The first step is to setup an account. Listed below are the typical options listed with the best being listed first.
401K
Pro - Lets you invest a percentage of your before tax income.
Pro - Most companies match a percentage 3-6% is common which is free money for you. Its like giving yourself a raise.
Con - If you take money out before you are 59.5 you get hit with a 10% penalty
Con - No matter when you take it out you will pay the current tax rate.
See
your company benefits for how to get one of these setup and what
investment options are available. There will most likely be a selection
of mutual funds to select from.
IRA
Standard IRA
If
you don’t have access to a 401K you can do this on your own. You will
have to go to a public investment service like ETrade, AmeriTrade, etc.
Pro - Lets you invest before tax income.
Con- You are doing this on your own so no matching dollars for you.
Con - If you take money out before you are 59.5 you get hit with a 10% penalty
Con - No matter when you take it out you will pay the current tax rate.
Roth IRA
Pro - No taxes on withdrawn money.
Con - You pay taxes on the money before you invest it.
Con- You are doing this on your own so no matching dollars for you.
Con - If you take money out before you are 59.5 you get hit with a 10% penalty
Which IRA is best?
Well
that depends on if you think you will be in a higher tax bracket when
you withdraw the money then you are now. Thats hard to predict since the
answer depends on what the politicians do. One thing can be said with
certainty is that you will be better off with any of the options above
then if you don’t do anything at all.
Private investing
Pro - The money is yours you can take it out anytime you want
Con - You have to pay taxes on any profit you make that same year
Con - Like the Roth you invest after tax money.
You can use a public investment service for this also.
Investment styles
Once you have the accounts active you need to start making some investment decisions. This is where it gets tricky and everybody has an opinion. I’ve summarized a few below.
The trendy gambler
They always look for the hot topics in the news or the tips from their friends cousins. While sometimes they get some big gains they often have lots of losses. Some investments are so risky that they are not allowed in 401K or IRAs.
The expert worshiper
They rely on financial advisers who recommend investments for a living. Financial Advisers, Managers and new letters fall into this category. While this can be a good technique it depends on who you pick and if they can consistently keep giving good advice. Another problem is that some charge you per trade so this encourages them to cycle your money from one investment to another. Some are just crooks who scam you. Ever hear of Bernie Madoff? See link below.
http://en.wikipedia.org/wiki/Madoff_investment_scandal
The do it yourself
They do all their own research and don’t trust anybody else. Very time consuming and their mistakes are costly during their learning curve.
Balanced Investor
This is a combination of the the do it yourself and the expert worshiper. Essentially they use the recommendations from a expert to narrow down the field of what they recommend. Typically they throw out most of the experts advice but when their own research agrees they follow. Saves time researching bad picks and also its nice to know that somebody else agrees with you.
Balanced Investor advice
So you have an account open and you need to make some investment decisions. I recommend the Balanced Investor method.
Tools
Your 401K at work will likely have a history of all the investment options of how they did in prior years. That is a good place to start. This is a long term investment so don’t decide on just what made more last year, take a look at the track record for the prior years also.
For the money you have in IRAs or private accounts your investment service has lots of tools which take some learning to use so go slow. I use ETrade and it has historical charts and financial information on both stocks and mutual funds. One of the better things is that for each stock or mutual fund it show recommendations from multiple sources as to whether you should buy, sell or hold it. Examine some picks and see if you can spot why these advisers made that decision. If you agree then that is a potential investment.
If you are just starting out the safe bet is to go with a Mutual Fund which has a good track record. As you get more comfortable with the research you can pick individual stocks.
One last warning. Resist the temptation to go all in. You are investing not playing Texas Holdem. It is not a good idea to have all your money in one stock or even one industry. Diversify your investments. The less diversified you are the more conservative you should be in your picks. See Dot-Com_Bubble below.
http://en.wikipedia.org/wiki/Dot-com_bubble
Have fun and prosper.
