Investing

[KaiineTN]

Is there anywhere I can really learn about investing without someone else essentially trying to "teach" me to put money into their pockets, one way or another? I've been playing around with investments for a few years now, and I want to learn more about foreign markets and leveraging currency differences. I think a lot of successful investing needs to be learned through hard lessons and trial and error, but there must be some good information out there, somewhere, that isn't trying to shove a bunch of bullshit in my head that will lead me in an unprofitable (for me) direction.

Anyone know of any good resources? Websites? Books? Whatever.

[Naethyn]

Set a goal. If you're investing for your retirement then I highly suggest a Roth IRA as well as any 401k programs your work offers. What sets Roth IRA's apart is the fact that the money you put into the investment is taxed up front instead of on the back end. With a traditional IRA you can deduct all money you've put in for the past year. When you take the money out you are taxed on it. Roth IRA works the exact opposite. You are taxed when you put the money in but not when you take the money out. The advantage may be subtle but it will make a huge difference.

For example:
Say you invested 10,000 into a traditional IRA. That money is taxed from your income and is deducted on your income taxes. For simplicity lets say the investment doubled in value after 10 years for a total of 20,000. If the taxes are set at 10% at the end of that 10 years you'd end up paying 2000 to pull the money out.

With a Roth IRA and the same investment of 10,000 into a Roth IRA the money is taxed from your income and is not deducted from your taxes. At the end of the year you'd pay taxes on the amount you invested. With taxes at 10% the cost would be 1,000. Now, if it grew at the same rate and after 10 years it too was worth 20,000, there would be no taxes to take it out.

That's a difference of 1,000 just in taxes! With all things it's very important to keep how much you're paying in taxes, the cost of the investment broker, and finally the rate of inflation. If you're not making enough off your investment to cover that you're only losing money.

There are many resources available to learn all this neat stuff. Your best bet is to invest in a target fund. They are based on a year. Mine is 2040. That's when I plan to retire. All my investments are targeted in terms of risk with that date in mind. Also, one other rule of thumb. If you're not investing at least 10,000 let someone else handle your money such as a mutual fund.

http://www.fundadvice.com/

(Where I learned what I know)

[Harrison]

I talked with my bank about it.

[Eziekial]

Become a Fool. Seriously. That site has a wealth of information. Just avoid buying any weekly stock-tips and stick to the articles. Also, stay away from message boards for certain stocks, those tend to be filled with morons trying to naked short or pump and dump and they usually just put out false or misleading information. Learn how to read financial statements is your #1 priority. Then move on to various forms of valuation and due diligence.

[vonkaar]

So far, everyone has given good advice. However, if you are really a 'first time' investor, you need to listen to the Tax advice like Naethyn's post first. Get a full understanding on your tax situation before you commit to any type of investment strategy. If you are able, you'll want to max out your 401k, Roth and any other tax-deferred plan (HSA, 529s, etc) that you can - every year. Once you have figured all of this out, you might look back on your past few years and hate yourself for not doing this. Every lost year makes a sizeable difference come retirement time.

The only time you should invest with your 'own' money is if you have completely maxed out all of your deferred plans first. You don't want to be taxed on 'your' money more than you have to. I'm also a big proponent of a HDHP-HSA medical plan... if you are in good health it's a VERY good way to save for the future AND offset catastrophic medical expenses - all while saving money - I pay $115 a month to cover both me and my wife.

Quick list of standard savings plans:

401k = pre-tax dollars. Contributions are made with money that is not taxed yet. You are taxed when you withdraw. Investment gains are not taxed. Early withdrawl penalties. $15,500 contribution limit for 2008.

Roth = post-tax dollars. You contribute to this using money which you have paid income-tax on. Capital gains are not taxed. Not taxed on withdrawl, although early penalties do apply. $5,000 contribution limit.

Deductible IRA = post-tax dollars. You contribute this with 'taxed' money, although you get a tax-deduction so it's "sort of" like a pre-tax plan. HOWEVER - capital gains are usually taxed AND you pay income-tax on the entire withdrawal.

Traditional IRA = post-tax dollars, no deductions. You paid taxes on the money you use to fill this, you pay taxes on capital gains AND you pay taxes when it's time to withdraw.

HSA = pre-tax dollars. Contributions are made with money that hasn't been taxed. Withdrawals for 'qualified medical expenses' (including OTC medication - Tylenol, etc) are tax-free. No taxes on capital gains. $2,900 contribution limit, or $5,900 for family coverage.

So let's build an example. We'll say 30 year old "George" makes $80,000 a year and is single. He works for a giant multi-national company and is going to get 5% raises until he retires at age 65. To make it easy, we'll say he averages 8% annual returns on his investments and I'm ignoring inflation until the end. He decides to max out his 401k(employer matches 5%), ROTH and HSA ever year. If we say that at 30, he starts out with $20,000 in his 401k, $10,000 in his Roth and $5,000 in his HSA, it looks like this:

The 401k picture:
Year 1 (age 30), he is contributing $15,500 and his employer is matching 5% so that's $775. Starting with $20,000, 8% annual rate of return - year 1 ends with $38,572.
Year 2 (age 31), same story - ending balance = $58,630.
skipping ahead...
Year 10 - ending balance = $329,139
Year 15 - ending balance = $583,181
Now at year 20, he's 50 and can contribute up to $20,500 and so the employer will match to $1,025.
Year 20 - ending balance = $961,927
Year 25 - ending balance = $1,545,073
Year 30 - ending balance = $2,401,905
Retirement at 65
Year 35 - ending balance = $3,368,914

Onto the Roth:
Year 1. starting balance $10,000. Contributing $5,000 a year, 25% tax bracket - 8% annual rate of return Ending balance: $16,200
Skipping faster...
Year 10 - ending balance = $113,202
Year 20 - ending balance = $322,622
Year 30 - ending balance = $774,744
Retirement at 65
Year 35 - ending balance = $1,078,364

Now the HSA:
Starting out with $5,000. $2,900 maximum contribution = $241 a month. We'll assume George has to spend $50 a month on medical expenses. This is conservative, but he's in good health and his 30s and 40s go off without a hitch (to offset the higher cost of his 50s and 60s) 8% annual rate of return.

Year 01 - Investment Gains: $498.15 saved: $2,892.00 spent: $600.00 ending balance: $7,790.15
Year 10 - Investment gains: $3,285.53 saved: $2,892.00 spent: $600.00 ending balance: $45,419.72
blahblah
retirement at age 65...
Year 35 - Investment gains: 35 $35,905.56 saved: $2,892.00 spent: $600.00 ending balance: $485,790.13

Soooooo...
George retires at 65 with $3,368,914 in his 401k, $1,078,364 in his Roth and $485,790 in his HSA.
Total: 4,933,068

And just to complete the retirement picture, we'll calculate Social Security (assuming it even exists in 35 years).

We'll just say he started the workforce at 22 at $54,000 a year and got his 5% raises to get him the $80k at age 30.

The social security picture would be:

starting age 22
Household income $54,000
Expected salary increase 5.00% per year
Inflation rate 0.00%
Are you married? yes
Age to begin benefits 65
Household Income at age 65 $419,126
Estimated benefit $34,529 per year
$2,877 per month
Estimated percent of income 8.24%

Soooooooooooooooooooo...
If he plans on living to 85, his $5m plus social security needs to stretch twenty years.
$4,933,068 / 20 (years) / 12 (months) = 20,554.45 + $2,877 from social security = 23,431.45. That's a monthly 'fixed income' amount... sounds nice, right?

Now we'll adjust for inflation @ 3% annual rise.
That's the equivalent of living off of $8,068.82 in today's dollars. Comfortable retirement, but hardly what you'd expect given the initial $5,000,000 number.

All of this should help paint a picture. George started off making decent money and contributed the MAX every year until he retired. That's basically 'what it takes' to have a comfortable retirement for the average American.

Scary, no?

Now, the cool point to all of this is to show how much of a difference 'knowing the market' and understanding all of this could help you. All of those numbers were calculated with an average return of 8%. That's a fair number, but what if we got NINE percent? The ending balance on all 3 suddenly jumps up to $6,136,651. I have a buddy who has averaged 13.3% for the past 5 years. Imagine if you could get that your entire life (you'd sort of be a God, but w/e)... the total jumps to 17,548,740... from $4,933,068. Five percent goes a long way, no?

K, now the scariest paragraph of all. George decided to skip the tax benefits of 401k, Roth and HSA and invested all of this money with post-tax dollars. He still got his 8% return but was taxed on capital gains every year and taxed when it was time to withdraw. So, he was contributing $15,500 to 401k, $5000 to roth and $2900 to HSA = $23400 a year. We'll stick with that and, "Just invest it!" (no tax deferred plans). And we'll help him out by putting him in Texas, with 0% state tax.

Year 01 - Balance: $38,281 Balance after taxes: $37,711
Year 02 - Balance: $58,025 Balance after taxes: $56,045
Year 05 - Balance: $127,247 Balance after taxes: $119,840
Year 15 - Balance: $516,368 Balance after taxes: $432,246
Year 25 - Balance: $1,356,450 Balance after taxes: $991,719
Retirement:
Year 35 - Balance: $3,170,125 Balance after taxes: $1,993,648

Adjusted for inflation: $684,850
Same rate of return... just a dumb fucking way to invest it.

This concludes my lecture. I preach this shit to all of my bartender friends or whomever else wants to listen... so sorry if it came off scripted.


P.S. You can do the calculations yourself at http://www.dinkytown.net/financialcalculators.html

[vonkaar]

omfg, I had no idea it was that long til I finished it... that was my most epic post since the EQ drama days

[Harrison]

Fucking bravo, I was thinking "how long will it go?"

[10sun]

Invest in yourself.

Get that sex change you always wanted Fink.