Personal Finance: Long-Term Investment Strategies

[4Q Basket Case]

Some of you are familiar with my investment philosophies. They're not terribly popular with the general public because:

1. They require discipline over decades, which means....
1A. You have to keep your head, turn off the TV and talk radio during recessions, put your fingers in your ears, hum, and keep on keeping on.
2. They require taking responsibility for your own financial well-being, and not spending every dime you make. This flies in the face of today's spending and "it's not my fault," cultures.
3. They don't yield a ton of additional dollars for at least 5 years because.....
4. They rely on geeky stuff like exponents to generate the real money later in the process
5. Most of all, they require doing stuff that most people laugh at, and not doing stuff that most people pressure you to do.

I have a friend who sums it up well: Borrow as little as possible, for as short a period of time as possible, buy used cars, and Keep Calm and Invest On.

Here's an article that, if you follow it for 20 years, you'll be giving thanks for a lot of really cool things, most especially financial freedom.

Strategies for Lasting Security

One thing I would clarify: The article rightly includes maxing out your 401k and IRA. It doesn't, however, define that.

Too many people erroneously define, "maxed out," as contributing so that you get the maximum employer match. That's a good start, but only a start.

Truly maxing out is contributing $19K a year if you're under 50, and $25K a year if you're 50 or older. Those numbers adjust upward every so often, so once you finally get there, it also means keeping up with the increases.

I know that seems impossible. But I promise, it isn't. Here's how Mrs. Basket Case and I did it: First, we started by contributing the most we could, and we were painfully honest with ourselves as to what "the most we could" was. That means having hard conversations distinguishing have-to-buy vs. want-to-buy. That was really the hardest part.

Then, every time we got a raise or a bonus, the raises went straight into the 401k, and bonuses went straight into the IRAs.

The bad part is that it meant we effectively didn't get a raise for 7-8 years.

The good part is that it enforced discipline around lifestyle spending. While we went through the 7-8 dry years, watching the nest egg grow helped to sustain the effort.

A better part is that, when we finally did truly max out, we got to spend on some fun stuff (in our case, travel) without guilt about where the money should be going.

The best part is that, when we reached that point, financial freedom was no longer an abstract concept that only “other people” could have. It was realistically achievable for us.

 

[jabcmb]

I’m totally onboard with your thoughts and philosophy. Everybody’s situation is different; but most people—if you have access to a 401k program, do all you can toward optimizing your contribution as soon as you can. If your career leads you to multiple jobs you can always roll those 401k’s to a single IRA that is tied to you, not your job(s). There’s smarter people than me on here (prob some certified financial folks) who would likely be willing to help someone get started, if needed.

 

[Toddrn]

Good sound advice. Big difference between want and need. Still live in the first home we purchased in 1984. It's payed for. Drive a 2000 and 2002 Honda Civic and a 1997 Dodge Ram. My wife and I work for the same hospital. Max out our 403b and put money in savings every paycheck. Very blessed to also have a pension. In 3 years at 62 we are going part time and then retire at 65. God has blessed us greatly.

 

[4Q Basket Case]

Good sound advice. Big difference between want and need. Still live in the first home we purchased in 1984. It's payed for. Drive a 2000 and 2002 Honda Civic and a 1997 Dodge Ram. My wife and I work for the same hospital. Max out our 403b and put money in savings every paycheck. Very blessed to also have a pension. In 3 years at 62 we are going part time and then retire at 65. God has blessed us greatly.

Is having the house paid for not the most liberating thing in the world?

You may or may not have GTH money. But if you have a GTH debt position (i.e., $0 owed to anybody for anything), the peace of mind is incredible.

Congratulations!

BTW — God blessed you and your wife with minds capable of doing what you’ve done. The two of you, however, transformed those blessings (over which you had no control), into tangible results (over which you had a lot of control).

The world is flooded with smart people who squander the abilities with which they were blessed.

All of our blessings ultimately come from God. That doesn’t mean we should, or even can, sit idly by waiting for the tangible fruits of those blessings to fall into our laps. It means we are obligated to make the best use of what He gives us, and thereby earn the tangible fruits.

I feel sure that your use of the blessings He gave you has created an aroma pleasing to Him.

 

[Toddrn]

Amen brother.

Is having the house paid for not the most liberating thing in the world?

You may or may not have GTH money. But if you have a GTH debt position (i.e., $0 owed to anybody for anything), the peace of mind is incredible.

Congratulations!

BTW — God blessed you and your wife with minds capable of doing what you’ve done. The two of you, however, transformed those blessings (over which you had no control), into tangible results (over which you had a lot of control).

The world is flooded with smart people who squander the abilities with which they were blessed.

All of our blessings ultimately come from God. That doesn’t mean we should, or even can, sit idly by waiting for the tangible fruits of those blessings to fall into our laps. It means we are obligated to make the best use of what He gives us, and thereby earn the tangible fruits.

I feel sure that your use of the blessings He gave you has created an aroma pleasing to Him.

 

[BamaNation]

4Q and I share so many of the same fundamental investment thoughts grounded in reality of what happens in the investment world and not on get-rich quick schemes or loud-mouthed TV financial "gurus."

Mine are based on John C. Bogle's many works (Bogle founded and ran Vanguard and was for many years a lone voice in the financial wilderness regarding index funds beating managed funds 9 out of 10 times, perpetually, until he died earlier this year) and the philosophies he and like-minded folks have espoused, in general, on bogleheads.org. If you don't know what to do or where to go to get financial advice, you could do much worse than read Bogle's books or the Bogleheads' website and their 3 available books and similar ones.

I've posted before but will do so again here as an FYI, years ago my wife and I put together the details of our philosophy and sent them out to all our family who were of investing age (3 neices/nephews in college + in laws + siblings) as an "if you don't do this, you're stupid" email

tl;dr version: Follow Dave Ramsey to get out of debt and follow Bogleheads 3-fund philosophy once you're out of debt.

We have refined these ideas over time and I've added a ton of resources that I make available to friends and all my students. NOTE: I'm not an investment adviser or hold any "credential" other than an MBA in Finance (which that plus $1 gets you a Coke and a smile).

One thing to absolutely avoid: Any adviser who's going to charge you >0.5% in "assets under management" fees (0.3% is what Vanguard charges for their PAS service with no pressure gimmicks) and/or put you in crazy & expensive actively managed funds with >0.5% expense ratios (vs <0.1% for passively managed). Keep it simple and you can do it all yourself pretty easily. If it's all too confusing or behavioral economics works against you, just put your investments in target date retirement fund and check back on it the day you retire in 20-40 years and be amazed

I’m often asked, “In what order should I do all these things – invest, save, pay off debt, etc?”

My first answer is always "Don't buy bling bling" - all the shiny useless (but many times self-gratifying) stuff we accumulate (cars, houses, jewelry, rims, etc etc) and instead save more than is spent! Try saving 1 month's expenses in an emergency account and contribute to it until you get up to 3-6 months in emergency funds (in high-interest (>1.5%) savings account or money market) then go for saving/investing 1 year of expenses every year. Once that's done and as your wages increase, go for 2 years expenses every year. This implies that a) you're saving bigtime and b) you're probably reducing expenses bigtime. It's hard to get to this point but it's common sense stuff that isn't so common! Get rich slowly!

Here’s what Bogleheads.org wiki says about the most likely order in which you should pay off debt and invest (modified slightly by me by adding some commentary on the interest & return rates):

“Here is the most likely order of priority for investments versus paying off loans; it does depend on the rates, so these examples are based on typical rates which may not be accurate at any specific time.

1. Invest in 401(k) to get maximum employer match (return rate may be over 100% in the first year)
2. Pay down credit cards (interest rate may be 10-30%)
3. Pay down non-deductible auto or student loans, or other medium-rate loans (interest rates typically 5-10%)
4. Invest in Roth IRA, deductible IRA or decent 401(k) (compare at rate of <5% on Treasury bonds)
5. Pay down deductible mortgage or student loans (rates are around 4% after tax for most)
6. Invest in taxable investment account … (at Fidelity, Vanguard, Schwab, etc – but definitely NOT anywhere where you’re going to be charged management fees of up to 2% per year!)
7. Do not pay down subsidized loans as long as subsidy lasts (rates of 0-3%)”

We can quibble over the fine details (i.e. what you should do after contributing at least the amount to get your full match from your company 401k/403b/457b, which is the most tax-efficient allocation? do I do Roth IRA or taxable IRA? should I pay mortgage or student loan first? what about back-door Roths and mega-backdoor Roths when my salary is too high for Roth? What about after-tax investments? What about if I'm self employed? solo 401ks etc.) but all things being equal, this is a great path to follow considering 4Q's comments on the article - particularly the parts about being disciplined and consistent!

 

[4Q Basket Case]

It’s bad form to bump one’s own thread, but I’m doing it anyway.

One huge advantage of 401Ks, 403Bs, 457Bs and like accounts is that if you hit the reverse lottery and have to file bankruptcy, they’re absolutely untouchable by creditors. SCOTUS ruling on that.

IRAs, whether traditional, Roth, or whatever, also enjoy protection in bankruptcy, though the rules aren’t quite as indisputable as with 401Ks and the like.

 

[Jessica4Bama]

This is some great info. I hope this question is okay to post here as I don't want to start another thread.

I am closing on my house on Monday. I have been blessed to be in a position where I will be able to put around 30% down. I still will have a lot of money left in savings even after my down payment. I am not sure what to do with that money? I know I need an emergency fund, which I plan on keeping at approx. $15,000-$20,000, but should I invest the rest? Put it all in a high yield savings account? Or what? I have worked hard to save this money and have always tried to be financially sound, so I don't want to make dumb decisions now. I do have an invest account with Morgan Stanley that I was told I could gain access to my money there when I needed it without penalty. Maybe I should put the majority of it there.

I do plan on paying more monthly than what is owed. I am just not sure what do to with all my money that is left over. I was saving to buy a house but now that I am about to do that, I am clueless about the leftover money. LOL.

 

[DzynKingRTR]

I learned about capitol gains tax last year. Not really a fan. I wasn't expecting it so it blindsided me. I am prepared this year. I also stopped watching it daily.

 

[Jessica4Bama]

I do want to add. I haven't contributed to my Roth IRA with MS since I started nursing school. I have been contributing to my Fidelity account through the hospital at 8% since July. To get the match, I only have to do 5%, but I wanted to do a little more. I will invest more as I can, but right now I think 8% is a comfortable amount.

I am thinking of maxing out my Roth IRA for the year with some of the money I have left in savings. Is this a good idea?

 

[4Q Basket Case]

You shouldn’t have capital gains unless you...
1. Sell the investment, after holding it for a year, or
2. Hold a mutual fund in a taxable account (i.e., not a 401k or similar, and not an IRA of any description).

If you do hold a mutual fund in a taxable account, here‘s the deal: The fund itself isn’t a taxable entity. The owners of the fund (i.e., you and other shareholders) are.

That means that, unless you sell the investment, you aren’t taxed because the value of the fund went up from when you bought it. Likewise, unless you sell, you don’t get a deduction if the value goes down.

So, assuming you haven’t sold any of your fund shares, you’re taxed only if the fund managers sell some of the fund’s stocks in which they have capital gains. In that case, you owe your pro-rata share of the taxes on those gains.

The nastiest part, though is something that we veterans of the Great Recession’s investing environment will remember with pain....It’s possible that the value of the fund could go down and you still owe capital gains taxes.

It happens this way:
— Some underlying stocks go up in value. Others go down. But on a net basis, more go down than up. But....

— The managers don’t sell the ones that go down. No sale = no taxable event. In this case, no deduction.

— They sell the ones that went up. Sale = taxable event. In this case, a capital gain.

Let me tell you, 2009 was hard to stomach. The value of my fund went down, AND I owed taxes? Seems unfair, but nobody said the IRS was fair.

 

[4Q Basket Case]

I do want to add. I haven't contributed to my Roth IRA with MS since I started nursing school. I have been contributing to my Fidelity account through the hospital at 8% since July. To get the match, I only have to do 5%, but I wanted to do a little more. I will invest more as I can, but right now I think 8% is a comfortable amount.

I am thinking of maxing out my Roth IRA for the year with some of the money I have left in savings. Is this a good idea?

If you have (1) an emergency fund of 6 months’ living expenses after making the contribution, and (2) no reason to think you’ll need the money before age 59 1/2, then yes, it’s a great idea. The cool thing about the Roth is that you already paid tax on the contributed funds, so anything you take out after age 59 1/2 is tax-free, including all gains, dividends, interest, etc.

HOWEVER, you need to meet both of those conditions. The emergency fund is your safety net against the unexpected and unforeseeable. It’s one of the very few saving / investment priorities that I have above truly maxing out contributions to 401Ks and IRAs.

Also, there are potential tax impacts and penalties for withdrawal from an IRA before you reach 59 1/2. So you don’t want to do that unless it’s a choice of taking the hits or facing true privation.

If you meet both of the conditions, go for it.

And regardless of which way you fall on the conditions, big congratulations on taking control of your financial future.

Edit: Sorry, Jessica....I missed your initial question on where to put the extra money.

Again, assuming you meet the two conditions above, I would suggest investing your contribution to the Roth IRA In an S&P Index fund. As your overall portfolio grows, you can diversify into other asset types — Small Cap Growth, International, etc. For now, the S&P Index will work fine.

Shouldn’t be hard for your MS person to find one that is no load and has management fees of no more than 0.25%. An index fund really should be in the 0.1% range or less.

 

[Jessica4Bama]

If you have (1) an emergency fund of 6 months’ living expenses after making the contribution, and (2) no reason to think you’ll need the money before age 59 1/2, then yes, it’s a great idea. The cool thing about the Roth is that you already paid tax on the contributed funds, so anything you take out after age 59 1/2 is tax-free, including all gains, dividends, interest, etc.

HOWEVER, you need to meet both of those conditions. The emergency fund is your safety net against the unexpected and unforeseeable. It’s one of the very few saving / investment priorities that I have above truly maxing out contributions to 401Ks and IRAs.

Also, there are potential tax impacts and penalties for withdrawal from an IRA before you reach 59 1/2. So you don’t want to do that unless it’s a choice of taking the hits or facing true privation.

If you meet both of the conditions, go for it.

And regardless of which way you fall on the conditions, big congratulations on taking control of your financial future.

Edit: Sorry, Jessica....I missed your initial question on where to put the extra money.

Again, assuming you meet the two conditions above, I would suggest investing your contribution to the Roth IRA In an S&P Index fund. As your overall portfolio grows, you can diversify into other asset types — Small Cap Growth, International, etc. For now, the S&P Index will work fine.

Shouldn’t be hard for your MS person to find one that is no load and has management fees of no more than 0.25%. An index fund really should be in the 0.1% range or less.

I don't know if you saw my first post (post #8) but I was planning on keeping $15,000-$20,000 in my emergency fund. I just don't know where to keep it. I have a money market account though my bank but it doesn't draw much interest. I am thinking of switching it over to the Citi Accelerated Savings account. It generates 2.05% right now. But even after the emergency fund, I will have a lot of money left over. I don't know where to put it or what to do with it.

 

[CharminTide]

I don't know if you saw my first post (post #8) but I was planning on keeping $15,000-$20,000 in my emergency fund. I just don't know where to keep it. I have a money market account though my bank but it doesn't draw much interest. I am thinking of switching it over to the Citi Accelerated Savings account. It generates 2.05% right now. But even after the emergency fund, I will have a lot of money left over. I don't know where to put it or what to do with it.

Emergency funds typically go in a high-yield savings account, money market funds, or no-penalty CDs. The idea is balancing safety (meaning no price volatility) and liquidity (meaning you can access it immediately when needed).

As for investing the rest, I've read maybe 10 finance books over the past few years (my own personal crash course), and the most useful one has also been the simplest: The Bogleheads' Guide to the Three-Fund Portfolio (amazon link). It's short and to the point, you can finish it in an afternoon, and it's written for the layman. Whenever friends and family ask for investing advice, I loan them my copy. There are other resources you can turn to after that if you're hungry for more, but that's a great practical summary of basic investing strategy that will give you everything you really need to know without needless fluff.

 

[Bamaro]

I don't know if Fidelity has a good option or not but Ally has a good online savings account currently paying about 1.7%. Its a liquid account so all money is immediately available.

 

[CharminTide]

Ally never has the highest rate, but they're always competitive and I've had great interactions with their customer service when I've (rarely) needed to contact them. I use them for my savings.

 

[4Q Basket Case]

I don't know if you saw my first post (post #8) but I was planning on keeping $15,000-$20,000 in my emergency fund. I just don't know where to keep it. I have a money market account though my bank but it doesn't draw much interest. I am thinking of switching it over to the Citi Accelerated Savings account. It generates 2.05% right now. But even after the emergency fund, I will have a lot of money left over. I don't know where to put it or what to do with it.

OK, I think I understand now....there are two questions on the table.

First is where to park your emergency fund. The suggestions for a high-yielding savings or money market account are spot on. I personally use Capital One, and have been really satisfied with both the yield and their customer service. But the suggestions others have offered are excellent as well.

Second is where to invest the excess cash that (1) is over and above the emergency fund and, (2) you have no reasonable expectation that you will need before age 59 1/2. For that, I'd suggest contributing it to your Roth IRA, and investing it in a low-cost S&P Index fund. You can branch out into other asset classes as your portfolio grows. But an S&P Index fund is a great place to start.

If you still have money left over after maxing your 2019 Roth contribution, you have two options.

You could wait until after January 1, and put it in your Roth as part of your 2020 contribution. Or you could put it in a regular investment account that isn't part of your IRAs or 401k. At this point in calendar 2019, I'd probably go with Option 1.

The main thing is you absolutely have the message. Invest as much as you can as soon as you can. Max out the tax advantaged account (401k and IRA), and if there's more, invest it too. Keep on keeping on regardless of economic ups and downs.

You're young, and have the single most important asset you will ever have on your side -- time. But it is also your most perishible asset, and you're doing a great job not frittering it away (which a lot of people do, to their great sorrow as they approach retirement age).

Excellent start, Jessica. Keep going, keep asking good questions, and Keep Calm and Invest On!

 

[BamaNation]

I don't know if you saw my first post (post #8) but I was planning on keeping $15,000-$20,000 in my emergency fund. I just don't know where to keep it. I have a money market account though my bank but it doesn't draw much interest. I am thinking of switching it over to the Citi Accelerated Savings account. It generates 2.05% right now. But even after the emergency fund, I will have a lot of money left over. I don't know where to put it or what to do with it.

OK, I think I understand now....there are two questions on the table.

First is where to park your emergency fund. The suggestions for a high-yielding savings or money market account are spot on. I personally use Capital One, and have been really satisfied with both the yield and their customer service. But the suggestions others have offered are excellent as well.
...
Excellent start, Jessica. Keep going, keep asking good questions, and Keep Calm and Invest On!

Excellent advice all the way around! We use Ally & Marcus online banks. Both are currently at 1.7% which, while not great, is better than the 0.1% BOA offers Cap1 is about 1.9%. Depending on where you live credit unions may also have good rates. https://www.bankrate.com/ offers daily updates on rates for savings and loans across the country at thousands of banks and brokerages.

sidenote: You might also look for bonuses from banks to start out if you've got a significant amount to move or deposit. For example, Chase will offer up to $500-$1000 sometimes to get you to move / open an account with a decent amount of cash. Then after 90 - 120 days you could move it back to Ally/marcus/cap1 etc.

If none of those bonus offers are available, choose one bank / credit union and don't try to chase the best return (until you've got 6-7 figures in the bank ) 0.1% on $100k is only $100 so usually not worth the hassle. 0.1% on $1MM for $1000 might make sense if you had that kind of money and all it took was a few minutes to open & move money online, so it's all relative.



Ally has 11month CDs that offer good rates depending on the amount you deposit and are no-penalty after 7 days (meaning you could break the cd w/o losing interest earned). So, you earn a better rate and it doesn't really cost you anything. Marcus & others have similar products. Fidelity and Vanguard (and maybe others) offer money market products which, while not receiving FDIC protection, are pretty safe and offer 1.7-1.8% rates. Ally and Marcus both usually take only 24-48 hours to receive money back into your "normal" checking / savings account.

As others have indicated, anything you might need (i.e for emergency funds) typically should not be invested. If you're buying a house you'll probably also want to start saving for ongoing / routine maintenance & repairs outside an emergency fund. Things like painting every 5 years or new roof every 15-20, etc. that you know are going to need to be done aren't really emergencies.

As a reminder, I've posted my retirement resources here for anyone who wants to take a peek. Keep reading and learning. You are starting off on a great note. Well done! As you accumulate more through earning more and continue spending less than you earn, you'll want to make sure you're still headed in the right direction.

Finally, Echoing 4Q, great job! I wish I was as smart as you when I was in my 20's