Investments, IRAs, 401(K)s, and Stocks

Just curious what everyone does for their investments. This likely won't apply to the college-age members, but it's something I started this past year and have been researching more fully recently. From all the literature I've read, it's something you should start as early as possible. Compound interest favors those who start early, so setting aside, say, $2,000 starting at age 20 and not touching it will (likely) make you a millionaire on the strength of the IRA alone by retirement age. Most can't do that at such an age, but it's the ideal. I'm late 20s, so I'm a bit late to the party, but not so late that I should be worried about my future state.

I have a company-match SIMPLE IRA (they match 3%), which is set up as a Roth IRA (i.e. pre-taxed so that I pay no penalties upon withdrawal later in life). It's invested in some growth-oriented mutual funds, and has performed admirably in its first year of existence.

In the interests of diversifying, I've been considering opening a separate IRA account, or possibly a 401(K). The IRA could be another Roth or a Traditional IRA - at my tax level there's no major advantage or disadvantage to either. The returns on 401(K) plans seems to be slightly lower than IRA estimates that I've seen, provided you put in an equivalent amount of money. I'm not entirely sure why this is. The other option is putting more into my existing IRA; yearly limits are in the neighborhood of $5,500, which I'm not in danger of surpassing currently. And there exists an allure of doing some self-managed stuff on a site like eTrade. So long as I'm continuing the more traditional investments, and making sure those come first, setting aside some to play with in a more hands-on environment is appealing to me.

I'll be talking to my CPA about all of this soon - I'm not really looking for investment advice on KMC, just discussing my current situation. Where is everyone else at with this stuff?

I also don't have a go-to website currently for this kind of literature. I found some helpful articles disambiguating IRAs on the "Get Rich Slowly" website: http://www.getrichslowly.org/blog/category/investing/ , but I can't vouch for its overall credibility. What websites do you trust for this sort of information?

I don't trust websites that tell me a 2,000$ investment will turn me into a millionaire. Even if it supposedly takes decades.

Originally posted by ArtificialGlory
I don't trust websites that tell me a 2,000$ investment will turn me into a millionaire. Even if it supposedly takes decades.

Well, it's just simple math. If you do this with an IRA and it has returns of about 5% or better (most actually assume about 7% returns as the norm), you'll have a lot of money by the retirement age of 65. It might not be a million, but it will be a lot. You can do the calculations yourself:
http://www.bankrate.com/calculators/retirement/roth-ira-plan-calculator.aspx
http://www.bankrate.com/calculators/retirement/traditional-ira-plan-calculator.aspx

The point isn't the million figure, though. It's that earlier investment is favorable, and even if the market as a whole is slow, you'll see a considerable long-term return on your investment.

And to your specific point, no website promises it will make you a million to do this. The point of long-term investing is to minimize risk; but the risk is still present. But they universally recommend this type of investment as early as you can. Do you do something outside of this type of investing? Or was your criticism aimed at websites only, not investing in general?

Originally posted by Digi
Well, it's just simple math. If you do this with an IRA and it has returns of about 5% or better (most actually assume about 7% returns as the norm), you'll have a lot of money by the retirement age of 65. It might not be a million, but it will be a lot. You can do the calculations yourself:
http://www.bankrate.com/calculators/retirement/roth-ira-plan-calculator.aspx
http://www.bankrate.com/calculators/retirement/traditional-ira-plan-calculator.aspx

The point isn't the million figure, though. It's that earlier investment is favorable, and even if the market as a whole is slow, you'll see a considerable long-term return on your investment.

And to your specific point, no website promises it will make you a million to do this. The point of long-term investing is to minimize risk; but the risk is still present. But they universally recommend this type of investment as early as you can. Do you do something outside of this type of investing? Or was your criticism aimed at websites only, not investing in general?

I thought it was a one-time 2K investment. The website you linked claims an annual investment of 5K will net you 700K in 36 years. That sounds somewhat more believable.

Nah, I don't do any kind of investing as I have financial independence anyway, but I probably should start to make sure it lasts. I find it quite intimidating though. I don't know how it's different from country to country as I'm from Europe and those websites seem to be from the perspective of the USA/NA.

My criticism was aimed generally at things that sound too good to be true.

Originally posted by ArtificialGlory
I thought it was a one-time 2K investment. The website you linked claims an annual investment of 5K will net you 700K in 36 years. That sounds somewhat more believable.

Nah, I don't do any kind of investing as I have financial independence anyway, but I probably should start to make sure it lasts. I find it quite intimidating though. I don't know how it's different from country to country as I'm from Europe and those websites seem to be from the perspective of the USA/NA.

My criticism was aimed generally at things that sound too good to be true.

Yes, but run that same calculation from age 20 to 65. It doubles to 1.5 million. That's my point. 10 more years, double the amount of 35 years. Compound interest. And even in yours, 180K is becoming 700K. A significant increase, even accounting for inflation.

This isn't necessarily a too-good-to-be-true thing. It takes time. It's a retirement thing. It's not a get rich quick scheme, it's 35 years or more of careful planning. Now, downtrends in the economy can slow the growth. This money isn't guaranteed. But, for example, my IRA operated at about 6% returns this past year, which is fairly consistent with the default value for that tool. If I invest maybe $2,000 a year until I'm 65, it's not outlandish to say I'll turn an investment of roughly 80K into a lot more than that...as much as half a million depending on my luck.

Add that to a 401(K) or another account with a similar investment, and retiring with a million dollars to spend isn't a pipe dream. Or double that if you have a spouse who has similar foresight. I can't afford to set aside 5K every year right now, but I'm getting there. And the returns are potentially substantial, and certainly better than saving on your own or putting it in a bank account. It just takes planning and steady sacrifice. But an alarming number of people don't start this until middle age, or not at all, or don't have the financial freedom and knowledge to do so. And when rich people get richer, this is what they're talking about. They have 30K in IRA and 401K buckets each year, plus individual stock options being traded, that are compounding into millions upon millions by their retirement. It's possible to get there, it's just not as easy for the middle and lower class, since no one has 30K to stash away each year.

No clue about European rules though.

Well then, I will certainly have to investigate if we have such an investment plan over here. I believe I could afford it.

Good luck to you then. 👆

And I don't mean to seem too rosy - it probably seems that way because I had to rebut your initial skepticism. Market fluctuations can and sometimes do affect these things. I tend to look at less ideal scenarios as target goals...say, 5% returns as opposed to 7%, which can add up to 10s of thousands of dollars over the long haul (or hundreds of thousands at higher investing ends). And total market crashes can do even worse, which is why diversification is a common buzzword...don't want all your eggs in one basket. The idea behind mutual funds - the most common type of IRA and 401K investment - is that they're far less volatile than traditional stocks. And they are! But that doesn't mean they're without risk...it's just far less risk than individual stocks come with.

Most investment firms can adapt to these needs though...higher risk growth funds in younger age, and lower risk ones as you near retirement. It's a common strategy, one that major firms are used to handling. You can even tell some to move your money into lower risk investments without your approval when you hit certain monetary goals or age limits.

Again, none of it is a promise. But it's all better than most of the alternatives.

Thank you.

I see. Didn't the 2008 crisis completely destroy some people's retirement funds though? Or am I thinking of something else here?

Originally posted by ArtificialGlory
Thank you.

I see. Didn't the 2008 crisis completely destroy some people's retirement funds though? Or am I thinking of something else here?

Destroy is probably a bit melodramatic. I know a lot of 401(K) plans got hit pretty hard, but it wasn't a "sky is falling" moment for most. Here's a decent analysis of it:
http://www.marketwatch.com/story/401ks-took-big-but-not-devastating-hit-in-2008-2009-10-06

I keep all my money under my mattress. It's safe there.

And moist.

Originally posted by BackFire
I keep all my money under my mattress. It's safe there.

I assume this is in jest, but it's a mentality many have. But stash 2K under a mattress each year for 30 years and you have enough to last you maybe a year or two. Invest it wisely and you can retire in relative comfort. The number of people I encounter who either know nothing about any of this, or are scared of it for irrational reasons, is startling.

There's a reason the rich talk about their investment portfolio. It's not because they're bored and have money to play with, but because they understand what it takes to maintain and grow the wealth. Risk is risk, which turns some off. But I don't want to work until I die.

Originally posted by Stealth Moose
And moist.

Lol

Originally posted by Digi
I assume this is in jest, but it's a mentality many have. But stash 2K under a mattress each year for 30 years and you have enough to last you maybe a year or two. Invest it wisely and you can retire in relative comfort. The number of people I encounter who either know nothing about any of this, or are scared of it for irrational reasons, is startling.

There's a reason the rich talk about their investment portfolio. It's not because they're bored and have money to play with, but because they understand what it takes to maintain and grow the wealth. Risk is risk, which turns some off. But I don't want to work until I die.

Oh yeah, where I come from, this sort of mentality is still relatively prevalent. Not entirely without reason, however. Many people lost a lot of their money(entire life savings, in some cases) during the 90s to fraudulent banks and investments. Thankfully, laws, insurance, and accountability have improved massively since then, but fear still lingers in the minds of many.

I get the impression that you're talking about some pretty low-risk stuff in this case. It's not like buying a bunch of stocks and then praying that they increase in value.

Originally posted by ArtificialGlory
Oh yeah, where I come from, this sort of mentality is still relatively prevalent. Not entirely without reason, however. Many people lost a lot of their money(entire life savings, in some cases) during the 90s to fraudulent banks and investments. Thankfully, laws, insurance, and accountability have improved massively since then, but fear still lingers in the minds of many.

I get the impression that you're talking about some pretty low-risk stuff in this case. It's not like buying a bunch of stocks and then praying that they increase in value.

Right. Mutual funds are technically stocks, but instead of, say, buying stock in Google and hoping for the best, your money is disseminated amongst dozens of prominent companies. So Google might be one of 50 major companies I own stock in, and the fluctuations of one company, or even one entire industry, aren't as meaningful so long as the majority stay steady or slowly climb.

So, for example, you can buy stock in the S&P 500: http://en.wikipedia.org/wiki/S%26P_500 which is literally hundreds of major companies. Or you could have stock in dozens of foreign companies, or historically steady companies, or religious companies. In any scenario, it's far lower risk than individual stocks, but a full market collapse can still hurt it. Even then, if you're diversified, some "markets" can suffer while others stay steady, so your long-term gains are still there; it's only the degree that varies.

Obviously if you're in a country with rampant bank or stock fraud or something, things change. Mattress that sh*t. But otherwise, we're talking about much lower risk.

Originally posted by Digi
Right. Mutual funds are technically stocks, but instead of, say, buying stock in Google and hoping for the best, your money is disseminated amongst dozens of prominent companies. So Google might be one of 50 major companies I own stock in, and the fluctuations of one company, or even one entire industry, aren't as meaningful so long as the majority stay steady or slowly climb.

So, for example, you can buy stock in the S&P 500: http://en.wikipedia.org/wiki/S%26P_500 which is literally hundreds of major companies. Or you could have stock in dozens of foreign companies, or historically steady companies, or religious companies. In any scenario, it's far lower risk than individual stocks, but a full market collapse can still hurt it. Even then, if you're diversified, some "markets" can suffer while others stay steady, so your long-term gains are still there; it's only the degree that varies.

Obviously if you're in a country with rampant bank or stock fraud or something, things change. Mattress that sh*t. But otherwise, we're talking about much lower risk.

Ahhh, so basically you give your money to some company to handle and invest it for you? I suppose it's not a bad idea if they're honest and know what they're doing. Would work well for me as I find doing it myself to be too intimidating.

Originally posted by ArtificialGlory
Ahhh, so basically you give your money to some company to handle and invest it for you? I suppose it's not a bad idea if they're honest and know what they're doing. Would work well for me as I find doing it myself to be too intimidating.

The honesty is largely institutional. There are benefits to some companies over others, but when you're handling literally hundreds of thousands of accounts, as most of the large firms are (T. Rowe Price, Hilliard Lyons, Vanguard, Charles Schwaab, etc.), their financial interest is the same as yours, and the potential risk to them for being dishonest is unjustifiably massive. History isn't without exceptions (Enron maybe...though that wasn't investing, really), but the Icarus-like fall they experienced is warning enough for most companies.

As ever, there are no promises. Eliminating risk in investing doesn't exist. But the fear of corporate dishonesty is negligibly low.

Originally posted by Digi
The honesty is largely institutional. There are benefits to some companies over others, but when you're handling literally hundreds of thousands of accounts, as most of the large firms are (T. Rowe Price, Hilliard Lyons, Vanguard, Charles Schwaab, etc.), their financial interest is the same as yours, and the potential risk to them for being dishonest is unjustifiably massive. History isn't without exceptions (Enron maybe...though that wasn't investing, really), but the Icarus-like fall they experienced is warning enough for most companies.

As ever, there are no promises. Eliminating risk in investing doesn't exist. But the fear of corporate dishonesty is negligibly low.

Well, this was a fairly enlightening discussion for a total newbie like me. I suppose I'll try to go slow and steady as that seems to involve the least risk.

Originally posted by ArtificialGlory
Well, this was a fairly enlightening discussion for a total newbie like me. I suppose I'll try to go slow and steady as that seems to involve the least risk.

Sure. A low-risk IRA is a pretty reasonable play (though if you're young, any adviser will tell you to do slightly riskier ones). Aside from total market collapses, worst case scenarios are still way better than, say, a savings account at a bank.

Glad you enjoyed the discussion, though. Cheers!

Wish I knew more about economics and how money works in general.

It's difficult for me to focus on things that aren't inherently interesting for me, but I can recognize the importance of being money-smart.

Hm. Might be worth investing a class or two into.

It's too bad they don't force us to go over this stuff in high school. It's essential in some degree, because such a large part of being wealthy or at least comfortable economically relies on it.