401k and investments

ETF: Exchange-Traded Fund. It's a group of stocks where the blend mirrors an index. Think of it like this... the Dow Jones is an index that tracks the performance of 30 US Companies that are considered Blue Chips. When people say "The Dow is up today", then that means the value of those 30 companies as a whole moved up. Same thing is true for the S&P 500, except that index tracks 500 companies. Suppose you want to invest but lack the fund$ to buy 30 different stocks for a diversified portfolio. In that case you can purchase in an ETF. An ETF simply mirrors an index (like the Dow or S&P500), so if you buy an ETF like SPY you are buying into an index that owns 500 companies and your performance will be the same as the S&P500.

 

so its pretty much a mutual fund?

so youre tellin me im gonna be a millionaire?

 

Ive got an uncle in the field and most of my family uses him, but on the other hand I dont think hes making them much money.

 

Mutual fund vs ETF a thin line but important difference as each provides diversification w/out having to purchase individual stocks.

Mutual funds are large pools of assets that are actively managed, meaning that they have analysts reviewing the funds mix and are actively buying/selling all the time using advanced metrics and other flashy computing. Because this takes man hours, mutual funds carry higher expenses. Take a relatively low expense long-term growth mutual fund like ABALX for example... this fund charges a one-time 5.75% front load and an annual expense of 0.61%. What does that mean? If you invested $10,000 today in ABALX, in 10 years you would have paid $1,293 in expenses/fees just to be part of the mutual fund (with the hope being that even after paying all those expenses your return in the fund would out-perform your individual efforts).

An ETF on the other is not actively managed. No analyst is looking at it everyday (or even every week) and the stocks usually mirror a select index. Suppose you're in an ETF that mimics the Dow (like DIA). This ETF will only change it's mix of stocks when the Dow is updated, which only occurs a few times per year. Your return would mirror the Dow's performance. Since there's less to do on the ETF side, the expense is 0.17%. which is much lower So taking the same example of you invest $10,000 today into DIA, in 10 years you would have paid $170 in expenses/fees.

Some advisors say you're better off with mutual funds so professionals can manage your funds, others think they're overpriced and ETF's are just as good. Some like neither and think you should invest in individual companies and make your own mix.

 

Ok I understand all of that but if imanage my own investments through my 401k should I beable to get ETFs or can I only pick what Mutual funds im in?

 

You should be able to buy either/both, but I believe it depends on who your investment account is thru. Great question to ask when you open your 401k!

 

Some good advice here, but most are putting the cart before the horse. First off, as you've already done, define what you are going to take out, and get that setup and going. If you are not comfortable with making a choice initially, just use their money market fund. Fine to do this until you feel comfortable with a choice.

Next, you need to define what your risk tolerance is. Many on-line quizes to help you here. Think TIAA-CREF has one of the better ones, Vanguard is also good for this. Once you understand your risk tolerance, you can set your asset allocation (stock:bond:cash) ratios. Then you can start looking at your available funds and figure out what you have and what you can put into your asset allocation.

Watch out for overpriced 401k funds. Many small companies get stuck with high cost funds since their company won't spring for paying a 401k admin. Many 401k admins lowball the company's cost, then put high cost funds into the plan. If this is the case you may be better off in Roth/IRA or even a brokerage account (watch out for taxes here though).

Lots of moving parts here. Start doing some research, it will serve you over your life. BTW, I like Morningstar for fund research. Lots of knowledge from their articles and the forums there.

 

I know, I'm not saying I don't save just relaying what I hear.

 

You guys seem pretty knowledgeable about this, what advice do you have for a 19 year old in college? Reply and I can tell you what I'm currently doing.

 

Set and prioritize your goals, live within your means, save early and often

 

As another young guy (26) ill say that is great advice.. Also do a auto deduction from your check to savings/investment if you can. I find if i automatically have X amount out of my check before i ever see it in checking i am more likely to save it than if i have it in my checking first and have ot move it myself.

And the biggest advice i have learned for myself.....Dont try to time anything. For long term investments (ie retirements with 20+ years to go) just get good low expense ratio funds and just keep pumping money into them. Whether the market goes up or down you will come out ahead over a long period of time. once you get closer to retirement (ie 10 years or so) it gets more crucial to be mindful of events but by then you should be playing it safer anyways).

Ive tried to time the market and ended up losing a good chunk of money. Made it back but if i had just stayed in i would have made more

 

I do agree that is the best general advice and I do that now as much as I can. (Main reason why I don't have any mods!)

The check thing is a good idea, I'll look into that for my internship this summer.

I'm more curious as to how to get to this point...

^^ How did you get there?

 

Well i think my priorities are a little fucked right now, which is why i keep putting money into my truck but living at home and having a 3mile commute each way allows me to do that

never thought of the auto withdraw, im gonna check with my bank and see if i can set that up. even if its only $200 a paycheck that still that much more money im not tempted to spend.

 

i know youre only 2 years younger than me but i think youre thinkin a little to far ahead. Focus on school and dont lose sleep over money right now. School is the most important thing in your life right now

 

Yes, that's very true. School IS the most important thing right now, but I feel like I can still focus on investments, right? I mean it's not a time consuming thing. I work 10 hrs/week during the semester and I will be interning every summer at nice pay, and 80% of everything I make will be put into an investment account.

 

Keep in mind that your goals should include some "fun" money for you and your significant other. It's not all about the destination, the journey counts here too.

 

Perfect time for you to do some research on funds/investing while you get ready for the "real" world .

Again, I like to browse discussion groups, my preference are the groups on Morningstar, to build real world knowledge from people who have done this and been through a few investing cycles. Those groups will lead you to good resources for further research.