Friday, August 12, 2011


Simply put it’s one of those scary words that I never completely understood until I sought out the information for myself as an adult. In high school and college I was given brief and generic statements such as, “you should always invest in your future” and gems like “put money away for retirement,” but what did it all mean and how do you do it? The best understanding I had as a teenager was that rich and wealthy people invested, but I never knew how or in what.
            When I set out on my own personal journey to educate myself, I found a plethora of information that all contained big words that were hard for my evolving brain to understand. I checked out online articles from personal finance pages, editorials, read money related magazines, and at the end of it found that just about everyone out there has an opinion and a theory, but I couldn’t find examples of tried and true strategies that actually worked. Which, and I’m beginning to feel like his name will come up a lot in this blog as long as it exists, I was introduced to Dave Ramsey.
            As a preface I will say this before continuing, I never invest in anything that I do not understand or could not explain to my 10 year-old nephew. Before putting a penny into investments I must comprehend the nuts and bolts of what I am investing in, no ifs ands or buts.
            Once I found my ground in life: living on a budget, establishing a six month liquid cash emergency fund, planning short-medium and long term goals, paying off all debts, I was ready to begin this thing called investing. As a general rule of thumb, any money that I set aside to invest I do not plan to use for at least 5 years, no exceptions. Although the primary vehicles I use for investing are a 401k at work and a Roth IRA, I also utilize an account that allows me to trade equities that is not a retirement account, but I use for any plans that are at least 5 years away. I always invest for the long term and never put money into the stock market that I need in the short or medium time spans of my life.
            But what is it that I invest in? Mutual funds. Basically, a mutual fund is set up like this: A team takes in a collection of money from investors (you and me). They then use this pool of money, that has been mutually funded by you and I, to buy a collection of items. So rather than buying stock into a single company, this mutually funded “account” can be used to buy stock into hundreds upon thousands of companies. Now there are several strategies/objectives that the mutual fund team can follow. For instance they can focus on finding small US companies that are expected to grow, this is called a Small Growth Cap Mutual Fund (cap for capitalization, which means the size of the company and how much money it makes, for example: Wal-Mart = Large Cap company, Your corner grocery store with 2 locations = Small Cap company). If the mutual fund’s objective were to invest only in bonds, it would be called a Bond Mutual Fund, etc.
            Now I avoid and no do not own neither single stocks nor single bonds in any of my portfolios and only invest in mutual funds, but where is the diversification you may ask. For me, this comes through the type of mutual funds that I own. I spread my investments across four types and use strict criteria when investing in funds: Small Cap Aggressive Growth, Medium Cap Growth, Large Cap Value and International funds. The criteria I use are the following: Fund has existed (inception date) for at least 10 years, has returned at least 12% average annualized returns since inception, has a fund manager that has been with the fund at least 5 years, and, although this is more of a subjective criteria, has an allocation layout across companies in several business sectors – so that, say for example, the fund is not over loaded in companies that build houses and the housing market is in a long downturn (see your local housing market today), that the fund as a whole would be fine because it is not “putting its eggs” into one industry basket.

            The first place I start is setting aside 15% of my pre-tax income amount for retirement. I max out the match that I receive from my place of employment, which happens to match $0.50 to every $1 that I put in up to 6%, so on the money I put into my 401k I immediately gets a 50% return on investment. Unfortunately though, the fund options at my company completely suck. I am not a fan of target dated funds. I feel that the concept of mixing a mutual fund with stocks and bonds, and “easing” the allocation towards bonds as the “year” date gets closer, allows the investment manager and his team to go into cruise control when selecting stocks, and that the return on my long term investment would barely beat inflation, let alone hit a 12% mark. So as for the actual options in my 401k, I selected the best valued bond fund so that the money that’s invested at least keeps pace with inflation. The remaining 9% flows through to my Roth IRA, which all of the gains made on investments, are tax free, and in the Roth I utilize my four mutual fund investment categories.
            Now why 12% and doesn’t the stock market scare me? Looking into the history of the Dow Jones and the S&P 500, 100% of 10 year periods in ANY time frame including the “lost decade” from 2001 to 2011, have made positive returns. Since the beginning of these two “big board” items, annualized returns have yielded greater than 10%. Now will some years/periods show low returns, absolutely. But by investing in mutual funds with long track records with investment managers and researching teams that have a clue, and by investing with long term goals in mind, any and all storms/hurdles are eventually cleared. With the proven long term success of well managed mutual funds, my fear of investing subsides and I continue with steady, long term focused growth. And to be honest, the real fear for the long term lies not with the stock market, but rather inflation. Average inflation I believe hovers somewhere between 3 and 4%, so if you leave your money in a cookie jar, in 10 years you lose purchasing power. Put it in a CD, you lose purchasing power. Buy bonds or bond funds, you maintain purchasing power. Invest in historically proven and well managed mutual funds and you kick inflation to the moon and back. 12% is not attainable or realistic the naysayer says, well, in a way they are right. Not counting the 50% match I receive from my employer, my mutual funds have average annualized returns as of this year at 18%, so the naysayer is right, you may perform better than 12% J -- even during the “Great Recession!”
            I gave some thought and consideration to posting which funds I invest in, but decided against. Should anyone come across and read this, I feel that the best influence I would want to have is to create discussion, internal dialogue with any readers, so that you think and rationalize for yourself, because I feel that self-empowerment is the strongest of any weapons.

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