Investing questions

[tussin]

Simply not the case. If you are a value investor, you are measured against other value investors. You can certainly beat the INDEX, but you cannot beat the market. To do that means you know things others don't. That's why even Buffet does not beat the market.

I think we are talking around each other. Value hedge funds are measured against their benchmark which is can be anything from the S&P to the MSCI Global, aka a proxy for "the market" in the investment world. In practical terms, market = benchmark (at least where I work).

In regards to edge, people that beat the market have a contrarian viewpoint. They see value in situations that the rest of the market doesn't, this could be driven by a wide range of factors such as corporate restructuring, event-driven bias, or even a fundamental misunderstanding of end markets. Bobias hit it right on the head.

 

[jerboski]

Question-

I have 401 and I am already investing the maximum allowed out of every paycheck for my 401. My question is I am thinking of investing in a Roth IRA for about $5000 in the Vanguard S&P500 Index they offer. Thoughts? I was thinking it would be a good supplement to my 401, thoughts and opinions needed. Thanks

 

[MJ12666]

Question-

I have 401 and I am already investing the maximum allowed out of every paycheck for my 401. My question is I am thinking of investing in a Roth IRA for about $5000 in the Vanguard S&P500 Index they offer. Thoughts? I was thinking it would be a good supplement to my 401, thoughts and opinions needed. Thanks

Without knowing your age, income, and savings it is hard to say. However if you are maxing out in your 401K plan, I would not invest in a IRA (either a Roth or traditional); the reason being you never know if you will need these funds and withdrawals may be subject to tax if they are not a qualified distribution. Additionally, a lot can happen in the future regarding the Roth rules. Who knows, Congress can change the tax laws if they need revenue and end up for example subjecting Roth earnings to tax. If you simply invest the $5,000 in the Vanguard S&P ETF you will only be taxed on dividend distributions and you have access to the money (via selling shares) if you need it without having to pay any penalty (you obviously may need to pay capital gain tax if the price appreciated but would also get a capital loss deduction if the shares have fallen).

 

[AFisch86]

Contribute to the Roth. You can always take out your contributions tax free and penalty free

 

[AFisch86]

The gains are subject tax and penalty if you take distributions prior to 59.5

 

[MJ12666]

The gains are subject tax and penalty if you take distributions prior to 59.5

Question, if you take an early distribution can you specifically designate the distribution as simply a return of your contribution or is distribution allocated based on an equation between a return of the contribution and gains?

 

[AFisch86]

You can specify return of contribution. Your advisor would be doing you a disservice if they distributed gains if you ask for early distribution from your Roth.

 

[MJ12666]

You can specify return of contribution. Your advisor would be doing you a disservice if they distributed gains if you ask for early distribution from your Roth.

Thanks for the information. I took another look at the IRS guidelines and you are correct (not that I doubted you. Based on this then assuming an individual can contribute to a ROTH IRA there is no downside to doing so.

 

[AFisch86]

Not a problem. You aren't going to accumulate wealth with a Roth but it's not a bad choice if you have an extra 5,500/yr or 6,500 if you're over 50. If you receive a match on salary deferral plan (401k, 403(b) etc) with your company make sure you contribute enough to get the maximum match. It's basically free money. If you want more freedom open up an individual account (non-qualified).

 

[jerboski]

Not a problem. You aren't going to accumulate wealth with a Roth but it's not a bad choice if you have an extra 5,500/yr or 6,500 if you're over 50. If you receive a match on salary deferral plan (401k, 403(b) etc) with your company make sure you contribute enough to get the maximum match. It's basically free money. If you want more freedom open up an individual account (non-qualified).

I receive a match however I am already at the limit and receiving the maximum match offered. I am 32 years old and have extra income to invest however I am not into day trading and have little confidence in actively managed mutual funds over the long haul so I thought a Roth in the Vanguard S&P 500 Index would be a decent investment with a span of 33 years to invest in the account. After reading your opinions, your not in favor of a roth but an individual account non qualified, what exactly does that mean? Sorry for the confusion

 

[RallySonsOfND]

Not a problem. You aren't going to accumulate wealth with a Roth but it's not a bad choice if you have an extra 5,500/yr or 6,500 if you're over 50. If you receive a match on salary deferral plan (401k, 403(b) etc) with your company make sure you contribute enough to get the maximum match. It's basically free money. If you want more freedom open up an individual account (non-qualified).

if you think you can't accumulate wealth with a Roth IRA, you need a new financial advisor.

 

[AFisch86]

I would definitely utilize the Roth but if you are maxing your 401k and you have more than 5,500 to invest I would open an individual account. Non-qualified meaning using after tax dollars to invest. You will have access to this money whenever you want it and will pay taxes on the gains. I'll expand my statement regarding not accumulating wealth with a Roth. I was simply stating that when your limited to such a low contribution on an annual basis compared to a 401k you can expect the Roth to have a much lower balance versus a maxed out 401k at retirement. I would not use a Roth and social security as my only retirement vehicles.

 

[MJ12666]

I receive a match however I am already at the limit and receiving the maximum match offered. I am 32 years old and have extra income to invest however I am not into day trading and have little confidence in actively managed mutual funds over the long haul so I thought a Roth in the Vanguard S&P 500 Index would be a decent investment with a span of 33 years to invest in the account. After reading your opinions, your not in favor of a roth but an individual account non qualified, what exactly does that mean? Sorry for the confusion

See the definitions below regarding question of "Qualified" vs "Non-Qualified" plans. However based on the ability to withdraw contributions from a ROTH IRA tax free even before the age of 59 1/2, if you have the extra money, and you are legally qualified to make the contribution, there is no downside to investing in the S&P 500 index fund in this type of account. Just keep in mind that you can only withdraw contributions tax free before 59 1/2. If you withdrawn any funds in excess of your contributions, the withdrawals will be subject to a 10% penalty and need to be included in your current year taxable income (there are some exceptions to the 10% penalty rule which you can view if you want by simply Googling ROTH withdrawal rules). Hope this helps.


Qualified Plan

A qualified retirement plan meets certain requirements in order to receive tax benefits not available to other types of plans. These plans may be structured so that the plan is part of an employer's retirement benefits package, or they may be independent of an employer plan. The qualified plan may accept tax deductible or non-deductible contributions. If the contributions are tax deductible, then all withdrawals from the plan are taxable. If the plan contributions are non-deductible (as is the case with Roth accounts), the withdrawals are normally tax-free. Regardless, all plans allow for tax-free buildup inside the plan.

Non-Qualified Plan

Non-qualified retirement plans fail to meet IRS guidelines for qualified retirement accounts. These plans accept only non-deductible contributions. Money is taxable to the employee when it is received. All money that grows inside the plan is tax-free, however. An example of this type of plan is an annuity. Annuity contributions are always made on an after-tax basis, and gains are taxed when withdrawn from the plan.

Read more: Qualified Vs. Non Qualified Retirement Plans | eHow

 

[Veritate Duce Progredi]

I'm curious what people's feeling are on this scenario:

I work in an industry that could contract at any time but is currently lucrative (compared to my current simple means). I have 7% diverted to 401k and I'm investing directly into a Vanguard portfolio. We have a house purchase on the horizon and we've saved enough to put 20% down. After we have finalized our mortgage, would it be best to continue sending 30-40% into my portfolio or should we increase our mortgage payment monthly by roughly 150% to avoid paying back additional interest.

I'm extremely risk averse. We have an additional 30k in a savings account just for a rainy day fund. I'm tormented by the idea of being unable to provide for my family. We are relatively young, with our first child on the way.

I usually figure my investing purely on the numbers with safe estimates but there is a lot to be said for paying off your mortgage in 7-10 years and avoiding an additonal 150k an interest over the expected lifetime of the mortgage 30 yr.

I'm still very new to all of this investing so I'm interested in any suggestions.

 

[RallySonsOfND]

I'm curious what people's feeling are on this scenario:

I work in an industry that could contract at any time but is currently lucrative (compared to my current simple means). I have 7% diverted to 401k and I'm investing directly into a Vanguard portfolio. We have a house purchase on the horizon and we've saved enough to put 20% down. After we have finalized our mortgage, would it be best to continue sending 30-40% into my portfolio or should we increase our mortgage payment monthly by roughly 150% to avoid paying back additional interest.

I'm extremely risk averse. We have an additional 30k in a savings account just for a rainy day fund. I'm tormented by the idea of being unable to provide for my family. We are relatively young, with our first child on the way.

I usually figure my investing purely on the numbers with safe estimates but there is a lot to be said for paying off your mortgage in 7-10 years and avoiding an additonal 150k an interest over the expected lifetime of the mortgage 30 yr.

I'm still very new to all of this investing so I'm interested in any suggestions.

If you can do it, do a 15 year mortgage. That's what I will be doing when purchasing a home in the next couple months.

I'll make it work to afford a 15 year mortgage now, so I have as little debt as possible when starting a family. Not having a mortgage payment will allow you to do even more.

 

[MJ12666]

I'm curious what people's feeling are on this scenario:

I work in an industry that could contract at any time but is currently lucrative (compared to my current simple means). I have 7% diverted to 401k and I'm investing directly into a Vanguard portfolio. We have a house purchase on the horizon and we've saved enough to put 20% down. After we have finalized our mortgage, would it be best to continue sending 30-40% into my portfolio or should we increase our mortgage payment monthly by roughly 150% to avoid paying back additional interest.

I'm extremely risk averse. We have an additional 30k in a savings account just for a rainy day fund. I'm tormented by the idea of being unable to provide for my family. We are relatively young, with our first child on the way.

I usually figure my investing purely on the numbers with safe estimates but there is a lot to be said for paying off your mortgage in 7-10 years and avoiding an additonal 150k an interest over the expected lifetime of the mortgage 30 yr.

I'm still very new to all of this investing so I'm interested in any suggestions.

Some advisers will say pay off the mortgage as quickly as possible, others will say the opposite and use the leverage of the mortgage to generate wealth. I personally went with a different strategy. I took out a 15 year mortgage and after I think 12 years I had saved enough to simply paid off the outstanding principle balance. You can have the same approach with a 30 year mortgage, it will just take a little longer to accumulate enough to pay off the principle. Additionally, if I was really concerned about my family financial obligations I personally would not try to make early payments but rather save as much as I could just to have the biggest emergency fund possible. Also there is the tax benefit of being able to deduct the interest expense on your personal tax return; and interest rates are really low so if you get a fixed rate 30 year mortgage and have savings, as interest rates rise you still get a tax deduction at the fixed rate but your investment returns could very well be greater then the interest you are paying on your mortgage so your come out ahead both ways.

 

[RDU Irish]

10 year ARM is a good alternative if you are accelerating payments. I like the idea of the REQUIRED payment being as low as possible while still matching up your interest lock with your expected payoff. If your expenses increase or income decreases you have flexibility to reduce payments where a 15 year mortgage could put you cash flow negative with the same changes.

I also hate seeing piles of money producing no return in bank savings. If your "emergency" savings is getting quite large, consider a bond ladder for the excess. If you know bonds are maturing every 6 months or 1 year, you build in liquidity in the event of a job loss. Example, keep $10K in the bank.

 

[wizards8507]

You aren't going to accumulate wealth with a Roth.

Sorry... What?

$5,000 per year invested in good mutual funds will get you about $2M if you invest from 20 to 60.

 

[Rack Em]

Sorry... What?

$5,000 per year invested in good mutual funds will get you about $2M if you invest from 20 to 60.

Daddy Likes

 

[wizards8507]

I took out a 15 year mortgage and after I think 12 years I had saved enough to simply paid off the outstanding principle balance.

Rather than piling up cash that doesn't earn any interest and then paying off the mortgage in a lump sum, you would have been better off making the extra payments ASAP. Pay early and you avoid the interest.

10 year ARM is a good alternative if you are accelerating payments.

In this interest rate environment? When you're near historical lows, the only way that ARM will be adjusting is up.

I also hate seeing piles of money producing no return in bank savings. If your "emergency" savings is getting quite large, consider a bond ladder for the excess. If you know bonds are maturing every 6 months or 1 year, you build in liquidity in the event of a job loss. Example, keep $10K in the bank.

I'd rather see the emergency fund staying perfectly liquid (i.e. money market). Three to six months of expenses sitting in a fund not earning interest isn't going to break anyone. Any more than that and you're outside of "emergency fund" territory anyways so you should feel free to invest the surplus aggressively.

 

[wizards8507]

Daddy Likes

Feel free to experiment for yourself in Excel.

=FV(Rate of Return, Number of Years, Annual Contribution)

=FV(0.1,40,-5000)

 

[Rack Em]

Feel free to experiment for yourself in Excel.

=FV(Rate of Return, Number of Years, Annual Contribution)

=FV(0.1,40,-5000)

I opened a Roth IRA when I was 19. I haven't been able to contribute to it since I started Law School, but my return has been ~ 39% since I opened it. But I did open it when the market was down (intentionally) so I've only really experienced big returns to date.

 

[Rack Em]

Wizards do you want to co-author an article with me? It's going to be about how, when the Fed Funds rate is low, people should move any money they have in savings accounts, money markets, or CDs and bet it all on the moneyline of a 1 seed beating a 16 in the NCAA Tournament. Your money retains its liquidity but still attains a higher rate of return than just sitting in one of those accounts.

Huh? Huh? You guys are just jealous you didn't think of it first.

 

[RDU Irish]

Rather than piling up cash that doesn't earn any interest and then paying off the mortgage in a lump sum, you would have been better off making the extra payments ASAP. Pay early and you avoid the interest.


In this interest rate environment? When you're near historical lows, the only way that ARM will be adjusting is up.


I'd rather see the emergency fund staying perfectly liquid (i.e. money market). Three to six months of expenses sitting in a fund not earning interest isn't going to break anyone. Any more than that and you're outside of "emergency fund" territory anyways so you should feel free to invest the surplus aggressively.

While I don't disagree, the original question indicated he was making extra payments so as to pay off the mortgage in 7-10 years. Even if 10 year ARMs are the same interest rate as a 15 year fixed, your monthly REQUIRED payment will be much higher, which then necessitates a larger emergency fund. Example, if your mortgage is $1000/month less you need $6000 less in your emergency fund assuming you want to cover 6 months of expenses.

As for investing some of an emergency fund in bonds, yes you have some risk of losing value in the short run but I think it is worth it when you consider many people might sit on an emergency fund their entire life without ever needing it. Bonds are all liquid, your risk is in price. If you are sitting on $30,000 that could easily mean $500 - $1000 per year of income you are missing out on. Now if you had a $30,000 untapped HELOC for which you pay nothing so you can make that $30,000 work for you a bit you have bases pretty well covered.

 

[RDU Irish]

Sorry... What?

$5,000 per year invested in good mutual funds will get you about $2M if you invest from 20 to 60.

Not to mention you are not forced to make withdrawals at 70 and 1/2 and does not come with a tax burden when inherited like a traditional IRA. Required Minimum Distributions really can sneak up on you since the percentage required increases every year you increase in age. Even for lower income folks, these forced withdrawals can increase the amount of Social Security that is taxable amongst other problems that make the real tax hit much higher than you would think.

So converting traditional to Roth is done by wealthy to preserve and grow wealth and by the less wealthy to manager their taxes.

 

[Ndaccountant]

Rather than piling up cash that doesn't earn any interest and then paying off the mortgage in a lump sum, you would have been better off making the extra payments ASAP. Pay early and you avoid the interest.


In this interest rate environment? When you're near historical lows, the only way that ARM will be adjusting is up.


I'd rather see the emergency fund staying perfectly liquid (i.e. money market). Three to six months of expenses sitting in a fund not earning interest isn't going to break anyone. Any more than that and you're outside of "emergency fund" territory anyways so you should feel free to invest the surplus aggressively.

That's true.

However, the merits of the ARM resides in how long you think you will be in the home and how risky you think your income stream is.

If you think you are only going to be in the house for 6 or 7 years, the ARM is the better option. You could pay the same monthly amount as the 15 year and have a lower interest rate to boot. Additionally, you have the flexibility of knowing your required monthly payment is much lower than the 15 year in the event of job loss, loss of dual income, family growth or whatever. Assuming a $200K mortgage and current rates, the monthly payment differences can be roughly $550 per month. Without knowing the specifics, that may or may not be meaningful. Basically, it all boils down to risk and what your expectations are for keeping that house. If you are going to be in if "forever", you are 100% correct. Doing an ARM will most likely cost you more in the end assuming he pays it off in 15 years.

I am going thru a relocation for my job and I got a 5 yr ARM due to the likelihood that I will not be in that location for a long period of time. It's a risk for sure, but one that I am willing to gamble on based on the most likely outcomes.

 

[RDU Irish]

That's true.

However, the merits of the ARM resides in how long you think you will be in the home and how risky you think your income stream is.

If you think you are only going to be in the house for 6 or 7 years, the ARM is the better option. You could pay the same monthly amount as the 15 year and have a lower interest rate to boot. Additionally, you have the flexibility of knowing your required monthly payment is much lower than the 15 year in the event of job loss, loss of dual income, family growth or whatever. Assuming a $200K mortgage and current rates, the monthly payment differences can be roughly $550 per month. Without knowing the specifics, that may or may not be meaningful. Basically, it all boils down to risk and what your expectations are for keeping that house. If you are going to be in if "forever", you are 100% correct. Doing an ARM will most likely cost you more in the end.

I am going thru a relocation for my job and I got a 5 yr ARM due to the likelihood that I will not be in that location for a long period of time. It's a risk for sure, but one that I am willing to gamble on based on the most likely outcomes.

Excellent point on length of ownership. I think I saw somewhere the average house is owned for 7 years. Its not just relo, personal choice may have you trade up or downsize.

That $550/month could go to fund a Roth IRA, or up your 401k contribution. Either one leverages you cash flow into a higher growth, tax advantaged investment that you may otherwise be unable to pursue. Add in the compounding of returns and I am not sure I like paying the house off faster at the cost of a Roth IRA.

Yes you may be able to save more later, but you are limited in how much can be put in retirement accounts.

 

[MJ12666]

Rather than piling up cash that doesn't earn any interest and then paying off the mortgage in a lump sum, you would have been better off making the extra payments ASAP. Pay early and you avoid the interest.

I disagree. If you look closely at my original post I did not provide any advise regarding how to invest the excess funds. It all depends on the individuals risk tolerance. For me mine at the time was very high and I invested 100% of my money in the stock of the company I was working for at the time. It happened to be a pharmaceutical company and I was working in the worldwide consolidations group and had a very good idea how the company was doing (which was quite well). When the stock went down significantly after 9/11 I bought 5,000 shares on margin and did quite well. Shortly afterwords I paid off the balance of my mortgage. The individual who asked the question stated that he had a low risk tolerance and was concerned about providing for his family. There is no way based on this that he should make extra payments as once made they cannot be recovered. He would be better off saving the money and investing it conservatively. Mortgage interest rates are too low right now to be making extra payments. He should bank and invest his excess cash and he will sleep better.

 

[Ndaccountant]

Rather than piling up cash that doesn't earn any interest and then paying off the mortgage in a lump sum, you would have been better off making the extra payments ASAP. Pay early and you avoid the interest.

I disagree. If you look closely at my original post I did not provide any advise regarding how to invest the excess funds. It all depends on the individuals risk tolerance. For me mine at the time was very high and I invested 100% of my money in the stock of the company I was working for at the time. It happened to be a pharmaceutical company and I was working in the worldwide consolidations group and had a very good idea how the company was doing (which was quite well). When the stock went down significantly after 9/11 I bought 5,000 shares on margin and did quite well. Shortly afterwords I paid off the balance of my mortgage. The individual who asked the question stated that he had a low risk tolerance and was concerned about providing for his family. There is no way based on this that he should make extra payments as once made they cannot be recovered. He would be better off saving the money and investing it conservatively. Mortgage interest rates are too low right now to be making extra payments. He should bank and invest his excess cash and he will sleep better.

jk.......kinda?

 

[MJ12666]

jk.......kinda?

I am really disappointed with your reply. I always considered you one of the more mature individuals who post on this website but this is really childish; and just for your information, any employee of a company can buy and sell company stock without engaging in insider trading. When I bought I did so either automatically via my 401K contributions, or when I saved sufficient cash to purchase blocks of 1,000 shares per transaction. These purchases were never made during earnings season. This is not insider trading. I suggest that you review the laws governing insider trading.