Thursday, August 30, 2012

Investing for the Fed Up

The founders of investing site Motley Fool appeared on Yahoo! Finance saying investors should stick with stocks. Obviously they have their perspective, but just as after the tech bubble imploded in the early 2000s, may investors are turning their backs on equities.

But many business news outlets are caught in a trap. You can't sell a monthly, much less daily, publication with boring ideas like asset allocation or index funds. Plus, their advertisers are often the brokers and actively managed mutual fund companies.

At the same time, many young potential investors either don't have a 401(k) through their jobs, or don't even know where to begin. Thought this was a great NYTimes article about investing for those fed up with the stock market.

For those either thinking about pulling out of the stock market or not sure where to begin, here is what I personally would recommend:

1. A Single Bond Mutual Fund. If you are just starting a 401(k) or an IRA, just start with one fund. Lould look at either a Vanguard U.S. Bond Index fund or ETF, or a broad bond-based fund like PIMCO's Total Return Fund. These funds are less volatile than stocks, and you should at least be getting some interest payments. While you won't beat the market, you won't have to worry about what the S&P 500 is doing (or not doing). When you have more than a few thousand dollars in your IRA or 401(k), then you can think about a Lazy Portfolio approach with a half dozen funds.
2. Real Estate. People sometimes say they want to buy a home or condo because they are 'missing out' on something, whether it's a buyer's market, low interest rates, etc. The easiest way to invest in real estate is through a Real Estate Investment Trust, which is like a mutual fund of properties, usually apartment buildings, malls and office buildings. Like a bond fund, REITs usually have a healthy dividend, so you are making money even if they go down in value. I've put some money in the Fidelity REIT Index Fund and it's never lost money. Another way to get into real estate would be to look at a cheap second home or investment property. But my perspective is, if you make less than $70,000 a year, I wouldn't worry too much about buying a home to live in. You should just rent, stay flexible and focus on your career and personal life.
3. Online Banking. I am constantly amazed by the $3 ATM fees charged by many convenience stores and banks for non-customers. Then your own bank sometimes hits you with another fee. Get a checking account with Ally Bank, and just keep $100 or so in it. Ally refunds your fees at any bank. Otherwise you will probably be paying $50-$100 per year to access your own cash. They also have high-interest rate CDs, if you have a few hundred dollars that you aren't sure what to do with, including a no-penalty option.
4. Credit Cards. One way to bolster your investing, is to get a credit card that pays you to invest. Fidelity has cards that give you 2% back on all purchases. Let's say you spend $500 per month on groceries and gas (which would be pretty low). At 2% back, you'd be looking at $10 per month to put into a regular IRA, and you'd even get a tax write-off. It's not hard to imagine that you could end up with $200-$300 in your investing account just for using your credit card on things you already buy. Another idea would be to use your credit card cashback to pay off student loans. The Citi Forward Card offers an option to use your points for a check to send to your student loan provider. It also rewards you for staying under your credit limit and paying on time.

Ron Lieber's article mentions a few other ideas, but these are the handful that I find myself repeating over and over when I get into conversations about this.

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