Investing

401k's - Great for Saving... Terrible for Investing

You nailed the interview, negotiated a nice, fat salary and completed the HR paperwork.

Congratulations on the new gig!  Good on you!

But in all the excitement of your new job, don't forget about your old 401k!

After you leave a company, you have options.   With your old 401k, you can: 

  1. Leave it behind
  2. Roll it over into your new 401k
  3. Roll it over into an IRA
  4. Take the money…pay Uncle Sam 50% in taxes & penalties… and run!

Just because it's an option doesn't mean it's a good one.    Obviously, taking the money out and paying taxes on the whole thing PLUS a 10% early withdrawal penalty (if you're younger than 59.5) is a terrible idea. 

Leaving it where it is or rolling it over into your new 401k aren't as bad, but they're only a little better.   Want to know a secret?  Come a little closer…

401k's are great for saving, but they are TERRIBLE for investing. 

Why?

Each 401k plan is different, but even the most robust 401k's offer only a limited number of funds to invest in.  You're options are limited to whatever Human Resources has picked out for you.

I've seen the investment options of hundreds of 401k plans.   And I can tell you from experience, the funds usually kinda suck.  (And that includes the Target Date funds I bet you're invested in right now.)

So you're forced to pick the best of the mediocre and call it a day…until you leave your company.

Once you leave, you can roll your 401k into an IRA - Individual Retirement Account. 

It's tax-free and penalty-free to do so.   More importantly, once it's in your IRA  you can invest in pretty much anything you want.   Instead of picking from the best of the mediocre, you can pick from the best of the best!  Woohoo!

Then you can invest in a well-diversified portfolio of low-cost index funds, which is how you should manage all of your "serious money".  And what's more serious than your retirement savings!?

Then as you progress throughout your career and get better and better jobs, you consolidate all of your old 401k's into the same Rollover IRA.  

If you have old 401k's laying around, we'd be happy to help.   Check out our website - www.financialzen.com - and if you like what you see, schedule a free initial consultation

Disclaimer: This information is for educational purposes only and should not be considered advice or a recommendation.   Speak to your financial advisor for help with your specific situation.

Only Two Ways to Invest

Picture a little boy running around a cruise ship.   Little Johnny runs up the slide, then down the slide.   Dives into the pool, then runs over to look over the edge of the ship.   

Around and around little Johnny goes.   Where he'll run next is anyone's guess.  If you're not his parents or in the wake of destruction it might even be mildly amusing. 

Little Johnny is like the short-term fluctuations of the market.  He's all over the place and just when you think you know where he'll run next, he does the opposite.  Trying to keep up with him or predict his movements will be an exercise in frustration and futility.

The cruise ship is the long-term market returns.  We know it will arrive at its destination no matter where little Johnny runs. 

As an investor, you only have two choices.  You can either chase around Little Johnny or you can sit back, relax and sip your daiquiri. 

Chasing Johnny means you chase returns, get in and out of the market and bet on stocks.

Sipping your daiquiri means you buy and hold low-cost index funds and just enjoy the ride.

Your choice.

Money's Like Soap...

…the more you handle it the less you have.

The unspoken secret to long-term investment success is…ironically…to do nothing.  Buy...and then hold.

Wall St. doesn't want you to know this.   Wall St. doesn't make money if you buy and hold. 

They make money from the transaction fees you generate for them when you buy and sell and then buy and sell again.

If you truly want to beat the system, don't try and beat the system.

Your future, happily retired self will thank you.