Tuesday, June 19, 2007

Investing: What Not To Do

So, as I have mentioned, I am a definite newbie when it comes to investing, however, having spent a lot of time researching and learning over the last year, I've come to some definite conclusions as to what I should not do, when I begin investing in a couple of months.

1. Giving Up or Hiring Financial "Advisors": I have a friend at work who has $75K in his checking account and is too busy and/or clueless about what to do with that money so he just lets it sit there. Obviously for him, a financial advisor would be a step up from the status quo. For the rest of us, however, the high fees they charge (which is before any fees you also have to pay from mutual funds and investment products), make these "professionals" easily beaten by do-it-yourselvers with the patience, time, and willingness to learn about investment. I have no interest in paying someone 1% of my total assets every year to "manage my money," by failing to beat the S&P.

2. Fee-Heavy Investments: I similarly have no interest in investing in other fee-heavy investments: front or back loaded mutual funds, overly high expense ratioed mutual funds, insurance annuities, or overly expensive brokers to hold my hand while they overcharge me (cough cough Charles Schwab). The internet age means none of these products are needed.

3. Individual Bonds: I have no real time to learn about the complicated and subpar-performing bond market. Long-term Bonds are usually highly risky (though lesser returning than equities) while short-term bonds pay peanuts. To paraphrase Warren Buffett the only good day to invest in bonds is on a day that doesn't end in the letter "y." While I may invest in a few bond mutual funds (like an indexed fund) to hedge against a stock market downturn, I have no intention of overdoing it.

4. Investing Too Conservatively: The key to good investing is assessing risks and determining which paths present the best opportunity, given the risks, to achieve maximum rewards. Keeping a 12 month emergency fund or paying down your mortgage is not a reasonable assessment of the risks presented by investment. Passing up reasonably risky investments is a far too fearful strategy to achieve investment success, and is guaranteed only to lead to subpar returns and high opportunity costs.

5. Not Taking Advantage of Tax-Favored Investments- IRAs, 401Ks, etc.: These offer massive tax benefits, which work out to be free money (especially if you have an employer matched 401K), and turning them down is a huge mistake. My NYC friend, despite my advice that he do so, has failed to create & contribute to a Roth IRA. If he had done so for the last two years (contributed $8K) that $8K (assuming a 10% return) would have returned about $256K in 36 years (when he turned 62). If he is taxed at a 28% federal rate and a 6% state rate, then that Roth would have saved him around $87,040 in taxes.

1 comment:


You really do not need to pay for financial advice unless your looking to invest in something highly specialized.