Sunday, November 18, 2007

3 Things You Should Do

When I was thirty ... hell, when I was forty ... I was stupid as a sack of doorknobs about investing.

Of course, when I was forty, I didn't have any money. So it kind of didn't matter how stupid I was.

But time is an ever-flowing river, and now I have acquired a few shrinking dollars, and hedge fund honcho Barry Ritholtz has offered a short and handy guide about what I (and others) should do with our money:

1. Pay off your credit cards: Most people pay have much higher credit card rates than they realize -- they creep up over time, especially if you have any sort of a balance. Even a late payments to someone else will also send your rate higher.

Paying these balances off are the equivalent of a guaranteed return of 18% (or whatever your rate has become). RISK FREE, GUARANTEED. You wont get that deal anywhere else.

2. Max out your tax deferred accounts -- 401k/IRA: Putting money into these accounts gives you the equivalent of an extra 40% or so investment capital (depending upon your present tax rate), which then compounds over the decades until you take it. When you retire and withdraw these monies (which should have appreciated nicely) you will be in a much lower tax bracket.

3. Dollar Cost Averaging ETFs: The simplest investment thesis: Set your account up for dollar cost averaging for a few different ETFs. Each pay period (or monthly), but the same dollar amount of your choices. example: $100 of DIA, $100 of SPY, $100 of Qs, etc.

When prices are high, you buy less shares; When prices are low, you buy more. It's pretty foolproof.

I don't agree completely with the above. If you plan to Dollar Cost Average, do it with bare bones index funds (Total U.S. Stock, Total International Stock, a Real Estate Index, etc.). Otherwise, brokerage fees are going to eat you alive each time you purchase Exchange Traded Funds.

Buy ETFs when you have a big lump of money to invest.

One last thought: The markets are going to go up and down. Don't freak when they go down. Just keep Dollar Cost Averaging and ignore the falling prices. And concentrate on the face that you're buying at a discount.

5 comments:

Ritholtz said...

I should have made this clearer: Dollar cost averaging is cheap in any wrap account where you are paying an annual fee, and not transaction commissions. But the general priniciple is the same . . .

Anonymous said...

After a stellar eighty percent gain in profits from its cable division, Viacom has decided to reward it's production staff at Nickeloseon by taking away their matching 401K funds, killing their pension plan, reducing their health care choices, and of course removing a third of their vacation and half of their sick days.
Happy Thanksgiving everyone!

Steve Hulett said...

Happily, at least a few of them are unionized, and can't have their pension and health plans removed at the whim of Sumner Redstone.

Anonymous said...

For what it's worth, Kennon S. Grose wrote a few words about wrap accounts here:

Wrap Accounts Declared Illegal

It looks like the court's ruling has not yet taken effect, though.

Justin said...

These are the exact same things that Suze Orman says in her book "The Money Book for the Young, Fabulous, and Broke." It is mostly common sense, but sometimes you just need someone to point out the obvious. Why save money in a savings account earning 3-5% while you're paying credit card bills costing 12-15%? Max out your 401k matching; it's free money! Dollar cost averaging is good because people in general aren't good at predicting the ups and downs of the stock market. By paying the same amount every month you don't overpay when prices rise and you take advantage to a certain degree when prices are low. Over time it simply all averages out.

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