follow?ref=seealso">Investing Concepts to Ignore and to Follow</a>)</p> <p>But don&#39;t worry, there&#39;s good news: If you boil all the advice down to a few key fundamentals, what&#39;s left is a short list of true words of wisdom &mdash; real advice that&#39;ll put more money in your pocket over a lifetime of investing.</p> <h2>1. Start Early and Invest Regularly</h2> <p>If you start at age 25 and put in the maximum to your Roth IRA ($5,500 in 2014) every year for just 10 years (until you&#39;re 35, and then stop contributing), and your money grows by 8% each year, by the time you&#39;re 65 you&#39;ll have over $865,000. (See also: <a href="http://www.wisebread.com/retirement-planning-if-you-re-under-30?ref=seealso">Retirement Planning If You&rsquo;re Under 30</a>)</p> <p>But if you procrastinate for 10 years, start investing at age 35, and invest the maximum every year until you&#39;re 65 (30 years), you&#39;ll have just under $673,000 &mdash; a difference of over $192,000.</p> <p>How much would it hurt to lose $192,000?</p> <p>By starting a bit earlier, you put in less of your own cash, and end up with more money than if you started later and had to put in more of your own cash.</p> <h2>2. Choose Your Asset Allocation</h2> <p>This refers to how you split your money between the two main types of investments &mdash; stocks and bonds. (See also: <a href="http://www.wisebread.com/the-basics-of-asset-allocation?ref=seealso">Asset Allocation Basics</a>)</p> <p>To highlight the importance of this decision, here&#39;s what William Bernstein, author of &quot;<a href="http://www.amazon.com/gp/product/0071747052/ref=as_li_ss_tl?ie=UTF8&amp;camp=1789&amp;creative=390957&amp;creativeASIN=0071747052&amp;linkCode=as2&amp;tag=wisbre03-20">The Four Pillars of Investing</a>,&quot; says about it: &quot;The fundamental investment choice faced by any individual is the overall stock/bond mix.&quot;</p> <p>So how do you choose?</p> <p>Here&#39;s a rule of thumb recommended by John Bogle, founder of the Vanguard, the world&#39;s largest mutual fund company: Put your age in bonds. So if you&#39;re 30 years old, put 30% in bonds and 70% in stocks. Once you turn 60, put 60% in bonds and 40% in stocks.</p> <h2>3. Rebalance Yearly</h2> <p>Rebalancing means restoring your investment portfolio to its original asset allocation. For instance, if stocks have a good year, they&#39;ll increase in value and make up a larger percentage than your original allocation.</p> <p>To rebalance, simply sell the appropriate amount of your stocks and buy more bonds (or, to avoid capital gains tax on the sale, try this <a href="http://www.wisebread.com/one-simple-trick-to-get-the-best-tax-benefit-from-your-retirement-portfolio">contributions rebalancing trick</a>). By doing this, you&#39;re also following another investing idiom: buy low, and sell high.</p> <h2>4. Make Index Funds the Core (or All) of Your Portfolio</h2> <p>Here&#39;s what Warren Buffet, second richest man in America, has to say about the effectiveness of index funds for building wealth: &quot;Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.&quot;</p> <h2>5. Keep Costs Down</h2> <p>When it comes to fund investing, your costs are the fund&#39;s expense ratio. According to a report from the Investment Company Institute, the average actively managed fund costs 0.92% a year. With index funds (see #4 above), however, you pay a lot less. The average index fund costs just 0.13% a year.</p> <p>Why does this matter?</p> <p>Suppose you invest $5,500 each year for the next 20 years. Also, let&#39;s assume that both the actively managed and index funds grow by 8% each year.</p> <p>If you chose the actively managed fund, at the end of the 20 years you&#39;d have just under $242,000 &mdash; a fair amount. But if you invested in the lower-cost index fund, you&#39;d have grown your wealth to the sum of over $267,000 &mdash; a difference of over $25,000.</p> <p>Could you use an extra $25,000?</p> <p>Following these investing fundamentals, and you&#39;ll be sure to gain the financial freedom you&#39;re seeking.</p> <p><em>Anything I&#39;ve missed? What additional fundamental investing rules do you follow?</em></p> <a href="http://www.wisebread.com/5-investing-basics-that-can-make-you-rich" class="sharethis-link" title="5 Investing Basics That Can Make You Rich" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/darren-wu">Darren Wu</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment investing rules investment retirement saving saving Tue, 14 Jan 2014 10:36:16 +0000 Darren Wu 1111192 at http://www.wisebread.com One Simple Trick to Get the Best Tax Benefit From Your Retirement Portfolio http://www.wisebread.com/one-simple-trick-to-get-the-best-tax-benefit-from-your-retirement-portfolio <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/one-simple-trick-to-get-the-best-tax-benefit-from-your-retirement-portfolio" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/balance-5121079-small.jpg" alt="balance" title="balance" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p>The most basic strategy for long-term investing is asset allocation. But keeping to an allocation means rebalancing your portfolio, and rebalancing is fraught with complications &mdash; one big one being the tax implications of the sales you need to make. A simple trick can help you deal with that issue, but first let&#39;s take a closer look at asset allocation and rebalancing. (See also: <a href="http://www.wisebread.com/best-asset-allocation-for-your-portfolio">The Best Asset Allocation for Your Portfolio</a>)</p> <h2>What Is Asset Allocation?</h2> <p>The idea of asset allocation is to spread your investments among various categories (stocks, bonds, cash, gold, real estate, etc.), with the percentages in each category chosen to balance your desire for return and willingness to take risk.</p> <p>There are a lot of rules of thumb for asset allocation.</p> <h3>Spreading Your Wealth Around</h3> <p>One simple one is to set the stock fraction of your portfolio equal to 100 minus your age &mdash; so a 24-year-old would go with a portfolio of 76% stocks with the rest in bonds. Each year the portfolio gets a little more conservative, gradually shifting to only 35% stocks by age 65.</p> <p>An asset allocation championed by financial writer Harry Browne was a simple 25% each divided among stocks, bonds, gold, and cash.</p> <p>Many financial writers and advisors have model asset allocations. There is, of course, no way to know what asset allocation will turn out to be the best (until the future arrives, and it turns out that an asset allocation of 100% in whatever went up the most would have been best).</p> <p>My own sense is that any reasonably well-diversified portfolio will be okay: Just pick one. Sticking to an asset allocation means that you automatically avoid the error of putting all your money into whatever last year&#39;s hot investment was. (See also: <a href="http://www.wisebread.com/4-quick-ways-to-decide-if-a-company-is-worth-your-investment?ref=seealso">How to Know if a Company Is Worth Your Investment</a>)</p> <h2>What Is Rebalancing?</h2> <p>Because investment prices are constantly changing, your portfolio will almost immediately be out of balance. If stocks have gone up, the percentage of your portfolio invested in stocks will be above the target level. Rebalancing is the process of getting each category of your portfolio back to its target percentage. (See also: <a href="http://www.wisebread.com/keep-an-eye-on-your-money-with-these-7-online-investing-tools-and-apps?ref=seealso">7 Online Investing Tools and Apps</a>)</p> <p>In theory, rebalancing is easy:</p> <ol> <li>Calculate your total assets.<br /> &nbsp;</li> <li>Apply your target percentages to figure out how much money you should have in each category.<br /> &nbsp;</li> <li>In any category that&#39;s over its allocation, sell enough to bring the category down to the target.<br /> &nbsp;</li> <li>Use the money from those sales to buy the appropriate amount in each category that was under it&#39;s percentage.</li> </ol> <p>In practice, rebalancing is trickier than that, for several reasons.</p> <h2>Rebalancing Complications</h2> <p>The first issue with rebalancing is deciding how often to do it. You could do it every day &mdash; or even every second &mdash; selling a little of anything that had gone up a penny and buying whatever had gone down a penny, but that much churning would just add complexity and expense to no particular benefit. The general consensus is that annual rebalancing is about right, but you could make the case that doing it monthly or quarterly would be better.</p> <p>The second issue with rebalancing is procrastination. There&#39;s just natural inertia &mdash; it&#39;s one more thing to do, but one that doesn&#39;t have a real deadline, so it gets put off until later. (See also: <a href="http://www.wisebread.com/i-ll-finish-this-post-tomorrow-10-ways-to-stop-procrastinating?ref=seealso">10 Ways to Stop Procrastinating</a>)</p> <p>There&#39;s another factor, though, which is that after a year, your portfolio is probably pretty far off from its target percentages &mdash; but in what seems like a good way. You&#39;ll have more of your winners and less of your losers, and who doesn&#39;t want that? Selling your winners is always tough, and buying the laggards even tougher.</p> <p>Those are both real issues, but this post is about the third issue with rebalancing, which is taxes.</p> <h2>Tax-Efficiency in Rebalancing</h2> <p>Besides the issue of it just being tough to let your winners go, rebalancing also raises the issue of capital gains taxes. All those sales of winners incur tax liabilities. (Worse, since you&#39;re not selling the losers, you don&#39;t even have any losses to offset your gains.)</p> <h3>Rebalance Via Contributions Rather Than Sales</h3> <p>There&#39;s one basic trick to ameliorate this issue, which works pretty well: <em>Use your contributions to rebalance your portfolio.</em> Instead of dividing your contributions up the same as your target percentages, divide them up so as to move your portfolio closer toward balance.</p> <p>The calculations can get complicated if you let them &mdash; but you don&#39;t need to let them.</p> <p>If you make contributions frequently, and especially if a single contribution isn&#39;t big enough to bring your portfolio entirely back into balance, you can do it the easiest possible way: Figure out which category is the most dollars below its target, and put your whole contribution into that one category. Do the calculation afresh for the each contribution, and your portfolio will stay reasonably close to your desired asset allocation.</p> <p>The same thing can work when you leave the contribution phase of your life and move into the draw-down phase: Use your withdrawals to move your portfolio back into balance by selling from whatever category is the most dollars over its target.</p> <p>Rebalancing by targeting your contributions works very well, especially in the early phases of building your portfolio, when each month&#39;s contribution is large compared to the size of your total portfolio.</p> <p>After ten or twenty years, your portfolio (we very much hope) will be large compared to each month&#39;s contribution, and it will drift from your target asset allocation faster than targeting your contributions can bring it back in line. This is somewhat eased by the fact that you&#39;ll probably be able to make larger contributions as you progress along in your career, but eventually market volatility will almost certainly force you to going back to plan A: Sell things that have gone up and buy things that have gone down. But a careful application of rebalancing with your contributions will minimize the amount you have to sell &mdash; and thereby minimize the amount of capital gains taxes you incur. (<a href="http://www.wisebread.com/your-401-k-is-not-an-investment">Clever use of tax-advantaged accounts</a>, like IRAs and 401(k)s, will also help.)</p> <p><em>Do you look after your retirement funds via asset allocation? What tricks do you use to keep everything in balance?</em></p> <a href="http://www.wisebread.com/one-simple-trick-to-get-the-best-tax-benefit-from-your-retirement-portfolio" class="sharethis-link" title="One Simple Trick to Get the Best Tax Benefit From Your Retirement Portfolio" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Taxes asset allocation investment rebalancing retirement Wed, 08 Jan 2014 10:37:23 +0000 Philip Brewer 1107269 at http://www.wisebread.com How Much Money Will You Have in 30 Years? http://www.wisebread.com/how-much-money-will-you-have-in-30-years <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-much-money-will-you-have-in-30-years" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/finances-176601126.jpg" alt="couple doing finances" title="couple doing finances" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>For some of us, it&#39;s hard to know how much money we&#39;ll have a month from now, let alone 30 years from now. Yet, if you&#39;re planning your dream retirement, or even for your child&#39;s college fund in the nearer term, you&#39;ve got to make some educated guesses. And that&#39;s not always easy. (See also: <a href="http://www.wisebread.com/do-you-know-your-retirement-number?ref=seealso">What Is Your Retirement &quot;Number&quot;?</a>)</p> <p>Fortunately, Rick Ferri, investment expert and author of six books on the subject of investing, has taken a lot of the guesswork out of this process. He&#39;s done extensive research to provide a forecast of stock and bond market returns for the next 30 years.</p> <p>Of course, it&#39;s important to remember that this is just a forecast and not a guarantee. Still, as humans, it&#39;s inspiring to think about what our future could look like. And taking action by investing always beats not taking action. (See also: <a href="http://www.wisebread.com/begin-your-investing-career-right-with-some-mutual-fund-basics?ref=seealso">Mutual Fund Basics to Start Your Investing Career</a>)</p> <p>The thing that&#39;s different about Ferri&#39;s forecast, as opposed to someone else&#39;s, is that he does it every year. That means he takes into account changes to the factors that affect the return forecast, such as fiscal and monetary policy. This gives you the most accurate, up-to-date forecast possible.</p> <p>So without any further delay, let&#39;s look at the forecast.</p> <h2>The 30 Year Forecast</h2> <p><a href="http://www.portfoliosolutions.com/2013marketforecast/">Looking at the middle of the three columns</a> filled with numbers, we see that U.S. large-cap stocks, which are stocks of companies worth more than $10 billion, are expected to grow by 7.4% over the next 30 years.</p> <p>However, experts don&#39;t suggest putting all your money in the stock market. That&#39;s because your money is likely to see wide changes in value as it rides along the ups and downs of the stock market.</p> <p>Instead, to lower your chances of seeing this happen, experts also suggest investing in bonds. So looking at the same middle column, if you were to invest in U.S. Treasury notes, you can expect your money to grow by about 3% over the next 30 years as well.</p> <p>If you&#39;d like an example of specific stock and bond funds that you can invest in, check out the <a href="http://moneytobless.com/simplify-your-investing-with-the-core-four-portfolio/">Core Four Portfolio</a>.</p> <p>The S&amp;P 500 is the most widely used representation of U.S. large-cap stocks. That means if you invest in an S&amp;P 500 index fund, you can expect your money to grow by about 7.4% over the next 30 years as well. (See also: <a href="http://www.wisebread.com/3-steps-to-getting-started-in-the-stock-market-with-index-funds?ref=seealso">How to Get Started in the Stock Market With Index Funds</a>)</p> <h2>Dollars and Percents</h2> <p>Now let&#39;s say you decide to split your money by putting 60% of it in stocks and 40% in bonds, which is considered by experts to be an appropriate amount of risk to be taking over the long-term. Combined, your money would grow at the rate of 5.6% every year. Here&#39;s the math behind it: (7.4% x 60%) + (3% x 40%) = 5.6%. You can also do this for whatever stock and bond split you choose simply by changing the percentages.</p> <p>How about in dollar terms? If you invest just $1,000 each year, in 30 years you can expect to have over $78,400 &mdash; more than doubling your money.</p> <h2>Getting Yourself Started</h2> <p>You can begin with a retirement account that most employees already have &mdash; the 401(k). In 2013 and 2014, most of you can invest a maximum of $17,500. (See also: <a href="http://www.wisebread.com/how-to-make-the-most-of-your-401K?ref=seealso">How to Make the Most of Your 401(k)</a>)</p> <p>So let&#39;s say your 401(k) plan has index funds that track these assets, and that you invest the maximum each year. Doing this, you can expect to have over $1,372,000 to your name before taxes by the time you retire in 30 years. To verify the math, here&#39;s the formula, which is known as the <a href="http://www.financeformulas.net/Future-Value-of-Annuity-Due.html">Future Value of an Annuity Due</a>: (1 + .0564) X $17,500[((1 + .0564)^30 - 1)/.0564]</p> <p>(Note that .0564 is the combined expected return from Ferri&#39;s forecast above; $17,500 is the yearly contribution; and, 30 is the number of years. Substitute your own values for your personal calculation.)</p> <p>You can also plug this formula into an Excel spreadsheet: =FV(0.0564,30,-17500,,1)</p> <p>In addition to this, you may also be able to invest in a Roth IRA. In 2013 and 2014, most of you can invest a maximum of $5,500. (See also: <a href="http://www.wisebread.com/4-reasons-why-a-roth-ira-may-be-better-than-your-401k?ref=seealso">Why a Roth IRA May Be Better Than Your 401(k)</a>)</p> <p>Again, let&#39;s say you invest in index funds that track these assets. Let&#39;s also say you invest the maximum each year.</p> <p>Doing this, you can expect to have over $431,000 to your name by the time you retire. Again, to verify the math, here&#39;s the formula: Future Value of Annuity Due = (1 + .0564) X $5,500[((1 + .0564)^30 - 1)/.0564]</p> <p>Or just plug this formula into an Excel spreadsheet: =FV(0.0564,30,-5500,,1)</p> <p>Not as much as with a 401(k), but the good thing about the Roth is that it&#39;s tax-free &mdash; ALL the money is yours.</p> <p>By starting to invest a little bit now, you can build a nice amount of wealth for yourself later.</p> <p><em>So how much money will you have in 30 years? Do the calculation and let us know in comments!</em></p> <a href="http://www.wisebread.com/how-much-money-will-you-have-in-30-years" class="sharethis-link" title="How Much Money Will You Have in 30 Years?" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/darren-wu">Darren Wu</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Personal Finance investment retirement saving Tue, 26 Nov 2013 10:30:22 +0000 Darren Wu 1098777 at http://www.wisebread.com 2 Things You Must Know Before Making a Major Spending Decision http://www.wisebread.com/2-things-you-must-know-before-making-a-major-spending-decision <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/2-things-you-must-know-before-making-a-major-spending-decision" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/finances-5269347-small.jpg" alt="woman with paperwork" title="woman with paperwork" class="imagecache imagecache-250w" width="250" height="145" /></a> </div> </div> </div> <p>Most would agree that successfully <a href="https://www.barna.org/culture-articles/405-has-the-economy-influenced-americans-priorities">managing your finances is near the top of the list of important things to do in life</a>. In fact, for most Americans only two other things, family and health, are more important. But how do you define success? (See also: <a href="http://www.wisebread.com/defining-what-financial-success-means-to-you">Defining What Financial Success Means to You</a>)</p> <p>Without a clear and measurable definition of financial success, like Alice in Wonderland you risk falling through the looking glass and losing your way. Or as George Harrison paraphrased the book&#39;s author: &quot;<a href="http://www.cleavebooks.co.uk/grol/alice/won06.htm">If you don&#39;t know where you&#39;re going, any road will take you there.</a>&quot;</p> <p>So, what should your financial goal be? And what&#39;s the best road to get you there?</p> <h2>Financial Independence, Not Wealth, Is the Goal</h2> <p>It&#39;s best to start with the goal and work backwards, so let&#39;s begin there.</p> <p>Most personal finance advice focuses almost exclusively on only one thing: increasing your wealth, or net worth. But what good is wealth if it doesn&#39;t pay the bills? Yes, you want to accumulate wealth, but some sources of wealth actually increase debt and drain your monthly income.</p> <p>It&#39;s that monthly income that pays the bills, and if you have enough of it from sources other than salary, you will be&hellip; financially independent. That is the goal: financial independence; and it&#39;s measured by cash flow. Wealth does play an important role, but it&#39;s a supporting role. You want to accumulate the types of wealth that generate cash flow, and avoid or minimize those that don&#39;t. (See also: <a href="http://www.wisebread.com/just-saving-isnt-enough-how-cash-flow-allocation-helps-you-retire">How Cash Flow Allocation Helps You Retire</a>)</p> <h2>The Two Rules of the Road You Must Follow</h2> <p>OK, we&#39;ve defined the destination. That&#39;s half the battle. Now, what&#39;s the best road to get you there?</p> <p>There are actually many roads &mdash; many ways &mdash; to achieve financial independence. The key to success is to avoid the detours and dead ends that can delay your trip. To help you avoid the wrong roads and make more positive choices, you just need to follow two rules of the road. Before making any important investment or major spending decision, ask yourself two questions.</p> <p><strong>1. Will This Item Appreciate, or Grow in Value?</strong></p> <p>Appreciation is the &quot;wealth&quot; question. Does the asset increase or decrease in value over time?</p> <p><strong>2. Will It Generate Positive or Negative Cash Flow?</strong></p> <p>The other question is, of course, the cash flow question. Will I spend more on the purchase than the income it generates?</p> <p>You need to consider the impacts on both your wealth and your cash flow to make a fully informed purchase decision.</p> <p><strong>Where the Rubber Meets the Road</strong></p> <p>Here&#39;s where the rules actually help you make decisions. Just asking these two questions will allow you to prioritize every investment.</p> <ul> <li> <p><strong>Best:</strong> It BOTH appreciates AND generates cash flow (rental properties, stocks that pay dividends, business ownership).</p> </li> <li> <p><strong>2nd Best:</strong> It EITHER appreciates OR generates cash flow but not both (savings accounts, CDs, bonds, a primary home).</p> </li> <li> <p><strong>Worst:</strong> It NEITHER appreciates NOR generates cash flow (cars, boats, furniture).</p> </li> </ul> <p>Your strategy? Avoid, or at least minimize, the &quot;Worst&quot; investment decisions. Also, keep the &quot;2nd Best&quot; items in check. And, when possible, take advantage of opportunities to invest in &quot;Best&quot; items.</p> <p><strong>Cars Are Among the Worst</strong></p> <p>For example, a car purchase slows your progress on the path to financial independence because it&#39;s money spent on something that loses value and creates a negative cash flow in the form of a monthly loan or lease payment. Still, most people need a car. That&#39;s fair, but don&#39;t buy a costly one. Pay it off quickly to eliminate the negative cash flow; that will free up money you can use to pay off other debts (which frees up more cash flow), or to make a &quot;Best&quot; investment. (See also: <a href="http://www.wisebread.com/guide-to-buying-a-used-car-without-going-crazy">Guide to Buying a Used Car</a>)</p> <p><strong>A House Is 2nd Best</strong></p> <p>Another example, this time from the &quot;2nd Best&quot; category, is a house.</p> <p>On the surface you might think a house is a good investment. In fact, a primary residence often accounts for the majority of a household&#39;s wealth, and over the long term it even appreciates in value. But that&#39;s looking at it in terms of wealth only. What about cash flow? Truth is, a house can be a real cash flow killer, suffocating your ability to pay off other debts or to make &quot;Best&quot; investments&hellip; especially if you buy a house that&#39;s too big, or if you keep pouring cash into repairs or improvements. (See also: <a href="http://www.wisebread.com/9-costly-things-new-homeowners-dont-prepare-for">9 Costly Things New Homeowners Don&rsquo;t Prep For</a>)</p> <p>So a poor house purchase decision can slow your progress to a crawl on the financial freedom highway.</p> <p>What about a rental property? That&#39;s a different story, for if you make a good multifamily purchase it could appreciate in value and also generate positive cash flow. You win on both measures, and the additional cash flow will supplement your traditional retirement savings sources.</p> <h2>When You Come to a Fork in the Road&hellip;</h2> <p>Spending money involves making choices. In fact, the first choice is to spend or not to spend. Every decision has consequences, both in terms of wealth creation and cash flow gains or losses.</p> <p>It&#39;s the negative impacts that pose the greatest threat, because they carry an opportunity cost &mdash; &nbsp;a lost opportunity to grow your wealth or improve your cash flow. Even small everyday purchases trickle away cash flow and, taken together, they can add up to an annoying negative income stream. But the big purchases, like a car or a home, are the ones to really watch out for. Poor decisions on these big items can create large, ongoing negative cash flows.</p> <p>So when making an important investment decision keep your destination &mdash; &nbsp;financial independence &mdash; in mind. If you follow the rules of the road and consider the impacts to both your wealth accumulation and to your cash flow, you&#39;re bound to avoid the detours and arrive at your destination years ahead of schedule.</p> <p><em>What rules do you rely on to help guide your spending decisions?</em></p> <a href="http://www.wisebread.com/2-things-you-must-know-before-making-a-major-spending-decision" class="sharethis-link" title="2 Things You Must Know Before Making a Major Spending Decision" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/keith-whelan">Keith Whelan</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Personal Finance investment money management spending Fri, 01 Nov 2013 10:24:03 +0000 Keith Whelan 1064404 at http://www.wisebread.com 6 Financial Mistakes We Don't Make Anymore (and 2 We Still Do) http://www.wisebread.com/6-financial-mistakes-we-dont-make-anymore-and-2-we-still-do <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/6-financial-mistakes-we-dont-make-anymore-and-2-we-still-do" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/ok-3846541-small.jpg" alt="ok sign" title="ok sign" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>When I was a recent college graduate working at my first real job, my friends and I quickly realized that making the minimum payment on our credit cards meant carrying a balance for a long time. We learned to make heftier payments and avoid consumer credit altogether. (See also: <a href="http://www.wisebread.com/12-habits-of-highly-responsible-credit-card-users">Good Habits of Responsible Credit Card Users</a>)</p> <p>A few years later, when my employer transferred much of its workforce to a larger city, I noticed that houses in our town were difficult to sell, particularly at prices that would return a substantial gain to homeowners. That experience taught me to be conservative when buying a house and not count on a quick sale, helping me avoid problems during the housing crisis later.</p> <p>But there has always been more to grasp, especially as my personal circumstances evolved from single to married with children and the economy changed, tax laws were revised, new financial products introduced, etc. Basic principles remained the same, but each new phase required navigating more complex challenges and learning from more recent missteps.</p> <p>Like me, many Americans are learning from the past and moving toward better financial stewardship, according to <a href="http://www.citigroup.com/citi/news/2013/130807b.htm">a nationwide survey by Citi</a> that measures Americans' attitudes towards the economy. Specifically, the majority of people surveyed report the following changes:</p> <ul> <li>Establishing and maintaining adherence to a budget</li> <li>Saving money in an emergency fund</li> <li>Paying off credit card balances every month</li> <li>Developing a long-term financial plan</li> </ul> <p>In addition, we are generally more optimistic about our financial futures in 2013 than when the first pulse was taken in 2009.</p> <p>But Director of Financial Education for Citi's Personal Wealth Management, <a href="http://www.citigroup.com/citi/about/leaders/jonathan-clements-bio.html">Jonathan Clements</a>, cautions that &quot;national foolishness&quot; has not yet come to an end. We are not masters of our individual and collective financial destinies.</p> <p>Sure, <a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2013/08/15/five-facts-about-household-debt-in-the-united-states/">household debt is down 12% since its peak during the third quarter of 2008</a>. However, this decline is due in part to loan defaults and home foreclosures that erased debt, not fiscally responsible Americans applying disposable income to loan balances. In addition, <a href="http://www.consumerfinance.gov/speeches/student-debt-swells-federal-loans-now-top-a-trillion/">student loan debt is rising</a>. Further, student loan delinquencies have grown from 7.55% in the second quarter of 2008 to 10.9% in 2013.</p> <p>Jonathan points out that Americans who are more upbeat about the economy tend to have such an attitude because of personal financial circumstances rather than broader notions of increased prosperity for all. That is, those who are employed today tend to have a more positive outlook than when they were unemployed and unsure of their financial futures during the Great Recession. As unemployment numbers declined, countenances brightened.</p> <p>Similarly, MBA professor and portfolio manager Barbara Friedberg celebrates the <a href="http://barbarafriedbergpersonalfinance.com/credit-card-delinquency-rate-hits-rock-bottom/">decline in credit card delinquencies while expressing concerns</a> about credit card balances. She indicates we may have shown slight improvements in financial discipline without making more substantial changes.</p> <p>According to Barbara, &quot;The recency behavioral finance bias suggests that we weight recent events more heavily than those in the past. If that's the case, then we're saving more and paying our bills because we remember the recent financial crises. This theory also predicts that once we forget about the financial problems of the recent past, we'll all go back to over spending, over borrowing, and just living beyond our means.&quot; (See also: <a href="http://www.wisebread.com/4-ways-credit-cards-manipulate-you-into-more-debt">4 Ways Credit Cards Manipulate You Into More Debt</a>)</p> <p>Still, making adjustments to our current reality is a good first step in learning from our mistakes.</p> <h2>Mistakes We Won't Make Again</h2> <p>After thinking about mistakes that I won't make again, I spoke with Jonathan and folks at Citi about what Americans may have learned in the past few years. Here are items that made our list.</p> <p><strong>1. Assuming a High-Paying Job Will Always Be Available</strong></p> <p>Those unemployed during the most recent recession have learned that finding a high-paying job is difficult if not impossible. Many have taken salary and wage cuts in order to pay current bills.</p> <p><strong>2. Assuming Stock Market Investments Will Earn Double-Digit Returns</strong></p> <p>We've seen that the stock market can be volatile and steady returns are not guaranteed. People are starting to develop long-term plans considering this new reality.</p> <p><strong>3. Counting on a Modest Retirement Nest Egg</strong></p> <p>We now realize that we need to save much more and/or develop and maintain an income from a full-time position, part-time work, or business to support ourselves through much of our lifetimes. (See also: <a href="http://www.wisebread.com/6-ways-to-avoid-running-out-of-money-in-retirement">6 Ways to Avoid Running Out of Money in Retirement</a>)</p> <p><strong>4. Not Having Enough Cash</strong></p> <p>We realize that we need to have cash available to service debt, handle major expenses (such as home repairs or auto purchases), and capitalize on down markets (allowing us to buy low and sell high).</p> <p><strong>5. Spending Impulsively</strong></p> <p>The prevalence of mobile apps to monitor bank balances has helped curb spending. The constant awareness of how our habits affect financial solvency is beginning to impact our decisions.</p> <p><strong>6. Thinking That Spending More Means Getting More</strong></p> <p>For example, Americans in general and millennials in particular are increasingly opting out of expensive cable television packages in favor of lower cost streaming subscriptions. Similarly, teens and their frugal parents are shopping at Goodwill or thrift shops rather than name-brand stores. Frugality has become more in vogue for certain purchases.</p> <h2>Mistakes We Still Make</h2> <p>Though we are more happily coping with the new normal today and embracing greater frugality than in the recent past, we are persisting in making a number of finance mistakes.</p> <p><strong>1. Not Saving Enough</strong></p> <p>Our savings rate is still low. We are saving about <a href="http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm">4.5% of our income in 2013</a>, well below rates of <a href="http://www.hamiltonproject.org/multimedia/charts/u.s._personal_saving_rate_1970-2012/">8.6% in the 1980s and 9.6% in the 1970s</a>. (See also: <a href="http://www.wisebread.com/trick-yourself-into-saving-more-of-your-biweekly-paychecks">Trick Yourself Into Saving More</a>)</p> <p><strong>2. Chasing Investment Performance</strong></p> <p>We still have a tendency to put our dollars into investments that have recently experienced high returns. Jonathan points to potential buyers re-engaging in house bidding wars as one example.</p> <p>Recognizing our errors is the first step in correcting them. But we also need to look beyond our present circumstances and avoid past mistakes as we prepare for the future.</p> <p><em>What financial mistakes have you stopped making?</em></p> <a href="http://www.wisebread.com/6-financial-mistakes-we-dont-make-anymore-and-2-we-still-do" class="sharethis-link" title="6 Financial Mistakes We Don&#039;t Make Anymore (and 2 We Still Do)" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Personal Finance frugal living investment retirement saving Mon, 09 Sep 2013 10:00:30 +0000 Julie Rains 981741 at http://www.wisebread.com Investment Secrets of the Rich and Famous http://www.wisebread.com/investment-secrets-of-the-rich-and-famous <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/investment-secrets-of-the-rich-and-famous" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/piggy-bank-5304321-small.jpg" alt="gold piggy bank" title="gold piggy bank" class="imagecache imagecache-250w" width="250" height="181" /></a> </div> </div> </div> <p>Hollywood celebrities, recording artists, and professional athletes are among the highest paid people in the United States. According to a <a href="http://www.forbes.com/celebrities/">celeb ranking on Forbes</a>, Taylor Swift and Tiger Woods each pull down over $50 million per year while Will Smith surpasses the $20-million mark.</p> <p>It is true that many with exceptionally high incomes aren't rich due to bad financial management. But there are noteable exceptions we can learn from &mdash; Steven Spielberg with a net worth of $3.2 billion and Oprah Winfrey with $2.8 billion, both on <a href="http://www.forbes.com/forbes-400/list/">Forbes' list of richest Americans</a>. The <a href="http://www.celebritynetworth.com/list/top-50-richest-celebrities/">wealthiest of non-billionaire stars</a> include Bono, Jay-Z, Will Smith, and Ellen DeGeneres with total assets ranging from $100 million to $600 million.</p> <h2>How Celebrities Build Wealth</h2> <p>There's no one-style-fits-all investment formula among celebrities that I could detect. However, I did notice some investing themes worth sharing.</p> <p><strong>Invest in Yourself</strong></p> <p>Celebrities realize that their bodies, brains, and brands are their most important assets. The wealthiest find ways to maximize their payouts and leverage their names, generally through contract negotiations and celebrity endorsements. Money spent on promoting and positioning themselves as a brand is more investment than extravagance. (See also: <a href="http://www.wisebread.com/5-ways-to-make-extra-income-online-today">5 Ways to Make Extra Income Online Today</a>)</p> <p><strong>Invest in Tech Startups</strong></p> <p>The most common type of outside investment is the technology startup. Celebs often envision possibilities for tech applications pertinent to their industries and up-and-coming generations. Plus, the deep pockets and media presence of pop culture stars may be attractive to founders of startups who seek investment dollars and publicity.</p> <p>Examples of technology investments:</p> <ul> <li>Golf professional <a href="http://www.nytimes.com/2004/04/25/us/google-goes-public-search-for-rich-get-richer.html?pagewanted=all&amp;src=pm">Tiger Woods invested in Google</a> prior to its initial public offering.<br /> &nbsp;</li> <li>Singer Justin Bieber and comedian Ellen DeGeneres contributed to the <a href="http://mashable.com/2012/10/25/yahoo-acquires-stamped/">funding of mobile-app Stamped that was later acquired by Yahoo!</a>.<br /> &nbsp;</li> <li>Actor <a href="http://www.businessinsider.com/will-smith-invested-in-fancy-2013-7">Will Smith invested in Fancy</a>, a shopping site; he and rapper Jay-Z also put money into <a href="http://www.starpulse.com/news/Kevin_Blair/2012/04/24/jayz_and_will_smith_invest_in_new_ipho">Viddy, an iPhone app for video sharing</a>.<br /> &nbsp;</li> <li>Lady Gaga led <a href="http://techcrunch.com/2012/02/16/lady-gaga-backed-backplane-raises-over-4m-from-sequoia-more-acquires-sharing-platform-cortex/">funding for Backplane</a>, which provides web power for online communities of fans (the first was <a href="https://littlemonsters.com/">LittleMonsters.com</a> for Lady Gaga herself).<br /> &nbsp;</li> <li>Actor Ashton Kutcher joined an <a href="http://www.theatlantic.com/technology/archive/2011/06/ashton-kutchers-surprisingly-successful-tech-investments/240367/">investment group that purchased Skype</a> for nearly $2.8 billion and then sold to Microsoft for $8+ billion a few years later.</li> </ul> <p><strong>Leverage Expertise in Business Ventures</strong></p> <p>Celebrities often launch or become part owners of entertainment-oriented ventures, such as professional sports teams, luxury properties, restaurants, fashion empires, and television networks. Many of these businesses are closely tied to their areas of expertise.</p> <p>For example, talk show host and media mogul Oprah Winfrey invested her time and money in <a href="http://www.businessweek.com/articles/2013-07-31/an-aha-moment-oprah-winfreys-own-is-finally-profitable-dot">OWN (Oprah Winfrey Network), a joint venture with Discovery Communications</a>. Former NBA player Earvin &quot;Magic&quot; Johnson runs <a href="http://magicjohnson.com/company.php">MJE (Magic Johnson Enterprises)</a>, which includes investments in real estate and private equity funds, a chain restaurant, and a media company. These are departures from Johnson's basketball career but consistent with his urban-oriented, multi-cultural brand image.</p> <p><strong>Place Money With Investment Managers</strong></p> <p>Putting money with outside money managers seems like a boring way to make your assets grow in value. This method of wealth building may not seem as newsworthy as a stake in a tech startup or a professional sports team. So, the number of celebs that adopt this tactic may be underreported.</p> <p>However, I recently learned that <a href="http://www.investmentnews.com/article/20110911/REG/309119956">Taylor Swift's father is an investment manager</a> for high-net-worth clients. Presumably, Taylor is one of his clients or, at minimum, he provides her with financial advice such as &quot;save your money.&quot;</p> <p>Others who have <a href="http://www.forbes.com/sites/zackomalleygreenburg/2012/11/26/how-to-invest-like-david-letterman-andre-agassi-and-steffi-graf/">hired professionals for money management</a> include talk show host David Letterman and tennis stars Andre Agassi and Steffi Graf. Notably, U2 lead singer Bono is a co-founder and managing director of <a href="http://www.elevation.com/index.html">Elevation Partners, a global private equity investment firm</a>.</p> <h2>Lessons for Regular People</h2> <p>Just like the rest of us, celebrities make smart moves and stupid mistakes. We can learn from their successes and failures.</p> <p><strong>Maximize Earnings</strong></p> <p>Start by maximizing your earnings throughout your career. Personal finance expert <a href="http://www.jonathanclements.com/aboutclements.html">Jonathan Clements</a> advises me that our capacity to make money through a regular job or business is often the most overlooked income-producing asset.</p> <p><strong>Invest in Tech</strong></p> <p>With thousands rather than millions of dollars to invest, the average investor may not have the access to or risk tolerance for funding early-stage tech startups. However, you can purchase tech-oriented stocks or a specialty mutual fund or ETF in the technology sector.</p> <p><strong>Invest in What You Know</strong></p> <p>Like celebrities, you can invest within your circle of competence even if you don't start your own business. Acquire shares in companies with which you are familiar and make money in ways you understand. (See also: <a href="http://www.wisebread.com/17-places-to-find-investment-inspiration">17 Places to Find Investment Inspiration</a>)</p> <p><strong>Take Advantage of Online Management Tools</strong></p> <p>Finally, although private management is largely considered a perk of those with more than $500,000 of investable assets, portfolio management is becoming more accessible to regular people with modest wealth. Online brokerages offer a variety of money-management services, for example. (See also: <a href="http://www.wisebread.com/5-best-online-brokerages">5 Best Online Brokerages</a>)</p> <p>To build and keep your wealth, avoid common celebrity mistakes: Don't count on high income forever, spend within your means, and steer clear of investment scams.</p> <p><em>Have you learned anything about investing from celebrity hits and misses?</em></p> <a href="http://www.wisebread.com/investment-secrets-of-the-rich-and-famous" class="sharethis-link" title="Investment Secrets of the Rich and Famous" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment celebrity investing tricks investment Tue, 27 Aug 2013 10:24:35 +0000 Julie Rains 981522 at http://www.wisebread.com 4 Brain Hacks for Better Investment Decisions http://www.wisebread.com/4-brain-hacks-for-better-investment-decisions <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/4-brain-hacks-for-better-investment-decisions" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/thinking-5334787-small.jpg" alt="woman with questions" title="woman with questions" class="imagecache imagecache-250w" width="250" height="178" /></a> </div> </div> </div> <p>When it comes to investing, we all know what we should do: invest money early in our careers, so compound interest can do its magic; buy low and sell high; and avoid anything that sounds too good to be true. (See also: <a href="http://www.wisebread.com/4-quick-ways-to-decide-if-a-company-is-worth-your-investment">4 Quick Ways to Decide if a Company Is Worth Your Investment</a>)</p> <p>Unfortunately, just because we know what we should be doing doesn't mean we're any good at doing it. Our own cognitive biases and behavioral quirks get in the way of making the best investment decisions, which can really cost us in the long run. We may strive to be completely rational investors, but we tend to act more like emotion-driven gamblers.</p> <p>However, it doesn't have to be this way. Just because your brain tends to default to emotional decisions doesn't mean you're stuck with them. You can trick yourself into making better investment choices &mdash; without having to fight your nature. Here are four brain hacks you can implement today to improve your investing.</p> <h2>1. Imagine Yourself With Wrinkles and Liver Spots</h2> <p>The very biggest investment mistake that most people make is failing to invest at all. Even when your employer makes it relatively easy to invest in a 401(k), it's even easier to do nothing &mdash; or only invest the bare minimum. That's because <a href="http://www.amazon.com/gp/product/1583334386/ref=as_li_ss_tl?ie=UTF8&amp;camp=1789&amp;creative=390957&amp;creativeASIN=1583334386&amp;linkCode=as2&amp;tag=wisbre03-20" target="_blank">your future self feels like a stranger to you</a>, so it's difficult for you to care about him/her. (See also: <a href="http://www.wisebread.com/6-valid-reasons-not-to-contribute-to-your-401k">6 Valid Reasons Not to Contribute to Your 401(k)</a>)</p> <p>I recall a coworker who once told me with a straight face that she didn't bother saving for retirement because she wanted to enjoy her money now. This woman simply didn't care about the cat food-eating retiree that she would become because that future self didn't feel real to her.</p> <p>This is a phenomenon called <a href="http://moneyning.com/money-beliefs/how-hyperbolic-discounting-in-behavioral-economics-explains-your-irrational-money-choices/">hyperbolic discounting</a>.</p> <p>Human beings tend to place much more importance on things that happen now, and discount anything that might happen in the future. It's why it's so difficult to bypass that chocolate donut in the morning meeting, even though you're trying to slim down for a wedding or reunion next month. Your immediate gratification seems to be so much more important than your future trouble fitting into your dress.</p> <p>When it comes to retirement, many people feel like my former co-worker. They may feel like they really need the money now. Why bother putting it aside for some future self &mdash; who feels like a stranger?</p> <p><strong>Meet Your Future Self</strong></p> <p>The solution, according Hal Hershfield of New York University's Stern School of Business, is to get acquainted with your future self.</p> <p>Specifically, <a href="http://vhil.stanford.edu/pubs/2011/hershfield-jmr-saving-behavior.pdf">Hershfield found</a> that participants who looked at age-progressed pictures of themselves increased their saving behavior. Suddenly, seeing a be-jowled, wrinkled, and white-haired version of themselves made it clear to reluctant investors that they actually would reach retirement age &mdash; and boy would that extra savings come in handy.</p> <p>Basically, when you see a representation of what you will look like in 40 years, it makes your future self's financial concerns much more immediate.</p> <p>You can create an age-progressed picture of yourself for free at <a href="http://www.ageme.com">www.ageme.com</a>.</p> <h2>2. Automate</h2> <p>Wise Bread readers already know that they need to automate their savings and investing. It's the best way to pay yourself first, because relying on willpower is simply not going to cut it. Willpower is like a muscle, and it can be used up &mdash; even with unrelated issues. Anyone who has ever gone on a shopping spree to celebrate losing a few pounds, or who has gone face-first into a bag of cookies after successfully avoiding spending temptations, has felt the weakness of willpower.</p> <p>But even if you automate your savings and investing, you can do more automation in order to periodically increase the amount you put aside. For instance, if you know you can count on a 3% raise each year, it can be easy to let that money simply add to your lifestyle creep. A month prior to when your raise will kick in, let your rational side take the temptation to spend your extra cash out of the equation. Arrange for your 401(k) or other investment contribution to go up by 1% to 2% before you've even seen the check with the additional money it. That will allow you to ignore the emotional temptation to spend now. (See also: <a href="http://www.wisebread.com/lifestyle-inflation-the-ultimate-financial-trap">Lifestyle Inflation: The Ultimate Financial Trap</a>)</p> <h2>3. Set Short-Term Goals</h2> <p>I have a dirty little secret. Despite the fact that I am the daughter of a financial planner and a personal finance writer, I have often put money aside for my son's college education ahead of saving for my retirement.</p> <p>I certainly know better &mdash; but saving for my little one's education is a goal I can easily wrap my head around, and one that has a specific end-date and dollar goal. Putting money away for college feels like I'm doing something tangible that is working towards an achievable goal. Putting money away for retirement feels much more amorphous.</p> <p>My problem is a common one, even among diligent savers. It's difficult to really comprehend the huge investment goal that is planning for retirement, but a more tangible goal like saving for college or a vacation is much easier to grasp. This is related to hyperbolic discounting, since we are able to give up our need for instant gratification if we can feel like we're making progress on a short-term goal. (See also: <a href="http://www.wisebread.com/managing-your-short-term-money">Managing Your Short-Term Money</a>)</p> <p>In order to keep yourself from letting those short-term goals get in the way of your long-term ones, behavioral economist <a href="http://money.cnn.com/2011/09/06/pf/behavioral_economics.moneymag/index.htm">George Loewenstein</a> recommends that investors &quot;set short-term goals designed to accomplish long-term goals.&quot; This strategy will allow you to take care of your future needs, while still giving you the short-term gratification you need to stay the course.</p> <p>For me, since retirement is such a huge and undefined goal, I need to set immediate goals for my money within the big goal of retirement. For instance, my current short-term retirement goal is to max out my IRA contribution every year. Once I am able to do that, I will add a new goal of maxing out my Self-Employed 401(k), which has a much higher contribution limit. These goals are actionable, tangible, and allow me to feel a sense of accomplishment, whereas just planning to &quot;save more for retirement&quot; is none of those things.</p> <h2>4. Hide Your Statements From Yourself</h2> <p>It truly hurts to lose money. I can tell you the exact amount of money I have spent on various unused purchases that ended up being nothing more than clutter &mdash; because it hurts so much to think about the money I wasted.</p> <p>This universal phenomenon is called <a href="http://moneyning.com/money-beliefs/how-loss-aversion-in-behavioral-economics-explains-your-irrational-money-choices/">loss aversion</a>, and it's the reason why you're still using that treadmill in your basement as a place to hang laundry, and the reason why you might have sold a bunch of faltering stocks in the economic recession only to see them rebound. In the first instance, you hate the thought of taking a loss on selling off the treadmill, even though the money you can get through a sale is more than you have currently. And in the second, you can't stand the thought of losing any more money when things are not going well.</p> <p>Unfortunately, loss aversion is so hard-wired into our brains that it is very difficult for investors to think rationally while in the midst of a loss. Fear makes investors sell low in order to protect as much of their initial stake as possible. And often, those same investors will not feel confident enough to reinvest until the market has returned to a high point, meaning they have sold low and bought high.</p> <p>Since you cannot override your emotional reaction to a volatile market, the best solution is to selectively bury your head in the sand. While it is absolutely critical that you keep an eye on your investments and readjust your assets and your strategy as necessary, it is also a complete mistake to react to every movement of the market. So commit to only looking at your investments at pre-determined times.</p> <p>For me, I find that reviewing my investments quarterly can help me to overcome the panic I might feel at market losses and stay the course for the long term. (This also prevents me from feeling like I can guess what the market is going to do and jumping on &quot;hot&quot; new stocks.) Forcing myself to ignore the short-term ups and downs of my investments will allow me to better understand how they are doing over time.</p> <h2>Your Brain Is Costing You Money</h2> <p>We now know that there is no such thing as a completely rational investor. We are all slaves to our emotional/irrational brains, which will lead us into a much poorer future than we really want. The most rational investors are the ones who have found ways to circumvent their own irrationalities.</p> <p>Brain hacks like these can help your to protect yourself from your own worst impulses.</p> <p><em>What are your favorite investment brain hacks?</em></p> <a href="http://www.wisebread.com/4-brain-hacks-for-better-investment-decisions" class="sharethis-link" title="4 Brain Hacks for Better Investment Decisions" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/emily-guy-birken">Emily Guy Birken</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment emotions investing investment Mon, 26 Aug 2013 10:24:31 +0000 Emily Guy Birken 981434 at http://www.wisebread.com E*Trade Review: If a Talking Baby Can Do It, So Can You http://www.wisebread.com/etrade-review-if-a-talking-baby-can-do-it-so-can-you <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/etrade-review-if-a-talking-baby-can-do-it-so-can-you" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/baby-computer-1677680-small.jpg" alt="working baby" title="working baby" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>Just about everyone recognizes <a onClick="_gaq.push(['_trackEvent', 'afclick', 'contenttext', 'etrade']);" rel="nofollow" target="_blank" href="http://www.wisebread.com/redir/9813121">E*Trade</a>. The company is known as one of the earlier brokers in the online trading space, and the famous &quot;E*Trade Baby&quot; commercials have served to increase brand recognition.</p> <p>E*Trade is more than just clever marketing, though. It is a solid discount brokerage that makes it easy for beginners to start trading. There are even advanced tools that seasoned veterans can enjoy (although the cost can start to add up for active traders).</p> <h2>Why Choose E*Trade</h2> <p>E*Trade is a solid all-around choice for a brokerage. It offers a wide variety of trading tools and solid research. Additionally, the transaction fees, though not the cheapest, are in line with other brokerages in the space. For beginning investors, the easy-to-use platform and exceptional research tools can partially offset the higher transaction fee.</p> <h2>Fees and Account Minimums</h2> <p>E*Trade features a flat-rate commission structure. For most investors, the cost per transaction is $9.99. If you are a little more active, and you make at least 150 trades per quarter (that's an average of 50 trades per month), your transaction fee is $7.99. These flat fees apply to options trading, where the transaction fee plus $0.75 per contract is applied.</p> <p>One of the nice things about E*Trade is the fact that it has a wide selection of commission-free ETFs to choose from, nearly 100. If you don't want to invest in the ETFs on the commission-free list, you will pay the standard stock transaction fee (and the <a href="http://www.fool.com/personal-finance/general/2006/11/15/whats-an-expense-ratio.aspx">expense ratio</a>, of course, which is the percentage the fund manager charges to cover its expenses).</p> <p>E*Trade also offers a selection of no-load, no-transaction-fee mutual funds. Stick with these funds, and you can avoid the standard $19.99 fee for mutual funds. There is no fee for trading US Treasury bonds.</p> <p>You will be required to make a minimum deposit for many of E*Trade's accounts. For a &quot;regular&quot; investment account, the minimum is $500. The E*Trade OneStop Rollover IRA requires a $25,000 minimum deposit. But this is a managed account, so this makes sense. If you open a Traditional or Roth IRA, or if you rollover your retirement account without the management option, there are no account minimums.</p> <p>There are no account services fees with an E*Trade investment account.</p> <h2>Customer Service</h2> <p>You can access E*Trade's customer service 24/7, but it takes a little hoop-jumping to get there. Instead of having customer support numbers and access in easy to find places, E*Trade makes you go through the FAQs provided in the self-help section of the customer service. Getting to the service information is a little more complex than one click.</p> <p>Once you do get through to someone, though, you usually speak with a helpful and knowledgeable representative. E*Trade is also known for its outstanding email customer support. Only the weekend customer support is a little weak. So, if you have a problem, it's usually best if you can wait until Monday to hash it out (or email about the issue).</p> <p>There is a live chat option as well, and E*Trade also has retail locations, so there is the possibility of meeting someone face to face.</p> <h2>Research and Education Tools</h2> <p>This is an area where E*Trade really shines. Their research tools are easy to use and provide you with essential information quickly and easily. E*Trade uses third-party providers for research, and they are heavy-hitters. Morningstar provides the mutual fund research. You can also get research from Standard &amp; Poors, MarketEdge, and Thomson Reuters.</p> <p>It's possible for you to customize your research and education settings so that you can pull up studies to sit next to event data, giving you a complete picture of events and how they might have impacted performance. You can even display trading activity that takes place post-hours.</p> <p>Set up alerts so that you can take advantage of changes in the situation quickly and easily. Beginners can benefit from this information, and the real-time news and charting capability can also help seasoned traders as they strategize.</p> <h2>Other Features and Services</h2> <p>E*Trade also receives high marks for its mobile trading platform. It's easy to use, and you can make trades on the go. The platform is available in a web-based version and a desktop version. The desktop version, though, is a bit expensive at $99 per month, unless you meet certain requirements. However, the Elite platform provides a number of tools that active traders can appreciate.</p> <p>It's also worth noting that E*Trade offers banking services. You can use this account for bill pay and other transactions, and you don't have to worry about ATM fees. E*Trade banking also offers unlimited ATM fee refunds when you use other banks' ATMs. You can get checks and a debit card to aid in accessing the money in your E*Trade bank account. This account make it easy to transfer money to and from your investment account.</p> <h2>How Does E*Trade Compare to Other Brokerages?</h2> <p>E*Trade is a little more expensive than some of the other discount brokerages. However, it does offer commission-free ETFs in line with what other brokerages offer. Additionally, the research tools are fairly advanced. While they don't quite offer the depth that you might see with a TDAmeritrade or a Scottrade, they are nonetheless more than adequate for most investors.</p> <h2>How E*Trade Could Be Better</h2> <p>It would be nice if the Elite platform were available to more traders. Additionally, the $500 minimum means that some investors need to save up &mdash; unless they are opening a &quot;regular&quot; IRA. E*Trade could also make its customer service more accessible, rather than forcing investors to deal with self-help before being able to gain access to a customer support specialist.</p> <h2>Who Is E*Trade Good For?</h2> <p>While E*Trade tries to lure super-active traders with promises of $6.99 trades when you make at least 150 trades in a quarter, the reality is that active traders might do better with brokerages that charge less. These active (and experienced) traders can usually get by without all the in-depth research.</p> <p>Instead, E*Trade is good for beginning to intermediate investors looking for reasonably priced trades. This brokerage is especially friendly to the fund investor. If you plan to invest in mutual funds and ETFs, E*Trade is great because of its selection of funds that come without transaction fees. It's even better if you decide to <a onClick="_gaq.push(['_trackEvent', 'afclick', 'applytext', 'etradeira']);" rel="nofollow" target="_blank" href="http://www.wisebread.com/redir/9813122">open an IRA</a>, because then you can avoid the need for a minimum. The long-term investor saving for retirement can really benefit from E*Trade.</p> <h2>Bottom Line</h2> <p>E*Trade is a solid choice for just about any investor. However, those looking to buy and hold mutual funds and/or ETFs in an IRA are going to see the most benefit.</p> <p><a onClick="_gaq.push(['_trackEvent', 'afclick', 'applytext', 'etrade']);" rel="nofollow" target="_blank" href="http://www.wisebread.com/redir/9813121"><strong>Click here to open an account today!</strong></a></p> <p><em>Are you an E*Trade customer? What has your experience been?</em></p> <p>&nbsp;</p> <a href="http://www.wisebread.com/etrade-review-if-a-talking-baby-can-do-it-so-can-you" class="sharethis-link" title="E*Trade Review: If a Talking Baby Can Do It, So Can You" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/miranda-marquit">Miranda Marquit</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment e*trade investment online brokerage Fri, 16 Aug 2013 10:36:30 +0000 Miranda Marquit 981312 at http://www.wisebread.com Why Index Funds Are the Best Choice for New Investors http://www.wisebread.com/why-index-funds-are-the-best-choice-for-new-investors <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/why-index-funds-are-the-best-choice-for-new-investors" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/piggy-bank-2550695-small.jpg" alt="piggy bank" title="piggy bank" class="imagecache imagecache-250w" width="250" height="199" /></a> </div> </div> </div> <p>Are you looking to build long-term wealth, but are so new to the world of investing that you don't know where to begin? If so, I've got great news for you.</p> <p>There aren't too many things in life that both save you more money and make you more money at the same time. Fortunately, a type of investment known as an index fund is one of them. (See also: <a href="http://www.wisebread.com/begin-your-investing-career-right-with-some-mutual-fund-basics">Begin Your Investing Career Right With Some Mutual Fund Basics</a>)&nbsp;</p> <p>That's why index funds are one of the best long-term wealth-building tools ever made. So let's dig in to see exactly what they are, and &mdash; more importantly &mdash; how they save you money and make you money all at once.</p> <p>But before we go further, let me explain some terms.</p> <h2>What Are Mutual Funds?</h2> <p>In a nutshell, mutual funds are a basket of different kinds of investments. And the most common investments are stocks and bonds.</p> <p>For instance, one mutual fund could be made up of a few hundred stocks. Another could be made up of a few hundred bonds.</p> <p>This large amount of stocks or bonds is a good thing because it protects you. If a few stocks or bonds don't perform well, then there are still hundreds of others to help pick up the slack.</p> <h2>Different Kinds of Funds</h2> <p>Within the world of mutual funds, there are two types of funds:</p> <ol> <li>Actively managed funds</li> <li>Index funds</li> </ol> <p>What's the difference?</p> <p>Actively managed funds are run by managers who <em>try</em> &mdash; note the keyword <em>try</em>&nbsp;&mdash; to beat the market's return. So if the stock market goes up 8% one year, this manager will try to pick certain stocks so that you'll earn more than 8%.</p> <p>Index funds, however, do <em>not</em> try to beat the market. All they do is copy it. So if the market goes up 8% one year, this fund has the same stocks that'll provide pretty much the same 8% growth. (See also:&nbsp;<a href="http://www.wisebread.com/7-great-investments-for-first-timers">7 Great Investments for First-Timers</a>)</p> <p>OK, now that I've explained that, let's go back to the topic of saving you more money.</p> <h2>Saving You More Money</h2> <p>First, it's important to know that all mutual funds come with a cost. The difference, however, lies in the amount.</p> <p>Actively managed funds charge more for the &quot;potential&quot; for higher returns that I mentioned above. In some cases, a lot more.</p> <p>According to <a href="http://www.ici.org/pdf/per19-03.pdf">a report from the Investment Company Institute</a> (PDF), the average actively managed fund costs 0.92% a year. This means that for every $1,000 your investment is worth, you'll pay $9.20.</p> <p>With index funds, however, you'll pay much less. The average index fund costs 0.13% a year. So for every $1,000 your investment is worth, you'll pay just $1.30.</p> <p>Now, this $7.90 difference may not seem like a big deal, but that's because we just started with a small amount as an example.&nbsp;To build real wealth, you need to invest often.</p> <p>Let's say you invest $5,000 every year for the next 20 years. Also, let's assume that both the actively managed and index funds grow by 8% per year (although I'll show you later that this isn't a fair assumption).</p> <p>If you chose the actively managed fund, at the end of the 20 years you'd end up with $219,728 &mdash; a decent amount. But if you invested in the lower-cost index fund, you'd have grown your money to the sum of $242,994 &mdash; a difference of over $23,000. (See also:&nbsp;<a href="http://www.wisebread.com/boost-your-retirement-savings-avoid-401k-fees">Boost Your Retirement Savings: Avoid 401(k) Fees</a>)</p> <p>What would you do with an <em>extra</em> $23,000?</p> <p>Or here's another way to put it &mdash; how much would it hurt to <em>lose</em> $23,000?</p> <p>This extra money that you'd make with an index fund comes from one thing, and one thing only &mdash; the cost savings.</p> <p>So one way that index funds both save you more money and make you more money &mdash; at the same time &mdash; is by the simple fact that they cost much less.</p> <p>But that's not the end of the story. There's another way index funds make you more money, and that's from the poor performance of most actively managed funds.</p> <h2>Making You More Money</h2> <p>A <a href="http://us.spindices.com/resource-center/thought-leadership/spiva/">study from the S&amp;P Dow Jones Indices found</a> that during the past three years, over 86% of large-cap funds failed to beat their benchmark index, the S&amp;P 500 index. While the actively managed funds provided just under 9% growth, the S&amp;P 500 index grew by over 10% during this time.</p> <p>This means that if you invested in the S&amp;P 500 (through an index fund, of course) during this time, you would've made more money than 86% of all other related funds.</p> <p>When you combine the greater long-term performance with the lower cost of index funds, you end up saving more money and making more money. (See also:&nbsp;<a href="http://www.wisebread.com/using-time-horizons-to-make-smarter-investments">Using Time Horizons to Make Smarter Investments</a>)</p> <p>If you'd like to see how I'm using index funds to build wealth, and how you can do it too, check out the <a data-mce-href="http://moneytobless.com/simplify-your-investing-with-the-core-four-portfolio/" target="_blank" href="http://moneytobless.com/simplify-your-investing-with-the-core-four-portfolio/">Core Four Portfolio</a>.</p> <p><em>Do you invest in an actively managed fund or an index fund?</em></p> <a href="http://www.wisebread.com/why-index-funds-are-the-best-choice-for-new-investors" class="sharethis-link" title="Why Index Funds Are the Best Choice for New Investors" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/darren-wu">Darren Wu</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment index funds investment mutual funds retirement funding Fri, 16 Aug 2013 09:48:29 +0000 Darren Wu 980986 at http://www.wisebread.com The Basics of Asset Allocation http://www.wisebread.com/the-basics-of-asset-allocation <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/the-basics-of-asset-allocation" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/piggy-bank-5228342-small.jpg" alt="piggy bank" title="piggy bank" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>Whenever you talk to an investment professional, she invariably mentions the importance of <a href="http://www.investopedia.com/terms/a/assetallocation.asp">asset allocation</a>. Closely linked to the discussion of asset allocation is the concept of <a href="http://www.investopedia.com/terms/d/diversification.asp">diversification</a>. Both are considered useful in designing and managing an investment portfolio.</p> <p>Think of asset allocation as placing your proverbial eggs in three main categories of baskets: equities, fixed income, and cash equivalents. Refinement of asset allocation and diversification involves figuring out what types of baskets (such as large-cap blend and small-cap growth equities, technology and manufacturing sectors, etc.), and then choosing specific investments within those types. (See also: <a href="http://www.wisebread.com/a-guide-to-online-brokers-for-investing-newbies-and-beyond">A Guide to Online Brokers for Investing Newbies (and Beyond)</a>)</p> <h2>Rationale for Asset Allocation</h2> <p>Many professional advisers and websites will mention <a href="http://en.wikipedia.org/wiki/Modern_portfolio_theory">Modern Portfolio Theory</a> (or MPT) as the foundation of asset allocation. An idea crystallized and explained by <a href="http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1990/markowitz-bio.html">Harry Markowitz</a> (who won the 1990 Nobel Prize in Economics for his efforts), portfolio theory suggests that proper asset allocation is instrumental in optimizing portfolio return, given a specific risk tolerance.</p> <p>Others in the investment field simply promote the idea of allocating assets into various classes and diversifying within sub-classes or categories. This technique is useful for</p> <ol> <li>Managing risk and volatility.<br /> &nbsp;</li> <li>Capturing gains from the asset class along with the sub-class, sector, etc. that experiences growth during certain time periods.</li> </ol> <p>From what I can discern, the main difference between the two schools of thought is a nuanced one. Portfolio theory claims that proper asset allocation can optimize investment returns by locating the <a href="http://www.investopedia.com/terms/e/efficientfrontier.asp">efficient frontier</a> or <a href="http://oxforddictionaries.com/definition/english/sweet-spot">sweet spot</a> in an investment portfolio. Others indicate that you may need to sacrifice returns somewhat in order to minimize risk. Either way, asset allocation and diversification are employed to help investors reach their goals.</p> <p>The underlying assumption <a href="http://asset-allocation.net/modern-portfolio-theory-asset-allocation/">based on historical performance</a> is that different asset classes along with sub-classes, categories, and sectors perform better than others at any given time. For example, the prices of large-cap value stocks may grow at a rapid pace and small-cap growth stocks may falter under certain market conditions; however, small-cap growth mutual funds may soar when large-cap value funds decline.</p> <p>How different asset classes (and individual investments) move in relation to each other is known as <a href="http://asset-allocation.net/asset-class-correlation/">correlation</a>. If asset categories move in the same direction, they are positively correlated; in the opposite direction, negatively correlated. Asset allocation and diversification help manage this correlation so that fluctuations in investment returns stay within certain ranges based on risk tolerance. For an illustration of this concept, see the graph on <a href="http://www.schwab.com/public/schwab/resource_center/expert_insight/investing_strategies/portfolio_planning/the_portfolio_pyramid_how_to_diversify_your_investments.html">Model Asset Allocation Plans from Charles Schwab</a>.</p> <h2>Factors Affecting Asset Allocation Models</h2> <p>Most investment professionals and online investing tools create asset allocation models based on your risk tolerance and time horizon (or your current age). In general, stocks comprise a higher percentage of the overall recommended portfolio the higher your risk tolerance and the longer your time horizon. However, each model is designed slightly differently, so percentages assigned to asset classes vary. (See also: <a href="http://www.wisebread.com/using-time-horizons-to-make-smarter-investments">Using Time Horizons to Make Smarter Investments</a>)</p> <p>Your personal circumstances and economic conditions may lead you to alter a model asset allocation. For example, I feel comfortable investing more heavily in equities than generally recommended, so my ideal differs slightly from those proposed by asset allocation tools.</p> <p>Whatever your model, define and stick with its breakdown into various classes unless you have a compelling reason to change.</p> <h2>Using Asset Classes and More for Asset Allocation and Diversification</h2> <p>There are many sources, such as online tools as well as certified financial planners, that can provide guidance regarding asset allocation and diversification methods.</p> <p>Some offer general direction, specifying percentages for large-cap stocks, small-cap stocks, foreign stocks, bonds, and cash equivalents (such as this <a href="http://cgi.money.cnn.com/tools/assetallocwizard/assetallocwizard.html">tool from CNN Money</a>); whereas others give more detailed guidance. Note that this breakdown goes beyond main asset classes central to asset allocation and includes sub-classes, categories, sectors, etc. important for diversification.</p> <p>Portfolio analyzers often give comparisons of current holdings to target allocations based on risk tolerance. Also, there are diversification tools that help build and manage a portfolio alongside of asset-allocation illustrations. (See also: <a href="http://www.wisebread.com/5-best-online-brokerages">5 Best Online Brokerages</a>)</p> <p>Here are a few ways holdings may be classified and evaluated using portfolio analysis capabilities provided by these popular online brokerage firms:</p> <p><strong>TD Ameritrade</strong></p> <ul> <li> <p>Asset Allocation: Domestic Equity &mdash; Large Cap, Mid Cap, Small Cap, Other; International Equity &mdash; Developed, Emerging, Other; Specialty; Domestic Fixed Income; International Fixed Income</p> </li> </ul> <p><strong><a target="_blank" href="http://www.wisebread.com/redir/9812181">E*Trade</a></strong></p> <ul> <li>Asset Class: Stocks, Bonds, Cash<br /> &nbsp;</li> <li>Valuation: Value, Core, Growth<br /> &nbsp;</li> <li>Sector: Cyclical (Basic Materials, Consumer Cyclical, Financial Services, Real Estate); Defensive (Consumer Defensive, Healthcare, Utilities); Sensitive (Communication Services, Energy, Industrials, Technology)<br /> &nbsp;</li> <li>World Regions: U.S. &amp; Canada, Europe, Japan, Latin America, Asia &amp; Australia<br /> &nbsp;</li> <li>Stock Type: High Yield, Distressed, Hard Asset, Cyclical, Slow Growth, Classic Growth, Aggressive Growth, Speculative Growth</li> </ul> <h2>How to Use Portfolio Recommendations</h2> <p>Many portfolio management tools are comprised of three key components:</p> <ol> <li>Recommended allocations<br /> &nbsp;</li> <li>Current distribution among asset classes and categories<br /> &nbsp;</li> <li>Changes recommended because of differences between the ideal and existing asset mix</li> </ol> <p>High-level recommendations generated through online functionalities seem to be reasonable. For example, you may want to increase your holdings in international stocks and small-cap stocks if your portfolio is comprised mostly of large-cap stocks. Similarly, sector analyses may indicate ways you can diversify through greater concentration in utilities and healthcare and less in industrials, for example.</p> <p>However, more pointed recommendations, such as sell ABC stock or XYZ mutual fund and buy this one, tend to be less helpful. Take the suggestions as a starting point for further research rather than the ultimate answer about what you should do next with your portfolio.</p> <h2>Rebalancing</h2> <p>If your portfolio grows in the way that asset-allocation proponents predict (that is, certain asset classes grow and become over weighted when others languish or decline and become underweighted), then you'll need to <a href="http://investorsolutions.com/investment-strategy/portfolio-maintenance/is-your-portfolio-off-balance-2/">rebalance</a>. Review your current portfolio and make adjustments yearly or perhaps quarterly or whenever huge growth occurs and prompts the need to rebalance.</p> <p>To return your portfolio to its equilibrium, sell off the high-performing assets and increase your position in the other assets, or invest new money in the lower-performing assets. That is, buy more of what didn't perform well recently, so your portfolio will be positioned to capture gains in areas poised for growth. These rebalancing steps seem counterintuitive but are essential to maintaining your portfolio's asset allocation. (See also: <a href="http://www.wisebread.com/investment-allocation-by-age-birth-to-10-years-old">Investment Allocation by Age: Birth to 10 Years Old</a>)</p> <p>Asset allocation, diversification, correlation, and portfolio theory can get complicated. Financial professionals may oversimplify concepts (and occasionally draw misleading conclusions) for the purpose of championing thoughtful portfolio design as well as promoting an investment product and selling a service. Knowing the basic lingo of asset allocation can help you understand and participate in these conversations and make informed decisions for building and managing your portfolio.</p> <p><em>Have you employed asset allocation in managing your investments? Are you satisfied with the results?</em></p> <a href="http://www.wisebread.com/the-basics-of-asset-allocation" class="sharethis-link" title="The Basics of Asset Allocation" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment asset allocation investing investment online brokerage Tue, 13 Aug 2013 10:00:33 +0000 Julie Rains 981218 at http://www.wisebread.com TradeKing Review: The Best Brokerage for New and Intermediate Investors? http://www.wisebread.com/tradeking-review-the-best-brokerage-for-new-and-intermediate-investors <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/tradeking-review-the-best-brokerage-for-new-and-intermediate-investors" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/crown-3790885-small.jpg" alt="tradeking" title="tradeking" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>One of the most well-known online discount brokerages in the space is <a onClick="_gaq.push(['_trackEvent', 'afclick', 'contenttext', 'tradeking']);" rel="nofollow" target="_blank" href="http://www.wisebread.com/redir/9811531"> TradeKing</a>. TradeKing was launched at the end of 2005, and itwas one of the first online brokerage firms to add social networking tools for investors. The brokerage is also known for its Options Playbook (available free online), as well as its 2012 merger with another online brokerage, Zecco.</p> <h2>Why Choose TradeKing?</h2> <p>The biggest reason that many investors choose TradeKing is due to its relatively low pricing for stock trades. TradeKing also receives high marks for its easy to use platform and for its highly-rated customer service. Additionally, if community is important to you, TradeKing offers an active community that can provide you with answers to your questions and pass on interesting trading ideas.</p> <p>TradeKing has won recognition as one of the best brokers from Barron's, SmartMoney, Wall Street Journal, Consumer Reports, and the StockBrokers.com Online Broker Review. With all of this recognition, investors can feel safe knowing that they aren't risking their money with a fly-by-night organization.</p> <h2>Fees and Account Minimums</h2> <p>You will pay commissions no matter where you invest your money. TradeKing, though, offers one of the best deals on stock trades.</p> <ul> <li>The stock and ETF fee is $4.95 per transaction. (As long as the price per share is above $1. For stocks priced at less than a dollar, you pay the $4.95 transaction fee, plus one cent per share.) This is among the lowest transaction fees available, especially for a brokerage with the wide range of research and investment tools.<br /> &nbsp;</li> <li>Options cost $4.95, plus 65 cents per contract, up to eight. Once you move beyond eight contracts you pay $8.95 per transaction, but the per-contract fee drops to 15 cents.<br /> &nbsp;</li> <li>Mutual funds cost $9.95 to trade, and corporate bonds can be traded for $4.95 ($14.95 minimum).<br /> &nbsp;</li> <li>Treasury bonds cost $24.95 per transaction; you are probably better off opening a TreasuryDirect account and buying Treasury securities from the source. CD transactions cost $24.95 as well.</li> </ul> <p>One of the disappointments with TradeKing is the fact that there are no commission-free ETF offerings as of this time. More brokerages are offering trades on select ETFs with no commissions, so there are hopes that TradeKing will join the trend.</p> <p><strong>Account Minimums</strong></p> <p>You don't need a minimum deposit to open a TradeKing account. You do need to provide a way to fund your account if you expect to trade, but you don't need any money to open your account.</p> <p>Be aware that activity fees are a possibility, however. If you don't execute at least one commission-charge trade each 12 months, AND if you have less than $2,500 in combined account value, you will be charged an annual fee of $50. You can avoid this fee by simply making one trade a year until your account value reaches $2,500, and then making sure that your account value remains above that level, whether or not you make a trade.</p> <h2>Customer Service</h2> <p>TradeKing has long been cited for its great customer service. Representatives are generally knowledgeable, and if you pay for phone broker services, you normally speak with someone who can help you place a trade.</p> <p>Customer service is available via Live Chat during the week, as well as through email, telephone, and mail. It's usually possible to get a hold of someone (chat or phone) Monday through Friday, from 8 a.m. to 6 p.m. Eastern. Otherwise, TradeKing is generally fast at answering emails, and you can get customer service help through social media channels like Twitter and Facebook as well.</p> <h2>Research and Education Tools</h2> <p>TradeKing offers a number of research and educational tools. Investors have access to a stock screener, real-time research, and a number of educational resources, including the Options Playbook. Not only that, but there is an extensive trader community that acts as a resource as well.</p> <p>Investors with TradeKing have access to a variety of account choices, including corporate accounts, trust accounts, IRAs, and Coverdell accounts. However, you are mostly on your own when it comes to account management. The low prices and abundant research tools mean that you are expected to use what is offered, avail yourself of the community, and then make your own portfolio management decisions.</p> <h2>Other Features and Services</h2> <p>TradeKing has been recognized for its trading platform, which is intuitive and easy to use. Additionally, TradeKing offers a complement of mobile trading features that make it easy to execute trades from just about anywhere.</p> <h2>How Does TradeKing Compare?</h2> <p>TradeKing offers fairly low-cost trades and is competitive with most other brokerages. There are brokerages that offer lower transaction costs, but these brokerages generally offer less in terms of research tools. TradeKing does cost a little more when it comes to penny stocks and options trading, but many beginning investors aren't really interested in those items, anyway.</p> <p>TradeKing is one of the more responsive brokerages, and the thriving community is bigger than many of the communities seen at other brokerage sites.</p> <h2>How TradeKing Could Be Better</h2> <p>The main complaints against TradeKing center around high penny stock commissions, and the lack of paper trading availability. It would also be nice if TradeKing offered commission-free ETFs. With ETFs increasing in popularity, it makes sense to provide a wider selection, and add in some without commissions (TradeKing could still make money on the expense ratios).</p> <h2>Who TradeKing Is Good For</h2> <p>For the most part, TradeKing is good for an investor at just about any proficiency level. TradeKing is especially helpful for beginning and intermediate traders, though. The educational and research tools available can help less experienced traders get a leg up.</p> <p>TradeKing is great for long-term investors who are interested in building up a portfolio for retirement or for wealth down the road. This brokerage is ideal for those who utilize dollar-cost averaging.</p> <p>The brokerage is less ideal for options traders and frequent traders. There are other brokerages with lower commissions (as low as $2.95) and better options' prices that more active traders should use.</p> <h2>Bottom Line</h2> <p>TradeKing is one of the best online discount brokerages out there. It offers relatively low commissions and makes it easy for beginning to intermediate investors to get started with low-cost investment choices. Most &quot;regular&quot; investors will find TradeKing more than adequate for their needs.</p> <p><strong><a onClick="_gaq.push(['_trackEvent', 'afclick', 'applytext', 'tradeking']);" rel="nofollow" target="_blank" href="http://www.wisebread.com/redir/9811531">Click here to open an account now</a></strong></p> <p><em>Do you invest with TradeKing? Which online brokerage do you use?</em></p> <a href="http://www.wisebread.com/tradeking-review-the-best-brokerage-for-new-and-intermediate-investors" class="sharethis-link" title="TradeKing Review: The Best Brokerage for New and Intermediate Investors?" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/miranda-marquit">Miranda Marquit</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment investing investment online brokerage tradeking Fri, 09 Aug 2013 10:36:32 +0000 Miranda Marquit 981153 at http://www.wisebread.com