401k Investing For Beginners
A recent survey of nurses revealed personal finance or “money worries” were their chief concern. Shouldn’t be a big surprise, considering we are in a near depression.
So over the next few months I will try to post at least one article a week on basics of personal finance. This might include planned spending, retirement accounts, banking, credit cards and saving in addition to commentary,and punditry.
These basic articles may be boring to some, but fast forward to the years immediately before retirement, and you are thinking-”What am I going to live on, and how will I get by?”-then you will be glad you plowed through, and even more importantly, learned and executed on these recommendations….. So let’s get started!
401-K’s got a vote of confidence, in a couple of surveys discussed in this article in the “Wall Street Journal”. They report that the majority of 401-k holders kept their money invested, even during the severe market drop in March of 09. Why is this important? Because since that drop, the market has been up more than 30 %. So the money you had invested during the drop has come back in value substantially-you are still not even on that money, but getting close.
(Now for those of you who may have another version of 401-k such as 403-b accounts-all we say here applies. If you have no retirement account provided through your job, we need to talk!!!!)
More importantly, however, is that the new money that has been taken out of your check (pre-tax) has grown significantly since March 09-you bought at the bottom!!!!! Good Job!
Of course, who knew when the stock market would hit bottom-nobody! There for a while, it seemed as if the earth would stop spinning, the financial world was such a disaster.
Another article, discusses the argument about buying index mutual funds vs actively manged funds in your accounts. This article discusses a few advantages and disadvantages of the two type funds-but keep in mind, when stocks or mutual funds are in a retirement account forget about the fourth tip in the article-funds in retirement accounts are not taxed- on long or short-term capital gains. One of the main advantages of investing in a 401-k or IRA-you get tax free growth.
First a few definitions about fund types:
Index funds: These funds buy all the stocks in whatever index they are trying to mimic. So a S&P 500 index fund holds all the stocks that make up that index. So that mutual fund will go up or down the percentage rise and fall of that index. The stock holdings in that fund don’t change much, as changes in the stocks that make up an index don’t change often. There are many other “index funds”-Russell 2000, Russell 1,000, S&P 500, and 100.
Therefore, the fees that occur when holdings are changed within a mutual fund are much less than average. There are many different types of index funds, Dow index, Russell 1,000, and Russell 2,000 are a few popular ones, in addition to the S&P 500. Vanguard is a mutual fund company, whose founder, John Bogle, made these funds famous. But all investment houses, from Schwab, to Fidelity have their versions.
Actively Managed Funds: These funds have a manager or investment committee that makes decisions about which stocks to buy in their fund. They may trade frequently or infrequently. The difference between those that trade a lot, is that fee’s are higher. One of the problems with these funds is that if they have done well under a manager, and the manager leaves, what will happen? Who knows, but it might not be good-definitely worth watching.
So, what is a Millionaire Nurse to do?
Well the Millionaire Nurse at a minimum finds out what funds are in their 401-k. Write the name of the fund down, and go to Morningstar and look the fund up.
You may find that everything is Greek-hey, if financial folks read a medical file-they would think that was Greek (more like Latin). Find out how well your fund is doing compared to similar funds.
I think there is a place for both type funds, but if you don’t want to learn about them, then the index funds are the way to go. Find one with low fees if it is offered in your plan. Many plans only have one of each type to choose-that makes it easy.
Get the retirement plan managers to answer your questions about the type of fund, and how it is doing compared to its peers. When your benefit administrators are at your hospital or other place of employment-don’t be afraid to ask questions-they may not give you investment recommendations-but they should be able to explain your options.
I will do another post later on the different types of managed and index funds, because I don’t want to overwhelm you with information, today. You didn’t become a nurse in a day-and you will not be a financial expert in a day-but you have to start learning-and learn you will.
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