First, I'd like to start off with a most fabulous and concise summary on how to invest (courtesy of Bernstein's 'The Intelligent Asset Allocator'). Seriously, if you want the basics of investing, and have no irrational aversion to learning some of the math and statistics behind sound investing principles, it's a must-read.
1. Money managers do not exhibit consistent stock-picking skill
2. Nobody can time the market
3. Because of 1 and 2, it is futile to select money managers on the basis of past performance
4. Because of 1, 2, and 3, the most rational way to invest in stocks is to use low-cost passively managed vehicles, i.e. index funds
With these principles in mind, I wanted to give an update on my current asset allocation now that I no longer am at my prior job & have rolled over part of my 401k. In my case, I had two different accounts through my prior employer: a Roth 401k, and a traditional 401k. The money in the Roth 401k was money that I had earned and contributed post-tax. This means that I've already paid taxes on that account, and will not have to pay taxes on any of the growth. The traditional account was funded by my employer and was 100% vested. This means that it was 100% mine (partially vested contributions would only become fully mine after a certain amount of time working at the company). While the money was completely mine, it had been contributed by my company, and so I have not yet paid taxes on it.
When you part ways with your employer (voluntarily or otherwise), you are allowed to keep your money in your employer's retirement account, provided you have at least $5,000 in it. However, most 401Ks have fewer and more expensive options than you can find elsewhere. So while keeping your money put is the easy option, it isn't always the best. What I did (... two months after leaving) was roll over the bulk of my 401k money, the Roth 401k, into my Vanguard Roth IRA. Again, I won't have to pay any taxes as I already paid them, and I will be able to take out the money from my Roth IRA at any point. To be clear, I can withdraw the principal (original amount) at any point, but I can't withdraw the earned interest until I'm 59.5 -- the good news, though, is that I won't have to pay any taxes on the earned money when I eventually withdraw it.
The rest of my 401k (the balance in the traditional 401k contributed by my employer) is staying put until January of next year. I'll have to pay taxes when I move the money over to my Roth IRA, and so I've chosen to wait until next tax year, when my income will be lower. So, with some additional money in my IRA (individual retirement account), I've gone ahead and fiddled with my asset allocation. My philosophy is to maximize returns by minimizing costs, to invest simply and beat the majority of actively managed funds by getting 'average' returns from index funds. I've spoken before about my crush on Vanguard -- they're a fantastic company because they are owned by their funds & investors in the funds (like me), which means all excess returns are put back in the company and result in lower costs, rather than going to a family or CEO who owns the company.
The one downside to Vanguard is that they have pretty hefty minimums on many funds -- $3,000. I was able to start my account in early 2012 but contributing the maximum for 2011 and 2012 (as you have until April 15 to contribute for the prior year), and so I put in 10K, splitting it into 3K for the bond index fund, and 7K for the stock index fund. I've gone ahead and added some additional classes now that the amount of money in my account has increased substantially (first the 2013 IRA max contribution, and now with the roll-over). The goal of a portfolio is to give you the highest amount of returns with a reasonable amount of risk (this level of acceptable risk differs for everyone, of course). One way to achieve that is to diversify across multiple asset classes that have low correlation. The goal is to have assets that don't behave similarly -- when one class goes up in value, the other might go down or stay the same, etc. When one zigs, the other zags, so there's theoretically less volatility than if if had only one class (ie, large US stocks).
My portfolio isn't for the weak -- an 80% stock allocation means I could see declines of up to 40% in a given year (even though in the long run of 30-40 years I will probably have higher returns than someone with a more conservative stock/bond ratio). The real test will come when we have the next market downturn -- will I be able to stomach the losses and invest more instead of taking my money out? I sure hope so. I will note that my next step is to build out a savings/emergency fund. The reason I'm happy with my current level of risk in my investments is because I don't anticipate needing to touch it in the short-term. If I do, I can withdraw a bunch from my IRA with no taxes or penalties -- but I definitely will do a lot to avoid such a situation.
Check it out:
What about you -- what do you invest in? Index funds or specific company stocks? How much time do you spend managing your investments?
No comments:
Post a Comment