I've received a ton of pm's on investing strategy, where I think the market is heading, how to plan for retirement, and who doesn't want to know about Bitcoin, Ethereum, Litecoin, GBTC stock, etc. So I decided I'll put it all in 1 place. Please note, it's November 2017 and markets change rapidly, so if you're reading this from my profile in mid 2018, please don't follow my stock market guidance!
Retirement Strategy. Here's my order of operations for where to put your money for retirement:
1. PAY OFF YOUR DEBT. Not exactly retirement strategy, but before you invest in a 401k, IRA, etc., you need to pay down your debt. Credit card debt is usually 20%, student loans and auto loan debt ranges from 5%-12%+, etc. Paying down even a 5% interest loan is the smartest investment you can make because it is essentially a guaranteed 5% return on your money and even Warren Buffett would kill for that type of upside with no downside.
2. ROTH Employer matching 401k.
a. A 401k is essentially a place where you have a percentage of your income taken from each paycheck and put into an account that holds stocks, bonds, and other funds. You can invest up to $18,000 per year into this Typically, your employer will match a certain percentage. If your employer matches up to 5%, you should be putting in 5% because let's say 5% of your paycheck is $100, then that means your employer is giving you $100 of free money every check! Take it! What often exists too is a partial match, so let's say your employer matches 50% on 4%. That means that if you put in 4% of your paycheck, they'll put in 2% on top, again, free money, so you should be putting in 4%.
b. What is a Roth and why should I do it? Many companies offer a 401k, about half of those who do offer a "Roth" option. A Roth means that you're being taxed on your money upfront before it goes into the fund. On the surface that sounds bad, but realistically, we're all young here and we'll likely make more money as we go further in our careers than right now. Thus meaning, you'd rather get taxed on your paychecks now while your income is low than down the road when you're going to pull money out of your 401k when your taxes will likely be significantly higher. If you don't do a Roth and you have $1 million when you retire, you'll really only have maybe $600-650k because you'll be slammed in taxes, whereas if you had done a Roth, you'd only have maybe $750,000 in your fund, but you'd get it tax free because you already paid taxes on it. Call the company who holds your 401k (Wells Fargo, Fidelity, etc.,) and ask if they offer a Roth for your company. Half will, half won't. Check the box!
c. What funds in the 401k do I choose? Most companies will default you into what's called a "Target Date Fund" which is typically a mix of stocks and bonds blended based on your age. If you're young, it'll be about 90% stocks, 10% bonds. The older you get, the higher % of bonds it will be in a target date fund because as you near retirement age, bonds are more stable whereas stocks could take a downturn a few years before you retire and cost you a big chunk of your nestegg. I don't like target date funds at all. I suggest if you're under the age of 40, put 100% of your money into stocks. Specifically, aim for "index funds." Index funds are subsidiaries of mutual funds. Mutual funds typically have a 1% compounded fee that goes to the bank. Index funds are usually under .1%, significantly better, saving you tens or hundreds of thousands over a 30 year career. You should have options such as a small, mid, large cap stock index fund, an s&p 500 index fund, etc. "Index" is the keyword to look for. I suggest allocating all of your money into index funds. If you only have the s&p 500 index fund, I'd suggest putting 75% of your money into that and splitting the other 25% into an international stock fund so that you aren't fully based on US Stocks. If you don't have that, then put the other 25% into a very late year target date fund, which will have some exposure to international stocks, such as a 2055 index fund.
3. Non-Roth Employer matching 401k. So I explained what a Roth is. A non-Roth will be the default of your company regardless of if a Roth is or isn't an option, so again, be sure to call. Let's say your company doesn't offer a Roth 401k. Oh well, still worth it. As explained above, free money is free money even if it is taxed. Put in whatever your employer will match.
4. Roth IRA. Again, I explained how a Roth works. Unlike a 401k, your employer isn't involved and it doesn't come out of your paycheck. You're just putting straight cash money into the IRA. The government allows you to put $5500/year into a Roth IRA. If the government limits it, it's probably pretty good for you right? Yes. An IRA is great because unlike a 401k where you only have a few options of where to allocate your money, an IRA is almost unrestricted. If you want to put it all in Google stock, you can. My suggestion for amateur investors and often even seasoned investors is to download the Betterment or Wealthfront app and let them do it for you. It'll be restricted as they essentially manage your money for you and you just set the % of stocks and % of bonds (do at least 90% stocks if you're under age 40). However, they're quite good at what they do and charge extremely low fees for doing so. If not, Vanguard or Fidelity are good bets. Simply call them and tell them you want to invest cash money into an IRA and they will walk you through how to do it. It's quite simple actually. To meet your $5500/year, you're actually permitted to do this from January 1 through April 15 (tax day) of the following year, so you actually get about 16 months to allocate the $5500 to a specific calendar year. Since you've already been taxed on this money when you earned it, you won't be taxed again and thus it grows tax free. The reason you use an IRA or 401k vehicle is so that you do not get hit with Capital Gains Tax, which is essentially the government taxing you on the money that grows in your investment portfolio, generally 15%.
5. Traditional IRA. Works the same as a Roth IRA, but you won't be taxed upfront, you'll be taxed down the road. I see no benefit to a Traditional IRA unless you're old AF or really rich and beyond the income limits to do a Roth.
6. Non-Employer funded 401k. Even if your employer doesn't match, it's not a terrible idea. You can put in $18,000 per year and not get hit with capital gains on any earnings from your invested money. Not great, not terrible.
I also suggest googling HSAs and FSAs. Employers often fund these and they can get complex and vary greatly between companies. Look into it, it's essentially ways to reduce your taxes on healthcare and childcare.
Investing strategy
Please do not take my word as gospel. Each person's situation is very different. This is more a general guide to investing, along with my specific thoughts on the current market.
How do I get started investing?
1. You want to ensure you have enough money to invest. If you're paycheck to paycheck, be cautious and don't take a gamble if you can't afford your rent if you lose your investment.
2. I suggest thinking logically about what investing is. Putting your money somewhere in efforts to make more money. A Mark Cuban tip I always love is that if you see a blowout sale on your go-to toothpaste, shampoo, body wash, toilet paper, frozen foods, etc., get it! If you planned on investing $1000 in stocks for the year and your stock grew 10%, you made $100 and would be very happy right? Well, if you typically would spend $1000 on toiletries like shampoo, razors, toothpaste, etc. in a year, and you found a great sale that only cost you $500 for the year instead of $1000, you made a 50% return on your money, 5x what would be a GREAT return in a stock portfolio. This is a really good thing to keep in mind before you try to be the next Warren Buffett or George Soros.
3. I suggest downloading the app Robinhood. If you use e-trade, scottrade or other services to buy stocks, you'll likely pay $5-7 each time you buy a stock. On Robinhood it's entirely free, simple, and a really great way to get to know stocks and follow them.
4. Read articles regularly. Follow Facebook groups like Investopedia, Business Insider, etc. It'll give you constant exposure to terms, strategy, and knowledge.
What should I invest in and what should I stay away from?
This one is more up to you and your risk tolerance and personal situation. If you earn $100,000/year but really would be fine living on $50,000/year, then you can certainly be more risky than someone with only $100 extra per month.
1. Understand compound interest. Compounding interest is why investing matters and why it matters to start young. If you have $10,000 invested and it grows at 7%/year, that's pretty good, especially if it compounds! Let's use that $10,000 as an example. $10,000 with simple interest 7% growth over 30 years is simple, $700 * 30 = $21,000 + $10,000 initial investment = $31,000. Not bad. However, in investing, if you leave your money in and let it continue to grow, that is compound interest. Thus, with compound interest it isn't $31,000, it's over $76,000, more than double!
2. INVEST YOUNG. Let's say you plan to retire at 65 and you start investing at age 25. You have $10,000 initially and you put in $500/month for those 40 years til you're 65. Assuming a 7% growth rate average, you'll end up with $2.7 million. Now let's say you were tight on money from age 25-35, so you waited to invest. So you put in the same $10,000 and $500 monthly for 30 years from age 35-65 instead of 25-65. You'll end up with about $1.2 million. Meaning, those 10 extra early years would've made you more money than the last 30 years until you turned 65.
3. Know your fees and expense ratios! On every fund you look to invest in, it'll have an expense ratio, which is essentially a % that the bank like fidelity, vanguard, whoever, will take from you and put in their pocket and take out of yours. Avoid these! Average fees on a fund can be around 2%. 2% doesn't seem like a lot until you realize your career will be about 40 years long. Think of the compounded interest we talked about in #1 and 2 above. That 2% fee doesn't seem like much until it's compounded over 40 years, which means you could cost yourself hundreds of thousands of dollars for nothing! Stick with index funds if you can, and if you don't, at least make sure you're looking at expense ratios to know what fees you'll be getting charged!
4. So what do I invest in? This is up to you. S&P 500 index funds are basic and outperform the vast majority of hedge funds over the long term with almost no fees! I suggest having exposure to smaller companies, so maybe a Russell 2000 index is wiser. Also you want to ensure you're involved in foreign markets, so Google around and find other funds that seem attractive to you. If you feel good about a certain industry that you really understand well, there's likely an ETF (basically a group of stocks that make up an industry, such as an "energy" etf that may include phillips 66, chevron, exxon, etc.) If you see a trend happening, buy stocks in the industries that would do well if that trend really takes hold. For example, the "fast casual" restaurant chain years ago got really hot. If you invested early in Chipotle, Panera, etc., you did really well! If you foresaw Amazon killing retail and you bet on Amazon and bet against Sears and JCPennys, you did really well!
Cryptocurrencies
How does a Cryptocurrency work?
First you need to understand how a server works. A server is essentially a big computer where a bunch of "clients" link to it, such as a laptop, desktop, smartphone, etc. These clients upload data to a server, owned by a company such as uploading an image on your iPhone to a Facebook server, etc. These companies are in control of the centralized server. This is how banking works too. Banks have servers with a ledger on it. A ledger is just a key with you and your bank balance/transaction history. This is all stored on a bank's server. You can use clients such as an ATM, or a register at the supermarket, etc., that takes your bank card or credit card, sends that data to the bank, and completes the transaction, just as uploading an image to facebook works. Now how this relates is that the company always controls the server.
This is where Bitcoin first came in. The bank controls the server and can thus freeze your assets, they can (and do) take your money and lend it out, can make stupid decisions such as 2008 investment banks. Thus, just after the 2008 crisis, Bitcoin was created. Bitcoin is really just a decentralized currency. There's no need to take your money, send it to a centralized banking server who can do things with your money. Bitcoin has no ledger on a centralized server. Instead, it distributes a copy of the ledger through thousands of servers on their network. Thus, no one entity is able to have control over your assets. So if you want to move around your money, you can utilize something like Coinbase or any other app/program, or a bitcoin atm, to access and move around your money (bitcoin). There is no 1 entity controlling it since it is decentralized amongst thousands of computing mechanisms on the network. Since nobody owns the centralized server, and it just transacts based on a set of automatic rules. These rules allow transactions to take place. When a person sends through a transaction, all of the nodes add this transaction to their copy of the ledger and put it on their history of blocks, and all these blocks add up to be a blockchain. That is how it works and how there is no way to change the blocks since no one owns it. There's really no incentive to do it either. Every time a transaction is completed, it creates a % of a bitcoin, so their real only incentive is to continue to complete transactions.
Other cryptocurrencies are all growth spin-offs of Bitcoin taken a step further. We'll take Ethereum for example. With Ethereum, we add a field called "bytecode" into your simple transaction. This creates a contract that lives of its own accord and it stores ether and can manipulate ether based on the set of rules entered into the bytecode. Bitcoin CANNOT do this, it just solves the problem of having a currency without a centralized banking server. Ethereum and others use this blockchain technology for more advanced transactions such as stock transactions, car and home titles, etc., just like how the internet was very basic and then spin-offs programs such as Yelp, Facebook, Twitter, etc., were all things created off of the premise of the internet. Here's an example. Let's say you want to open a business. To do that today, you'd go to your government, fill out some forms that you sign that agree to certain rules/laws, etc. The government approves and enforces the rules of the contract for your business. If you wanted to start a business or create a business contract, you can do this through Ethereum. You create a contract that lives on the blockchain that gives the key to a specific person to be the "CEO" and set rules such as, if these 5 keys vote to replace the CEO, then that's what it is. It's managed by the blockchain that no longer needs a 3rd party such as the government, a mediator, etc., to verify anything. Another example, you use match.com and they operate as a middleman to match people. Amazon runs as the matchmaker between buyer and seller. You could decentralize this through a program such as ethereum to act as the contract that uses the rules between two entities. It's a bit difficult to conceptualize, but this is why people see value in further spin-offs of Bitcoin like Ethereum, litecoin, etc.
So, is investing into Bitcoin or others worth it?
Maybe. I think blockchain is absolutely the future. It's a bulletproof and secure method of moving money and completing transactions without a need for a centralized bank, government, company or server. So I think there's a ton of value in that. As far as an investment at this point, it's very hard to say. Knowing if people are pumping up the value and then dumping it to cause market ebbs and flows is nearly impossible. I think as a whole, the industry will grow. As an investment, I simply do not know and anyone who says they know is either lying or someone one of the largest owners of cryptocurrency that has enough to shift the valuation, which is almost entirely unlikely.
My thoughts on the current market
Please, make your own decisions on investing, but here's my thoughts on the stock market as of 11/15/2017. I'm bearish. I think stocks are at an all time high due to low volatility in the market. PE ratios are double what they usually are (the value of a stock based on the price of stock vs how much their actual earnings are) because there seems to be few things that could cause stocks to not meet future growth performance. In nearly ever end of a bull market, there's a short term bump/bubble at the end of it. The bull market of the 90s had a huge push in the late 90s before crashing in 2001. There was a huge push in 2007 before crashing in 2008. I think we're in that phase now. 2017 has been a huge year, which was surprising to me, so I think it's just the final push before the tipping point. Now, perhaps that 90s bubble burst because of the dot com bubble, 2008 happened because of dumb banks, and this one is lasting because of political change. It's possible, but I really don't feel good about it. Too much money is pouring in and having values way too high. I think once interest rates inevitably have to rise, that'll be the final straw that breaks the market. Could be some military conflict or political unrest as well that could trigger a bear market. That's what I see happening in 2018 personally.
PM me if you have any questions about personal investment, retirement, etc. I am happy to help.[/U]
This post was edited by AspenSniper on Nov 15 2017 01:01pm