Over a couple of decades, my investing has consisted of doing what most people do. Contribute money to their company's 401k after picking a handful of funds that seemed "good". Then, once every now and then (fill in months or years here as is your case) taking a look at my statement. And, to be honest, that's about it - not just for me but, I believe, for most investors. I've also ended up with a bunch of mutual fund IRAs resulting from rolling over 401ks after job changes.
I'm not sure what inspired me to learn about what I call "modern investing" but I finally decided to stop being an investing "sheep"...no...actually I'm an investing "cow". I think even sheep would be insulted by my not taking more control of my investing. Most people follow the path of the "investing cow"...though there does seem to be an awakening here. A LOT of people are opening up online discount brokerage accounts. I say discount because that's all you really need - IMHO, you shouldn't get investing advice from your broker (brokers have a vested interest in keeping you invested at all times and thus have a conflict of interest). And you definitely shouldn't pay their bloated commissions.
Back to my company-sponsored Vanguard 401k. In my company plan, I CAN NOT invest in precious metals, commodities or energy. Most of the funds I can choose are obscure and mediocre. Anyone care to invest in China, Japan (yes, some think its time has come), Asia, Canada, Australia or Thailand? What about opportunities in Malaysia, Indonesia, Chile, S. Korea, emerging markets, the BRICs (Brazil, Russia, India, China)??? Anyone ever hear of an ETF and the "revolution" it's creating in personal investing? If the market crashes, could I have stop losses (with limits) in place to avoid massive losses?
Nope, nope, nope and nope in my plan. I'm in one of those "cow" plans.
Here are just some of the thoughts I had that resulted in my taking more control of my investments:
- my company's 401k with Vanguard has a pathetic selection of investments (you could actually build a great portfolio with Vanguard ETFs but none are found in my plan).
- 75-85% (somewhere in there) of mutual fund managers can not even beat their respective index...what am I paying all those fees for?
- if the market crashes, will my funds be riding down all the way with the market? Most likely yes as you can't use stop losses with mutual funds...of course, you could sell and take losses.
- an IRA with an online brokerage account allows me to invest in ETFs. ETFs are similar to mutual funds but they are like unmanaged (think "index", sorta) funds that represent discrete "sectors" in a myriad of different investment categories. ETFs are much more tax-efficient and usually have far lower fees than mutual funds. With an online account, I can invest in a variety of ETFs representing every type of investment one can imagine with ALL the flexibility and functionality of such an account.
- mutual funds can generate capital gains and pass them on to me even if they lose money.
- a true analysis of the fees charged by mutual funds show they can have a huge impact on your wealth over time - much more than is commonly known.
- "buy and hold" is dead. Does anyone besides John Bogle not believe this? The numbers bear it out bigtime and it's likely to become even more "dead" with what our and the global economy are going through.
- online brokerage accounts are not just for individual stocks. ETFs can be used as excellent surrogates for mutual funds while the account itself gives you a variety of investing techniques like:
. buying or selling after a stock/ETF hits a certain price.
. setting up stop-losses to prevent major losses.
. investment analysis tools
. an investment community
. and much more
Maybe the biggest benefit of an online brokerage account is that, most likely, you will become much more closely involved with your investments...as opposed to remembering to look at your IRA statemnt once a year! MOOO!!!!
So what did I actually end up doing? I tranferred several mutual fund IRAs to an online discount brokerage IRA account that gives me 10 free trades a month due to my account balance. I researched newsletters and ended up spending a total of $350 on a stock-picking newsletter, a general "market" newsletter and a currency-picking newsletter. All of which I am quite impressed with.
Don't feel confident about choosing a newsletter or stock recommendation service? You can buy into the portfolio (or simply mimic it on your own) of successful investment "experts" at sites like kaChing, Covestor and Marketocracy (add .com to all). KaChing is even now offering IRAs where your retirement portfolio is invested in lockstep with the investment manager of your choosing. This method is becoming very popular and is quite empowering for the invdividual investor. This is a big step forward from mindlessly dumping a hundred dollars each paycheck into your 401k's "Old Fart" Balanced Fund. Yes, year's ago, I used to invest in the Vanguard Star Fund!!! Please don't tell anyone. And don't you dare MOOO!
What's the most important and most difficult hurdle to overcome if you decide to take more direct control of your investments? Controlling your emotions. If you decide to take this journey, as I have, you'll find out what I mean. Bye-bye "MOOO!", bye-bye "BAAA-AA-AAAH!".
DISCLOSURES: I own no sheep or cows.
-D.B.