Pat, you can take this one from Davis
Davis, congratulations on your intention to start out. First place to start would be your employer's retirement plan, if it's available. I would recommend contributing the maximum to this plan, whether or not the employer matches. If there is no employer plan, or you are self employed, there are other options. Second priority is to establish an emergency/liquidity fund equal to about 6 months of your normal expenses (not counting things like vacations). Finally, start a regular investment plan, perhaps with a good low cost mutual fund company such as Vanguard or T. Rowe Price. How much? Well, commit to a monthly dollar amount that won't impact your lifestyle (although it should hurt a bit - you will get used to it!), and set it aside FIRST, before pay your other monthly bills and carry on your normal spending (also known as "paying yourself first"). This should get you off to a good start!
Steve, you can take this one from Jacob
Jacob, I am a fan of the Roth too. If you are maxing your 401k and IRA then you may want to build up additional savings in a taxable investment account. This money could be used for anything since it is not tied up in a retirement account. That way you would have money for a house, car, emergency, or retirement.
JacobC: Congratulations on what you're doing, and for how far you've already come. I'm a big fan of Roths, both IRAs and 401(k), so I would suggest that you continue doing what you're doing. I would also do in a Roth rather than a merely tax-DEFERRED account any further retirement plan investing. As to whether to contribute even more to the Roth 401(k), however, that depends on whether you have an adequate emergency fund, and a fund for future car, house, etc purchases. If not, I think I might want to build those up first rather than tying everything up in a retirement plan.
Pat, here's another question for you from MM
MM, I"m not sure what you are referring to, but the usual reason that the Net Asset Value (NAV) of a fund goes down is because up to the date of the distribution, the distributions that have been made by the fund's holdings are held by the fund and are part of the calculation of the fund's NAV; after distribution, the NAV falls by the amount of the distribution per share. The NAV of a mutual fund is not the same as the value of a stock and those post distribution declines do not have the same significance as a drop in the price of a stock (although stock prices are a factor in a fund's NAV, in the long run). Mutual funds do not "go under," or if they do (due to administrative reasons) your investments are not going to disappear. A mutual fund is a way to pool ownership of stocks or bonds with multiple investors - if a mutual fund fails, the holdings are usually "adopted" by another fund family; those holdings belong to you and all of the other shareholders, not to the fund, and are not available to creditors. I hope my answer addressed your question.
Chad, when you're ready, here's one from Peter
Peter, What we do at our office is rebalance whenever a category is 5% overweight. Then we buy which ever category is underweight. Very similar to what to stated.
Peter, Fair values can be subjective, so you typically want to have a plan for what should be invested in each category. Then it is easily noticeable when a category becomes overweight and needs attention.
Chad, we have a follow-up for you from Peter
Peter, depending upon your risk tolerance we have most individuals between 8 and 12%
Francine, you can take this one from Bill
Bill: Please allow me to jump in here. Although I wouldn't go so far as to say "should," nevertheless I very much like PAAIX and PAUIX (the lower-cost institutional-class shares) and use these funds regularly in client accounts to further diversify stock-and-bond portfolios. Certainly a reasonable thing to do.
Bill, I'm not real familiar with that fund of funds but I think that it has a lot of bonds in it. I'm a fan of Mr. Arnott, though. If it's 70% bonds, then I would consider that 70% toward your bond allocation. Hope this helps.
Alright, looks like we have on more question from BUD
BUD, I'm sure you have heard a lot of opinions about bonds, whether there is a bond "bubble" or not, and what the impact would be on bond funds in a rising interest rate environment. For the long term bond funds provide portfolio stability, but as Peter Lynch once observed, "If everything in your portfolio is going up, then there is something wrong with your portfolio." Bonds could be the "bad boy" in a portfolio in the next few years, yet at that point, it's possible that equity investments could do well and would be the assets to move the total portfolio forward, just as bonds saved a lot of portfolios from the worst results during our last bear market. Investing should be a long term project, with your particular needs in mind, with an understanding that each type of investment has a role to play in your portfolio and that those roles rotate around - even a star baseball player can hit a slump, but the team can still do well. All that said, it would not be possible to recommend a percentage, without knowing more about your risk tolerance. Common wisdom these days seems to opine that intermediate term bond funds a bit less interest rate risk, RELATIVE TO RETURN. Some short term bond funds are doing some strange things to boost yield, so I wouldn't go there particularly. Hope this helps.
Alright, looks like we have time for two more questions today from MM and JEB
MM. the only mutual funds that I can think of that return equity are closed end funds that were set up with maturity dates (called "term trusts"). If a mutual fund is returning equity, that could be a sign that it is shutting down, and returning funds to investors, in which case you would simply use those proceeds to invest in a different fund. A return of equity is not taxable, so it does not make sense to put a fund making those payments into a tax deferred account such as an IRA or a Roth IRA, if that is your basic question - and that would be why folks are telling you not to use such a fund in a Roth, since the return of equity is not taxable so does not need to be sheltered in a retirement account.
Jeb, It's hard to make specific recommendations without knowing a LOT about you... clearly not what we have in this venue. I suggest that you see a fee-only planner for more specific advise.
Alright, does anyone have any other questions for today?
Unfortunately, we are out of time for today's chat. If you did not receive an answer to your question, or have other questions to ask, we will be back again next Tuesday, February 12. Same time, same place. If you submitted a question and didn't receive an answer, we will re-submit it for you during next Tuesday's chat -- and you will be first up!
This is Steve Johnson, CFP(r), Chairman of Johnson Lyman Wealth Advisors in Palo Alto, CA signing off. Thanks for the oppportunity to participate in this worthwhile program!
Signing off. Thanks for doing this. Chad
This is Francine Duke, CFP(r) signing off. I've enjoyed participating in this program once again.
Thank you so much for your time today, Steve, Pat, Francine and Chad. We sure appreciate it!
A big thank you to all who submitted such wonderful questions
And a special thanks to all of the NAPFA planners who helped out today
Thanks, all! See you Tuesday!