Investing 101 . . . No need to pay commissions

Save More, Spend Less, Retire Young and Rich (or at least not poor)

Simply put, Americans don't save nearly enough for retirement. The same foolish attitude that seeks immediate gratification will keep many of our neighbors working into their 80's. The antidote to having to work (as opposed to wanting to work) is saving enough money to fund your retirement.

You should try to save about 10% of your post-tax income. If you have the opportunity to invest in a 401k you should ALWAYS invest to maximize your employers match. Next dollars go to pay off your credit cards (reducing debt is a great way to save as your return is the interest you don't pay- up to 24% after tax). When you are debt free (excluding your mortgage) max out your 401k. If you can still save more, than just use after tax money to buy index funds (see below).

A general rule of thumb is that you should retire with 16x your income. Where does the 16x come from? Well, you will spend about 80% of what you made (because of lower taxes, not needing to save, social security at the right time, etc.) and you should be able to withdraw about 5% each year. So, if you made $100,000/year, you need about $1.6 million to maintain your lifestyle. You also need to keep your investments growing, so investing for the long term (remember, you will have +/- 30 years in retirement) is key. The only way to invest for the long haul is stocks.

If you are more conservative/cautious and wish to protect yourself against unforseen expenses or a series of bad years in the market, you can shoot for 20x (or more). But remember, life is for living, not working so long, so one day you can stop working (you can always work during retirment if you feel the need to supplement your income/savings).

You Need Stocks
Unless you think the world is falling apart, which makes investing fairly irrelevant, you need to be in stocks. You do not need to pay anyone a piece of your hard earned savings to invest for you or tell you what to invest in. The only think you need to do is to buy two index funds.

Index Funds Baby
Two index funds? The first is an S&P 500 index fund, the second is an international index fund (be sure it is an international, sometimes called a global, index fund, not an emerging market fund). As the world is becoming more global, it is important to participate in its growth. An international index fund not only broadens your investment reach, it diversifies you against weakness in the US dollar and domestic economic weakness. In spite of recent domesic weakness, the US economy is an innovative force for growth and you need to make a S&P 500 index fund a core part of your portfolio. I'd recommend investing 75% of your savings in a domestic index fund and 25% in an internation index fund. Both the Fidelity (www.fidelity.com) and Vanguard (www.vanguard.com) company's offer these index funds. You can invest completely on line or talk to a customer service representative. They tend to be knowledgeable, are not commission based and can give you the information needed to invest.

Why Index Funds?
The advantage of an index fund is that it has low annual costs (no sales or redemption fees) and mirrors the overall market. Year-over-year, you want market performance (not shoot the moon, high risk investments). That strategy, over the long term, should be enough to keep your account even-to-growing on an inflation adjusted basis

You will never see this in a mutual fund ad, but year-over-year over 75% of actively managed funds underperform the market. You might get lucky, but chances are you will not. Essentially, actively managed performance is like a person flipping a coin- you can flip a coin, call heads and get heads, maybe you can do this three or four times in a row- that is luck, not a special penny flipping skill. Essentially, picking an actively managed fund is like flipping pennies, except the flipper gets a piece of your money. Actively managed funds have to pay the active managers (a lot), their staffs, travel, etc. and provide the fund company (Fidelity, etc.) with a return on its investment. Who pays for all of this? You do- via management and other fees. Index funds, by definition, mirror a pre-defined index. They are "dumb" funds with no active management. Costs are very low and the fund company can still make money charging one tenth of one percent in fees (an added advantage is that the fund companies know investors pay particular attention to the management fees on index funds and keep them extra low, as a kind of "loss leader").

To best average your costs, try to make periodic purchases. That way some will be high, some will be low, but on average you will be OK.

Never Buy Funds Through an Advisor
Advisors may be smart and well intentioned. However, they almost always are something else as well- commissioned. They are incented to promote a fund family. Guess who pays their commission- you do. Don't. You don't need to. You can get the best funds- the best expected value (that is taking risk and return) by buying index funds.

What About Picking Your Own Stocks
I don't recommend it. Take me for example. I'm financially astute. I follow business, economic trends and the performance of companies as well as the stock market. I'm a horrible stock picker. In fact, even though I know I shouldn't, sometimes I can't help myself and I buy a stock- because it is incredibly clear (to me) that it is going to go up. And sometimes they even do go up. However, many times they go down (way down). Why? Who knows. An analyst comes out with a negative report (GE- down 10% in the last month). There is a fear problems may be deeper than suspected (AIG- down 20% in the last month). Earnings missed "expectations" (AMD- down 30% in the last two months). The list goes on and on. Skip the drama, buy index funds and over the long term you will earn 8%-10%, a 5%-7% premium over inflation and enough to fund your retirment.

Good night-