Investing

Investing

The world of retirement has changed dramatically since I started my first job, at IBM. The plan in 1980 was spend a career at IBM and you will have a pension that will support you until you die. It turns out that that was not reality.

Defined benefit plans, also known as pensions, have given way to tax advantaged personal savings plans with employer assisted contributions (401K, 403B). A lot of people are unhappy with the loss of pensions but there are problems with pensions.

If you are in a pension plan - DO NOT count on it. The money is not in your hands - it is debt to you. And only part of this debt has been funded - the rest is just a promise. If your employer has money problems, your pension may not be there. Companies die, and that includes big companies that people thought would last forever. Companies and state and city governments over-promise, under-fund, and can't necessarily fulfill their obligations. If you are counting on the Pension Benefit Guarantee Corporation, it's nowhere near a 100% guarantee, and an economic crisis could wipe it out quickly.

If you are in a personal savings plan, you have advantages and disadvantages compared to a pension. The big advantage is that the money is in your hands, you own it, you have control (well, some control). The big disadvantage is you must take PERSONAL RESPONSIBILITY for it.

So what should you do? Save and invest. Mutual funds, pooled money investments in stocks, bonds, "precious" metals, are widely used and a moderately easy way to manage a diversified portfolio. But they are easily abused by financial advisers. You must understand them and take personal responsibility in their use.

At a MINIMUM, you need to understand the terms and concepts below. This will get you started, just barely. Look them up on Wikipedia or a book about investing. If learning about this stuff is abhorrent to you, just look up one term every week.

• fiduciary - an adviser who puts your interests first - if you need an adviser, this is CRITICAL
• stock - a share in ownership of a corporation
• dividends - money paid to a company's shareholders, generally quarterly or yearly
• growth stock - growth stocks typically appreciate mostly by appreciation of the market share price
• value stock - value stocks typically pay dividends that support their market share price and can be reinvested
• bond - a debt note from a company that is generally paid at the date of maturity (can be traded like stocks at any time up to maturity)
• duration - the time to maturity of a bond  (roughly the percent loss in value of a bond for a 1% rise in interest rates)
• bond price versus yield - if interest rates go up the value of held bonds go down, so that similar bonds have essentially the same interest rate
• mutual fund - pooled money invested in stocks, bonds, etc. - regulated by the US Securities and Exchange Commission
• index fund - a mutual fund that tracks an index (as opposed to active management)
• exchange traded fund - a mutual fund that trades on a stock market exchange
• load - a sales fee on a mutual fund, in general AVOID these
• no load mutual fund - a mutual fund that has no sales fee
• expense ratio - the percentage of your mutual fund value that is charged as managing fee
• turnover - the percentage of mutual fund assets that is sold and replaced each year (relates to how a fund is managed, tax efficiency)
• assets - the total value of a mutual fund (relates to effective management)
• capital gains - the appreciation in value of a mutual fund
• distributions - monthly, quarterly, or yearly money paid from a mutual fund due to appreciation in value or dividends
• reinvested distributions - distributions that are used to purchase more shares in the fund
• average duration - the effective average time to maturity of the bonds in a fund  (roughly the percent loss in value of a bond fund for a 1% rise in interest rates)

Tax Advantaged Accounts

• IRA - a retirement savings account funded generally with untaxed money, invested and appreciated money is not taxed until it is withdrawn
• 401K - similar to an IRA but managed by an employer, often with some matching funds
• 403B - similar to a 401K but managed by an public sector employer, but there are significant differences that need your attention
• Roth versions of IRA, 401K, 403B - a retirement savings account funded with after-tax money, appreciated money is tax free

Investment Sectors

• Dow Jones index - 30 huge US companies
• S&P 500 index - 500 big US companies
• Nasdaq index - tech companies
• Russel 2000 index - small companies
• AGG - aggregate bond exchange traded fund
• EFA - Europe, Far East, Australia exchange traded fund
• ICF - real estate exchange traded fund
• GLD - gold exchange traded fund

There is free money to be claimed via employer matching contributions. There are efficient and inefficient tax strategies for your savings. There are severe penalties for not taking required minimum distributions from an IRA. There are multiple ways to give away money to advisers, money managers, stock brokers, and scam artists (this is not a desirable thing to do with your money).

I'm not saying that learning all of this is fun. I'm saying that if you don't handle your savings well, you will end up with much less savings. And I hate to see people throw away money that would make life easier.