This is why you buy when the market is breaking records

The Nasdaq hit an all time high yesterday, ending the day at 5,056. The previous record dated back to March 10th 2000, when the index was at 5,048. As you can guess, the previous record was set shortly before the dotcom crash that sent the Nasdaq down nearly 4,000 points to 1,114 in 2002.

The S&P 500 set an intraday high yesterday, but closed just a few points shy of a new record.

Looking at the Dow, we find an equally bubbly story…

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The low in 2009 was 6,626. Today we’re at 18,058. That’s an insane roller coaster that has been climbing aggressively for the last six years.

THIS BUBBLES GOING TO POP! 

But guess what. You should probably keep investing in the market anyways. In fact, this is the exact way the market is supposed to work. Although there are peaks and valleys, the market trend has always been in an upwards direction. ALWAYS.

Sure, we have a recession (or depression) every decade or two, but these occasions are always followed by a lengthy period of gains. For every two to four years of losses, we average five to ten years of gains.

The market highs are getting higher, which means the lows get higher too when the crash finally comes. It’s a beautiful thing.

WHY you BUY in a bubble. 

In June 2013, I wrote a post titled I might take out a $30,000 401k loan just to piss some of you off. I was thinking of borrowing from my 401k and one of the primary draws was that the market was trading at all time highs (the Dow was at 15,000 for the first time ever). Why wouldn’t I want to lock in the sexy appreciation I had earned?

Fortunately, I was too chicken to take out the loan. Thank goodness considering the market has shot up another 20% since that post.

No one can time the pop.  

The problem isn’t with identifying when the market might be in a bubble. It arguably is right now.

Problems come when you try and preempt the bubble’s pop. You could sell today thinking things are crazy overvalued, only to find out this gravy train goes on for another three years before there is a correction.

This is why I need to constantly remind myself that I should think about my investments like I think about my marriage.

To have and to hold from this day forward. 

In sickness and in health. 

In good times and bad times. 

For richer or poorer. 

Until death does us part.

I will contribute to my investment accounts. 

You NEED to know your expense ratios.

throw money in toiletNow that I’ve given our savings account the cold shoulder in hopes of building long-term wealth via our taxable and retirement accounts, basic investment strategies just wont cut it any more.

The need to go deeper.

In 2007, when I landed my current job with the Feds, I was handed a fat stack of HR paperwork as part of my new hire packet. One of the pieces of paper in this stack asked if I wanted to begin contributing to the government’s version of a 401k, known as the Thrift Savings Plan (TSP).

The paper told me that if I contributed 5% of my salary, the government would match that contribution and throw in an additional 5% on my behalf.

I didn’t have to be a savvy investor to know that a 100% return on investment was an incredible opportunity.

The TSP is nice in that it only has five funds that one can choose to invest in. They are…

  • C Fund: Essentially an S&P 500 index fund
  • S Fund: A total US stock market index (so companies the S&P doesn’t cover)
  • I Fund: An international fund that mimics a Morgan Stanley International fund
  • F Fund: A broad index representing the US bond market.
  • G Fund: A guranteed return fund. Currently about 2% ROI. 

For all of the bureaucratic red tape and politics that comes with the government, you sure can’t beat the simplicity of the TSP.

But the thing that puts the TSP miles ahead of the competition, likely even your 401k plan, is the expense ratios.

If you’re a super passive contributor to your retirement accounts you might not even know what expense ratios are.

Without boring you to death, expense ratios are a fee that you pay the organization that manages your investment account. You may not have known these expenses existed because you don’t pay them out of pocket, instead your organization just debits them from your account.

Know your expense ratios. 

It could literally mean the difference of tens (or hundreds) of thousands of dollars over the course of your accounts life.

For example, the TSP charges expense ratios of 0.029%. Or in other words, for every $1,000 you have in your TSP, they will deduct 29 cents, annually.

Whereas, if you have an actively managed account, it isn’t uncommon to have expense ratios of 1%, or in other words $10 is deducted for every $1,000 invested, annually.

Ten dollars a year might not seem like a lot, but OH BOY does it add up quick.

Impact of Expense Ratios over the long term

For the sake of making everything easy, let’s say you have $100,000 in your 401k right now. You add $10,000 to your account each year. You are planning on earning an 8% return on investment over the next 30 years.

Take a look at how an account with a 0.030% expense ratio absolutely DESTROYS an account with a 1.0% expense ratio.

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So while a 1% expense ratio may not seem like a lot up front, man-oh-man does it cost ya big bucks in the long run, $419,181.44 to be exact.

Why pay an organization $420,000, when you could keep all that money for yourself? 

I’m fortunate that the TSP has insanely low expense ratios. It would be stupid of me to not contribute as much as I can each year to take advantage of the low fees (hence the reason I’m hoping to max my contributions this year).

And the good news is, even if I quit working for the Feds, I still get to keep my TSP. This will be one account I will probably never get rid of.

“But Ninja I don’t work for the Feds.”

You ever heard of Vanguard? Of course you have! It’s universally known as being one of the most legit investing institutions in the universe (think the Costco of investing).

Vanguards expense ratios are really cheap compared to most of their competitors (although still two to five times that of the TSP).

The more money you have, the better rates you will get.

From 2007 to 2014, I was contributing to VTSMX, which is Vanguards version of a broad based stock market fund. The expense ratio was 0.17%. Not too shabby.

But now that I’m committed to not being such an investing dummy, I’ve sold all $30,000 of that fund and bought VTSAX, which is EXACTLY the same fund, but has an expense ratio of 0.05% (1/3 of VTSMX). The catch with VTSAX is that you have to have a minimum of $10,000 to invest in this account to qualify for the cheaper fee.

Had I left my money in the more expensive VTSMX, I would have paid $22,000 more in fees over the next thirty years.

THAT IS SOOOOOOOOOOOOOOO STUPID. 

So, seriously, if you haven’t thought twice about your investment (taxable and retirement) accounts’ expense ratios; you need to get off my web site and start doing some research (especially because your employer might have some really sucky options).

Not doing so could LITERALLY cost you a fortune.

*make sure you consider tax implications on realized gains if you sell investments from a taxable account. 

Are you investing more or less than you thought?

Just about every personal finance guru has an opinion on how much you should contribute to retirement. Their suggestions usually falls between 10% and 20% of your gross income. For as long as I’ve been at this personal finance thing (since 2007), I’ve decided to contribute no less than 15%.

Here’s what my retirement contributions have looked like so far for 2014…

401K: 10% of gross income

Roth IRA: $5,500 (which is 6.7% of gross income).

As our income has increased, we’ve been able to send more discretionary income to retirement, (I started with 5% contributions in 2007).

There’s something missing though, I also get a full 5% match from  my employer for my 401k contributions. So, although I am personally only sacrificing 17% of my pay for retirement, I’m really getting 22% socked away for future me.

So my question is simple:

When the talking heads state one should be saving 15% towards retirement, are they factoring in the company match? Or another way to think about it, would you say I am investing 17% towards retirement, or 22%? 

It’s an interesting question, one that could literally mean the difference of a $1,000,000+ come retirement depending on how one decides to proceed.

When I asked this question on twitter, I got a 50/50 split. Half said they count the match towards their goal, while the other half said they pretend like the match doesn’t exist and it’s just a bonus.

Thursday Poll: What day will the government get its crap together?

I recently mentioned I have not yet contributed to my Roth IRA this year. If you haven’t been living under a rock, I’m sure you’ve noticed the markets are down a couple hundred points as the Republicans and Democrats are being a bunch of drama queens. I would never advocate trying to time the market because no one can predict the future, but almost surely one of two things will transpire over the next week…

Option A) The government shutdown continues, and for the first time in the Nation’s history, we will default on our national debt obligations. The economy will likely see an immediate and sharp decline. If I buy in today, with the dow at 14,800, it could easily be thousands of points lower a month from now if the economic crap hits the fan.

Option B) Republicans and Democrats continue bickering, but ultimately strike a deal. Either the national debt issue is pushed back for another few weeks/months, or the debt limit is permanently increased and the shutdown ceases. The markets will react positively to this news.

What’s going to actually happen?

No one knows exactly. But, I’m pretty sure no elected official wants to be part of the nation’s first debt default so I’m betting a deal is struck before default becomes a reality.

Now is the part where you, the reader, can help me out.

I want YOU to pick what day I should make my Roth IRA contribution. Ideally I will contribute on the last business day BEFORE The House and The Senate strike a deal (right before the markets would make a nice little jump). Only problem is, I don’t know what day said deal will be made.

To have a little fun, I’ll let you do the picking for me. Whichever day gets the most votes, will be the day I drop $4,500 in to my Roth (side note: I’ve already contributed $1,000 to regular IRA). 

This could end up being the greatest idea I’ve ever had, but it could just as likely end up being the worst. Haha. Should be fun either way right?

So reader…

[poll id=”22″]

 

Financial laziness.

I’ve been a big sack of laziness lately when it comes to keeping up with my retirement planning. Apparently the calendar has decided to say it is September (when did that happen?) which means I could have contributed to my Roth IRA as early as nine months ago for the 2013 tax year.

Had I just invested the $5,500 Roth IRA contribution limit on January 1st like a good little Ninja, that amount would have grown by $935. Or in other words, basically my $5,500 contribution would be $6,500 right now. 

How lame am I?

Answer: only kind of lame because at least I’m realizing my lameness as opposed to justifying it? 

…Okay, well part of me wants to justify it for the following lame reasons…

  1. I upped my 401k contributions this year quite a bit.
  2. We bought a house, which hopefully will have some investment aspect to it.
  3. I’m lame.

It’s time I give myself a swift kick in the butt and get my Roth contribution in.

Have you needed to give yourself a kick in the rear for being financially lazy in any capacity?

  • Avoiding paying down debt faster than you could/should?
  • Not contributing to retirement when you have the means?  
  • Paying for two cable boxes when you haven’t turned your basement TV on in months? 

I-R-HoorAy, ho, hey, ho.

stupid brain

It’s a good thing I have a cousin-in-law that works for a Wells Fargo retail branch. He always fills me in on things I need to know about the companies personal banking products (Girl Ninja and I are WF clients). Normally I’d be all about a local credit union or community bank, but Wells Fargo has a product line called the Portfolio Management Account (PMA) that is pretty swaggerific.

It has some standard benefits like free checking, free cashiers checks, custom ATM cards; but the thing that really makes it stand out from the competition is the fact that a PMA member can make 100 free trades each year through their Wells Fargo brokerage account. The $30 annual fee for these types of accounts is also waived.

If you have the assets necessary to qualify, the PMA package is pretty much the best thing out there. Or at least that was true 10 days ago.

On March 31st, my cousin-in-law informed me that the 100 free trades benefit was disappearing on April 1st. Wells Fargo now charges a $6.95 per trade fee to any newly opened PMA accounts. That’s not an excessive amount by any means (E*Trade is $8), but that’s a heck of a lot more than the $0 per trade I’ve been paying for the last five years.

The accounts Girl Ninja and I already have are grandfathered in (my Roth, her traditional). But what if I quit my job a year from now. In the event I change careers, I’ll need to roll my 401k assets in to a traditional IRA. Meaning my new traditional IRA would be subject to the $7 fee.

Fortunately, I was able to call at about 8pm on Easter Sunday and get a traditional IRA opened up if/when this becomes a reality.

Problem solved.

Well except for the fact that I have never contributed to a traditional IRA before and made a major boo-boo. I told Wells Fargo to throw $1,000 in to my new traditional IRA for the 2012 tax year. Thinking I was a good boy for putting a little more away for future-me.

Not so fast! Apparently if you max out your Roth IRA, you aren’t suppose to contribute to a traditional IRA (or vice versa).

Basically I’m only allowed to contribute $5,000 total between my traditional AND Roth IRAs. I already maxed out my Roth ($5,000) a few months ago, so my recent $1,000 addition to my traditional puts me over the maximum allowed contribution. If I left things how they are the IRS would come kick my door down, punch me in the face, and penalize me for over-contributing. How lame!

Ugh, I remember the days where I worried if I should have Golden Grahams or Cinnamon Toast Crunch for breakfast, now I’m worrying about getting a visit from Uncle Sam for investing too much. Growing up sucks.

Completely unrelated note: Anyone work in medical/pharmaceutical/tech sales. I want to explore that career field and would like to pick someone’s brain! Not literally. Literally picking your brain would be kind of weird.

 

Eating my words

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Remember the controversial post I wrote a month or two ago titled “Screw my Roth IRA” where I blew the whistle on why Roths suck? Many of you wanted to burn me at the stake; accusing me of financial blasphemy. The comments section of that post got a little heated, but with the help of some fellow PDITF readers, my point was actually getting through to those who originally opposed it. I was vindicated. I had written an article that forced people to think about the Roth differently. I concluded that post with the following statement:

I don’t hate my Roth. I’ll continue to let what money is in there grow tax-free, but I’ll probably never contribute to it again.

Now comes the part where I eat my words…

I’m going to contribute to my Roth IRA this year.

I’m horrible I know. I say one thing, but do another. I reek of hypocrisy and Dr. Pepper (side note: I LOVE Dr Pepper).

I use to think the Roth was the sexiest thing ever, but the facts prove that’s simply not true. So what gives? Why am I continuing on with Roth contributions when I think Roths kinda suck?

Check it…

We will soon have more cash than we want/need.

We should hit our $100,000 savings goal in the next few months. That’s where I’m drawing the line. I’m a big believer that there is a such thing as saving too much. Even though 80% of this will probably go towards our down payment, I’ve already told you I don’t really want more than $10,000 in the bank at any given time.

Once we’ve hit our six-figure goal, we will have to be more creative with our discretionary income. This is why we’ll be having our first-ever No Save Month in November. To keep our cash reserves in check, I’ll likely throw another $5,500 in to my Roth, start contributing to my taxable investment account, and if we still have some leftover cash, I’ll try to max out my 401k. Meeting our savings goal affords us the opportunity to maximize our investment potential.

The Roth acts as a secondary emergency fund. 

This is the only significant advantage the Roth has over a traditional 401k, in my opinion. With a Roth, one can withdraw their contributions at any time, for any reason, without having to pay any penalties or taxes on that withdrawal. For example, I have a little over $37,500 in my Roth, of which $29,000 was contributed by me. That means, at any point, I can withdraw $29,000 from my Roth and do with it what I please.

I allowed my frustration with the Roth to cloud my judgement. Yes, the Roth IRA is nowhere near as tax-advantageous as people like to pretend it is, but its ability to be both an investment vehicle and a quasi-emergency fund – at the same time – make it a worthwhile option.

In conclusion, I still think Roth IRAs suck, but for now it will remain in my personal finance arsenal. Here’s to second chances 😉