Investing 101

How do I start investing for retirement?

• Emergency Fund. Save at least 3 months to a year of money for emergencies. That way if you lose your job, get in a car accident etc, you will not be tempted to take money out of your retirement accounts. You can keep this money in a High Yield Savings Account like HSBC or Emigrant Direct.
• 401k. Put money into your 401k before your Roth IRA.
• Roth IRA. After you have filled up your 401k to the "company matched" amount, then fill up your Roth IRA.
  

What’s a Stock?

Buying stock means you own a piece of a company.

Mutual Fund vs. Index Fund

Mutual Funds and Index Funds are just a lot of different stocks bundled together.

• Mutual Funds charge you 1-3% a year to own the Fund. There is someone managing the fund, so you pay extra to have it managed.
• Index Funds charge less than 1%. This fund follows a major index. It's done by a computer so it's cheaper than a Mutual Fund. (This is a better idea.)
  

401k vs. Roth IRA

• 401k - IRS will tax you when you take the money out when you are retiring. (It's called 403b or TSP for government employees.)
  
• Roth IRA - You've already paid income tax so when you take the money out at retirement, the money is now TAX FREE.

This topic has been addressed on a previous blog under "Answer to a Question."

http://www.fool.com/news/commentary/2003/commentary030416.htm

Why don’t I just pay someone to invest for me?

"Indeed, I have terrible news about brokers and money managers generally - news which I expect you've suspected, but couldn't quite believe, all along. There are no brokers who can beat the market consistently and by enough of a margin to more than make up for their brokerage fees. Or, if there are a few, they are not going to work for peanuts - and any account under $500,000 is peanuts.

By and large you should manage your own money. No one is going to care about it as much as you.”

Andrew Tobias
"The Only Investment Guide You'll Ever Need."
(There are three copies of this at the Arlington Library)

Open an Account

Picking a discount broker is like choosing an email account between Hotmail, Yahoo and Gmail.
There are pros and cons to each, but they all do basically the same thing.

Here is a recent list of pros and cons for Discount Brokers.
http://www.jdpower.com/finance/ratings/online_investment/index.asp

Scottrade is currently the best for lowest costs to get started.

They boast a no-fee Roth IRA
http://www.scottrade.com/ira/index.asp

• To open an account you will go to this site and click "Apply Online Now".
• You will fill out some paperwork with Social Security number, birthday, beneficiary and end up signing and sending in some papers. It takes around 10 days for an account to be created.
  
• Once your account has been created you can fund the account by sending them a check, or better yet transferring directly from your checking account. There is no cost to do this.
  
• This money will be transfered into your Scottrade account and sit as cash.
• You will then buy something and that will cost $7: Stock, Index Fund, Mutual Fund, etc.
  

What do I buy?

Answer: Index Funds!

"The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you'll be buying into a wonderful industry, which in effect is all of American industry," Warren Buffett (Rich old guy everybody should listen to.)


So which Index Funds do I buy?

That's a little more difficult as there are many to choose from. Here are two that I keep coming across in many articles which I have also purchased myself.


VTSMX

VTSMX is the ticker symbol for "Vanguard Total Stock Market Index Fund."
You are buying America. This fund has thousands of US based companies.

"Truth be told, your most important retirement asset isn't your cash -- it's your time."
Here is a good article that explains this idea and recommends VTSMX.

EFA

(iShares MSCI EAFE Index Fund)
Covers Index funds for Europe, Asia, Far East.
Most popular International Index.

How much do I buy?

60% - VTSMX
40% - EFA

Jeremy Siegel’s book “The Future for Investors” recommends different investment strategies. The simplest one is buy 60% in US based companies and 40% in Foreign based companies.

As you gain more experience and more financial knowledge you will begin to buy more and different fund to "diversify."


Final Goal

Please read one financial article a week or listen to a finance book on tape from your local library.

No one will care more about your money than you.

The final goal is to make long-term around 10% a year on Index Funds. This amount beats out almost all Mutual Funds over time.

If the economy goes up, keep saving money for retirement.
If the economy goes down, keep saving money for retirement.

Continuously put money away over a long period of time and you will retire rich.
Time is your biggest asset. Since most people don't save, you will be in a position to help others.

The sooner you take action, the sooner you will be in this position.
Learn more, save, buy index funds, continue to learn more, continue to invest.

You are now an investor, start taking action like one!