Investing questions

[Ndaccountant]

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.

I know the laws. I have to abide by them myself and while there are some complicated pieces of it, it really is quite simple. You cannot trade on information that is material and has not been disclosed.

I was reacting more to how your post was worded more than anything else. The wording was such that it could be interrupted different ways.

"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)."

I know in my company, those in consolidations are incredibly restricted when it comes to both acquisitions and sales.

In any event, I did not mean to offend you and I apologize if that was the case.

 

[Veritate Duce Progredi]

Thanks for the suggestions from everybody. I am risk averse in that my current employment can be canceled at any moment, despite having recently signed a 5 year deal (technical consultant). It's an industry that ebbs and flows and could contract.

For peace of mind, I'd like to have 30k available over a 12 month window. If progressively maturing bonds would make the most sense, then I can do that but I don't want to get caught with my "safety" money in the market and forced to withdraw at a loss.

On top of this, I'm set to contribute about 14k to my 401k and we are investing an additional $1k/month into vanguard funds (which I haven't really attempted to balance in any specific ratio).

With that continuing, I'd be able to feasibly pay double on the mortgage, minimizing interest while still keeping low payments with the 30 yr. The ARM would appear to make sense if I was confident in
the next 5-7 years of work, but I'm not.

I simply don't know if this market will extend itself another 20 years or begin to dissipate in the next 2-3. Which is why my current decisions have to be made with the possibility that our household income could drop to 60-70% of it's current number.

This makes me lean toward the 30 year but maybe I don't understand the benefits of other options. Given that info, would you change any of your previous advice? Direct me to proceed in a different fashion?

From the info above, I guess you could deduce that I'm a fan of the boglehead strategies but I wouldn't consider myself in that grouping because I haven't read enough to feel confident in saying I understand all of their principles.

 

[jerboski]

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

Thanks for the information and all the feedback from all of you, this is a great thread with some very solid financial advice. I think I am going to go with the original plan of starting off with a simple $5000 investment into the Vanguard S&P Index and make contributions. Based on everything you guys stated it seems to make the most sense for me, I don't need the extra funds for a rainy day as we have saved pretty nicely for that so this will be just for accessory retirement purposes. Thanks for all the great suggestions and information

 

[Irish Houstonian]

IMO, most of your investing calculus, in the short term, should be focused on if, when and by how much the Fed will 'Taper'. Once the music stops, get the hell out of the S&P.

 

[MJ12666]

I know the laws. I have to abide by them myself and while there are some complicated pieces of it, it really is quite simple. You cannot trade on information that is material and has not been disclosed.

I was reacting more to how your post was worded more than anything else. The wording was such that it could be interrupted different ways.

"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)."

I know in my company, those in consolidations are incredibly restricted when it comes to both acquisitions and sales.

In any event, I did not mean to offend you and I apologize if that was the case.

No hard feelings. It was a busy week and I had a little bit of a short fuse (plus I was really irritated as my internet connection was really slow for some reason and just scrolling down the page took forever).

 

[RDU Irish]

No hard feelings. It was a busy week and I had a little bit of a short fuse (plus I was really irritated as my internet connection was really slow for some reason and just scrolling down the page took forever).

Funny, Martha Stewart used the same reasons to validate her insider trading.

 

[BleedBlueGold]

Cool concept I'll share with you all about getting "free" cars...

The avg car loan scenario in this country - $26,000 loan at 9% for 60 months, $467 per month. (this scenario has likely changed as it was from a study passed down through my Dave Ramsey FPU class but you get the idea).

Most people get a car, pay the payments, eventually pay it off, get new car fever, get a new car, and then start the process over again. Every 5 to 6 years on average.

But what if you had a paid for, reliable car and were willing to keep it for ten years. All the while, paying a "car payment" to yourself. A $500 monthly payment to yourself for 10 years will generate a savings of $60,000. If that money was set up in a non-retirement mutual fund account earning a yearly avg of about 5%, you would actually have about $80,000. $20,000 of that would be growth/interest. I don't know about you, but there are plenty of reliable cars out there for $20,000 that would last another tens years.

So how is that a "free" car? Well, after the initial contribution of $60,000, that mutual fund account will continue to generate over $30,000 in growth every ten years without any additional contributions. What that means in short...every ten years, you withdraw the growth and buy a new car. Simple as that.

My wife and I have this set up. It works. I still have a while before I get to the "free" car part. But at least I know I'm on the right path. Give it a try and blow your friends' minds when you tell them you just paid cash for a new $30,000 car but didn't use a dime of your own money.

Anyways, food for thought.

 

[BleedBlueGold]

Follow up: I should've mentioned that most families have two car loans. So that's almost $1000 in car payments each month. With the strategy above, my wife and I will be able to drive reliable used cars for free and the entire thing will be funded based on a payment of $500 to ourselves rather than $1000 payment to the bank.

 

[wizards8507]

My wife and I have this set up. It works. I still have a while before I get to the "free" car part. But at least I know I'm on the right path. Give it a try and blow your friends' minds when you tell them you just paid cash for a new $30,000 car but didn't use a dime of your own money.

My only remaining debt is a car lease (worst financial decision of my life). I have the cash to buy it out but I'm going to wait until the lease is up in July so I don't have to pay the disgusting lease termination fees. I'll be buying the car with cash at the end of the lease and I'm tempted to literally buy it with cash... like, go to the bank, withdraw $15,000 in hundreds, and present it to the Ford dealer in a briefcase.

 

[tussin]

My only remaining debt is a car lease (worst financial decision of my life). I have the cash to buy it out but I'm going to wait until the lease is up in July so I don't have to pay the disgusting lease termination fees. I'll be buying the car with cash at the end of the lease and I'm tempted to literally buy it with cash... like, go to the bank, withdraw $15,000 in hundreds, and present it to the Ford dealer in a briefcase.

I regret leasing too, but I think it really depends on how much you drive, how long you plan to keep a vehicle, etc. I haven't run the numbers, but I'd imagine if you took the money you save monthly with a lease vs. purchase and invest it in an IRA you can come out ahead.

 

[Ndaccountant]

The strategy does work. My first car I took out a loan for, after that every car has been cash and trade in value. No loans.

 

[BleedBlueGold]

Are high fees (load, expense ratio) for high returns mutual funds worth it?

I ran a Boglehead 3-fund portfolio w/ Vanguard and compared it to my current American Funds portfolio. I used the same initial investment and same time period. Obviously you can only use previous years' returns and can't predict future ones, but this is really all you can go by. In every long-term scenario (greater than 10 years), American Funds out-performed Vanguard by a landslide. It was only in the short-term that the no-load/low fee approach proved better.

I bring this up because so many people have told me to get out of American Funds because of the fees and it's causing me to second guess my approach. The numbers don't lie and my goal for this particular portfolio is 10-years/plus for new car purchases and early retirement purposes, so I'm not sure why I have concern other than the fact that when you see the "cost" of being in such funds, you realize how expensive it really is.

Does anyone have any insight on this?

 

[Irishman77]

Are high fees (load, expense ratio) for high returns mutual funds worth it?

I ran a Boglehead 3-fund portfolio w/ Vanguard and compared it to my current American Funds portfolio. I used the same initial investment and same time period. Obviously you can only use previous years' returns and can't predict future ones, but this is really all you can go by. In every long-term scenario (greater than 10 years), American Funds out-performed Vanguard by a landslide. It was only in the short-term that the no-load/low fee approach proved better.

I bring this up because so many people have told me to get out of American Funds because of the fees and it's causing me to second guess my approach. The numbers don't lie and my goal for this particular portfolio is 10-years/plus for new car purchases and early retirement purposes, so I'm not sure why I have concern other than the fact that when you see the "cost" of being in such funds, you realize how expensive it really is.

Does anyone have any insight on this?

You need to post ticker symbols and allocations for feedback.

Equity to bond ratios need to be identical first.

 

[BleedBlueGold]

You need to post ticker symbols and allocations for feedback.

Equity to bond ratios need to be identical first.

The example I used was for a $40,000 investment.

The Vanguard was a lazy 3-fund: 33.33% in each of VTSMX, VGTSX, and VBMFX. In reality, I probably would use something more like 50%, 20%, 30% respectively. That allocation would help decrease the margin some, but I still don't see it coming close to what American Funds provided over a 30 year period.

The American Funds portfolio is 25% into each of ABALX, CAIBX, ANCFX, and AMECX.

 

[BleedBlueGold]

Also, how does dollar cost averaging factor into this? American Funds are front-loaded 5.75% and Vanguard are no-load. So technically, for every $1000 I put into Vanguard, $942.50 is going into American Funds. Wouldn't that add up over the course of 30 years if I'm doing monthly transactions?

 

[Ndaccountant]

Also, how does dollar cost averaging factor into this? American Funds are front-loaded 5.75% and Vanguard are no-load. So technically, for every $1000 I put into Vanguard, $942.50 is going into American Funds. Wouldn't that add up over the course of 30 years if I'm doing monthly transactions?

It matters quite a bit, as does your assumption for annual growth. Assuming all else being equal (risk, taxation, yield, etc), the higher your baseline growth, the less incremental improvement is needed to offset the load fees. However, in a low growth environment, the amount of incremental growth is quite high.

For example, assuming $500 monthly contribution for 30 years:

Yearly incremental return (American vs. Vanguard 10% growth) needed to offset load - 0.275%, or 2.75% return over Vanguard.

Yearly incremental return (American vs. Vanguard 3% growth) needed to offset load - 0.32%, or 11% return over Vanguard.

When people were looking at the "lost decade" of stock returns a few years back, people that paid a load fund and saw little or no growth over the market were SOL. Hence, the renewed push by some to use funds with lower expenses.

To each their own, but you can play around with various scenarios in excel that will match your personal situation.

 

[BleedBlueGold]

It matters quite a bit, as does your assumption for annual growth. Assuming all else being equal (risk, taxation, yield, etc), the higher your baseline growth risk, the less incremental improvement is needed to offset the load fees. However, in a low growth environment, the amount of incremental growth is quite high.

For example, assuming $500 monthly contribution for 30 years:

Yearly incremental return (American vs. Vanguard 10% growth) needed to offset load - 0.275%, or 2.75% return over Vanguard.

Yearly incremental return (American vs. Vanguard 3% growth) needed to offset load - 0.32%, or 11% return over Vanguard.

When people were looking at the "lost decade" of stock returns a few years back, people that paid a load fund and saw little or no growth over the market were SOL. Hence, the renewed push by some to use funds with lower expenses.

To each their own, but you can play around with various scenarios in excel that will match your personal situation.

Thanks for the response. I'm not quite sure I follow though (I'm very new to investing and all the lingo).

With a lump sum investment that's given a 30 year maturation date, American Funds (even with the fees) should out-perform Vanguard (based on historical returns per each fund). However, is my understanding of your statements correct by saying when dollar cost averaging is added to the equation, the loaded funds must consistently out-perform Vanguard by a significant margin yearly to make up for the high fees? If so, this makes perfect sense to me and is probably the #1 reason for my concern in staying with American Funds (because that account is set up for monthly contributions and is dinged 5.75% every single time I buy more funds).

 

[Ndaccountant]

Thanks for the response. I'm not quite sure I follow though (I'm very new to investing and all the lingo).

With a lump sum investment that's given a 30 year maturation date, American Funds (even with the fees) should out-perform Vanguard (based on historical returns per each fund). However, is my understanding of your statements correct by saying when dollar cost averaging is added to the equation, the loaded funds must consistently out-perform Vanguard by a significant margin yearly to make up for the high fees? If so, this makes perfect sense to me and is probably the #1 reason for my concern in staying with American Funds (because that account is set up for monthly contributions and is dinged 5.75% every single time I buy more funds).

I see your concern and the issue comes back to compounding.

If you do a lump sum in year 1, you have a much greater time horizon to outperform the market and if/when that happens, more time for that benefit to compound with future returns (again, assuming all else is equal). However, when you make monthly contributions, that potential benefit gets diminished. Thus, it takes a greater overall return to make up for it.

One other thing to keep in mind here is that I keep using "all else equal", when in reality it probably isn't the case. I did a cursory look at the funds and while they have the same overall philosophy (say, large cap growth), I would be shocked if they had the same overall risk.

 

[BleedBlueGold]

I see your concern and the issue comes back to compounding.

If you do a lump sum in year 1, you have a much greater time horizon to outperform the market and if/when that happens, more time for that benefit to compound with future returns (again, assuming all else is equal). However, when you make monthly contributions, that potential benefit gets diminished. Thus, it takes a greater overall return to make up for it.

One other thing to keep in mind here is that I keep using "all else equal", when in reality it probably isn't the case. I did a cursory look at the funds and while they have the same overall philosophy (say, large cap growth), I would be shocked if they had the same overall risk.

The Boglehead approach is via index funds (less risky, I assume). I'm only 30 and can afford a little bit more risk, which is why I'm in 100% growth stock funds with American. I can gradually cut that back over time (albeit at a cost, I'd imagine).

I guess I'm just looking for the best bang for my buck. Ideally, I have a reoccurring contribution to the account and over time I generate a respectable return, given the cycles of the market. If it comes at a cost of higher fees, then so be it. I guess I just worry I'll make a $100,000 mistake now but won't realize it until I'm 60.

 

[Irishman77]

Thanks for the response. I'm not quite sure I follow though (I'm very new to investing and all the lingo).

With a lump sum investment that's given a 30 year maturation date, American Funds (even with the fees) should out-perform Vanguard (based on historical returns per each fund). However, is my understanding of your statements correct by saying when dollar cost averaging is added to the equation, the loaded funds must consistently out-perform Vanguard by a significant margin yearly to make up for the high fees? If so, this makes perfect sense to me and is probably the #1 reason for my concern in staying with American Funds (because that account is set up for monthly contributions and is dinged 5.75% every single time I buy more funds).

Haven't had time to run your numbers, but also you need to add in 12b1 fees (hidden fees) with American funds. This could be another 25 bbs or so a year.

There are some devout AF investors, but giving up 6% is a not needed

Also comparing growth funds to index funds is not a apples to apples comparison. One approach is to be the market(index funds) and the other is attempting to beat the market (higher beta or more risky growth funds).

If you want growth funds and try to beat the market there are countless options that are drastically less expensive than American funds.

 

[Ndaccountant]

The Boglehead approach is via index funds (less risky, I assume). I'm only 30 and can afford a little bit more risk, which is why I'm in 100% growth stock funds with American. I can gradually cut that back over time (albeit at a cost, I'd imagine).

I guess I'm just looking for the best bang for my buck. Ideally, I have a reoccurring contribution to the account and over time I generate a respectable return, given the cycles of the market. If it comes at a cost of higher fees, then so be it. I guess I just worry I'll make a $100,000 mistake now but won't realize it until I'm 60.

I say this sarcastically, but that is investing.

In all seriousness, I think you answered your own question with your statement on risk. If you feel you can take on additional risk, then go with American. Just realize that you are taken on two different types of risk. First, you are taking on risk via investing in growth oriented stocks versus the market as a whole. Next, you are basically betting that the people running American will outperform the market in the long run (and realizing they need to for you to just break even).

Whether or not you are comfortable with those risks will determine what you should do.

Personally, I have avoided funds with loads, mainly because I feel like, as Irishman said, there are better alternatives. I probably have ~35% of my portfolio in various mutual funds.

 

[BleedBlueGold]

I say this sarcastically, but that is investing.

In all seriousness, I think you answered your own question with your statement on risk. If you feel you can take on additional risk, then go with American. Just realize that you are taken on two different types of risk. First, you are taking on risk via investing in growth oriented stocks versus the market as a whole. Next, you are basically betting that the people running American will outperform the market in the long run (and realizing they need to for you to just break even).

Whether or not you are comfortable with those risks will determine what you should do.

Personally, I have avoided funds with loads, mainly because I feel like, as Irishman said, there are better alternatives. I probably have ~35% of my portfolio in various mutual funds.

I guess I'm fine with growth stock funds, but not necessarily A Shares. That sums up my risk tolerance.

If you have 35% in mutual funds, is the rest single stocks and bonds? (Again, new to all of this. Any and all diversification and allocation strategies are foreign to me at the moment).

 

[Ndaccountant]

I guess I'm fine with growth stock funds, but not necessarily A Shares. That sums up my risk tolerance.

If you have 35% in mutual funds, is the rest single stocks and bonds? (Again, new to all of this. Any and all diversification and allocation strategies are foreign to me at the moment).

Outside of my mutual funds, I do hold individual stocks, MLP's, REIT's and some commodities. My allocation to each change based on what's going on in the market, but I generally try to keep a steady overall allocation.

The mutual funds I have include some bond funds, some general domestic stock funds and some foreign funds.

 

[RDU Irish]

Also consider indexes are market weighted. While the total market index has 3600 holdings, 14% of the value is in the top 10 names. International has over 5000 holdings and 8% in the top ten names. Something like the RSP tries to equal weight all 500 companies in the S&P 500.

Consider a core and explore approach. A core investment in an broad index then explore around the edges with managers or sectors you think can out perform.

As for American Funds, I think a large part of their past outperformance (and recent underperformance) can be attributed to the 15% - 20% international exposure they have in most of their funds while they benchmark to the S&P 500.

 

[RDU Irish]

SPY has almost 18% exposure to the top 10 names versus 500 holdings overall.

 

[BleedBlueGold]

Who here invests in rental properties? I'm considering getting into it (mostly as a passion but also for the investment).

What is considered a good cap rate? For example, I've found a duplex near Butler University, 100% occupancy, estimated 10% cap rate that's in my price range. It's not a huge cash cow but it's a start.

What all should I look for when considering a multi-unit rental for purchase?

Note: I've done single family rentals before, but never a multi.

 

[BleedBlueGold]

Any IE tax code enthusiasts/specialists out there who can explain something to me in layman's terms: Roth vs Traditional and how it pertains to taxes both now and in retirement.

I understand the basic premise but since it's tax time, I've been reading up on ways to lower your AGI. If my wife and I maxed out our 401k, 403b, Traditional IRA (x2), and HSA (family), we could decrease our taxable income by $53,550. Obviously the retirement accounts are then taxed on the back end in retirement, but that's where I've been reading about Roth Conversion Ladders.

My main question: The average/adjusted tax rate on a Roth account once in retirement is a ton lower than what you paid early on in life when you (typically) had higher earnings. However, I keep reading that the traditional method can save you even more if done correctly. Is this accurate? I need to settle this great debate.

Sources for such thinking:

Go Curry Cracker! - Spend Little, Save More, Travel the World. Go Curry Cracker!Go Curry Cracker! | Spend Little, Save More, Travel the World. Go Curry Cracker!
Stock Series
Mad Fientist - Financial Independence

Among others.

 

[RDU Irish]

OK, so you max out $18,000 each on 401k/403bs - $36,000 per year

Since you are covered by a work plan you phase out of Traditional IRA deductibility from $96k - $116k.

So if your under $96k you can deduct another $5500 each into Traditional IRAs. $11,000 plus $36,000 - $47,000 of annual retirement savings.

You would be a rare bird if you are able to make less than $132k and save $47k of it. If you did you would probably be in the 15% tax bracket, in which case I think 15% bracket folks are usually best off in Roths than Traditional.

So lets say someone puts $40k into 401ks for 30 years at 5% average returns. That grows to $2.8M. Your RMD at 70 is going to be over $100,000. If you get 7% your pot grows over $4M. Good problem to have category for sure.


Then you have Roths phasing out from $183k-$193k. If you are over those amounts, non-deductible Traditional IRAs that you then convert to Roths are an easy work around. The problem becomes if you have old IRAs laying around, the "basis" of the traditional HAS to be spread across all IRAs (not 401ks).

If you are older and behind on saving you have a clearer picture of todays tax bracket versus retirement. Pretty hard for a 30 year old to predict but a 50 year old is a different story.

 

[BleedBlueGold]

You would be a rare bird if you are able to make less than $132k and save $47k of it. If you did you would probably be in the 15% tax bracket, in which case I think 15% bracket folks are usually best off in Roths than Traditional.

This is true and very unlikely to happen. However, we already max out HSAs and if I can, at the very least, max out my 401k then that's a good start. I'm 32 and we're in the 25% bracket. I currently have Roth everything (401k through work and IRA for my wife and I).

So lets say someone puts $40k into 401ks for 30 years at 5% average returns. That grows to $2.8M. Your RMD at 70 is going to be over $100,000. If you get 7% your pot grows over $4M. Good problem to have category for sure.

I guess this is part of my question: Considering the RMD, how do I keep my tax burden the lowest? General thinking says Roth, ie. $0 taxes on withdrawals. But everything I keep reading is about bringing AGI down now (while my current income taxes are higher) and then converting later so withdrawals are via a Roth and tax-free. The whole premise is living well below your means, having no debt, and come retirement you can have an income that's just low enough to cover everything you want to do/enjoy but still have a zero-to-small tax burden.

Then you have Roths phasing out from $183k-$193k. If you are over those amounts, non-deductible Traditional IRAs that you then convert to Roths are an easy work around. The problem becomes if you have old IRAs laying around, the "basis" of the traditional HAS to be spread across all IRAs (not 401ks).

No need for backdoor-Roth. I don't make that much. I also don't have any other IRAs lying around besides the current Roth IRA I am funding.

If you are older and behind on saving you have a clearer picture of todays tax bracket versus retirement. Pretty hard for a 30 year old to predict but a 50 year old is a different story.

I'm 32. Wife is 30. Hoping to retire "early" if possible.

 

[RDU Irish]

I would look closely at your taxes, entirely possible you are losing some credits/deductions that traditional 401k vs Roth would save more than just the 25% marginal tax rate. If you are in the phase out range of child tax credits, that amounts to an additional 5% tax per child.

For my money, I would try to use 401ks to get into 15% tax bracket (which also gives you preferential capital gains treatment) and fund personal Roth IRAs. If making tradeoffs, 1) 401k to the match from employer, 2) max Individual Roth IRAs, 3) back to employer 401ks. Sounds like #1 going traditional and #3 going Roth may be the happy medium for you.

Don't be afraid of individual investment accounts either. If you are saving for early retirement these give you great flexibility. Building a blue chip stock portfolio gives you control of capital gains, allows you to gift appreciated stock for charity and dividends are taxed lower than income. Plus you can do municipal bonds or MLPs/REITs that are best owned outside IRAs too.

Balance between the two is key, you want to have options down the road. However, in 15% tax bracket Roth is a hard to argue against. We really don't know what taxes will look like in 30 years but I can assure you savers will be taxed to support those that did not.