Locator: 47071INV
I'm
starting a new series on investing that I can share with my extended
family members, most of whom have Schwab accounts but little
understanding about investing.
Anything
I write here is meant only for my extended family members and no other
readers. It is a starting point for discussion among the family members.
Nothing is written in stone. These posts will be updated as conditions
change. They will eventually be collected and linked under the "Personal Investing" tab at the top of the blog.
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Lessons in Investing
When
I started investing back in 1984, there were no discount brokers, no
tax-free retirement programs, no commission-free trades. I was pretty
much limited to high-commission brokers who really weren't interested in
small investors, and load / no-load mutual funds. Tax preparation was
confusing and itemized deductions were in vogue. There was little
information with regard to personal investing. The worst thing
uneducated folks could do was invest in individual stocks; the second
worst things, load funds. No-load funds were a crap shoot: some did
well, some not so well. Because there weren't a lot of options and there
weren't many resources, a lot of folks tried investing in individual
stocks on their own.
Flash
forward thirty years, and everything has changed. Except one: folks
like me should not be investing in individual stocks. We should leave
that up to professionals.
With
discount brokers, commission-free trading, several types of retirement
programs, investing has changed immensely. For most folks with earned
income less than, let's say, $250,000 per year, one's investment plan
should focus on tax-free retirement accounts.
Let's use an example.
One
of my extended family members has just transferred "all" their
investments into their existing Schwab account and wanted me to discuss
my thoughts on investing using their Schwab account as an example.
I would assume many Schwab accounts look like this cartoon:
Section A: IRAs, 401(k)s
Section B: an individual stock portfolio.
Section C: 529s.
Section D: ETFs.
Section E: cash.
I assume folks can customize this Schwab cartoon front page any way they want.
The first discussion with one of my extended family members was interesting.
The first thing we did was focus on section B, the individual's individual stock portfolio.
These
were individual stocks the extended family member had inherited from
parents and grandparents over many years that had been transferred into their Schwab
account. Three immediate problems:
- the individual family member knew "almost" nothing about investing in individual stocks;
- the individual family member had no plan / strategy for investing in individual stocks; and,
- the cost basis was pretty much unknown for 90% of the individual stocks in section B.
There
is not enough in the account to justify paying a financial advisor the standard
fee, at least not at this point. I can help them get started, and once they
get the feel for what they are doing, they can hire a financial advisor
if they want. I strongly advise against that if they have a solid investment plan that can run on auto-pilot.
The first problem: risk of losing everything or much of what they
already have in their individual stock portfolio. They are likely to
compound their error(s) by adding new money to section B.
This is what they need to be doing right now.
With all new money:
__ budget their monthly income and expenses (at this, they are incredibly good; welcome relief)
__ ensure they have emergency funds available
__ insure the breadwinner is adequately insured
__ maximize their IRAs; if married, establish a spousal IRA for the spouse without earned income
__ maximize their 401(k)s or equivalent, such as a TSP
__ maximize their 529s -- even if they have don't have children, but especially if they have children
Going back to the Schwab cartoon, I stressed again:
__ focus on sections A and C
__ do not spend "any" time on section B
__ do not put any new money into section B until sections A and C are maxed out
__ when "investing" in section B, only use what currently exists;
__
if there is a "hot"stock that needs to be bought, go ahead and buy it
but use the proceeds from sales of existing stock in section B; again,
add no new money to section B until section A and C are maxed out
Section B:
__ buy and sell "small" until you understand what you are doing
__ don't sell shares of stock in "good" companies (or any company, for that matter) without a good reason
__ use Schwab tools to help determine what I mean by "good" companies
Dividends in section B:
__ stop all automatic reinvesting, for several reasons which we can discuss later
__
option: keep the section B dividend cash in section B to make additional investments in section B; that's the only exception
to "no new money" in section B -- however, see next line
__ my recommendation: move dividend cash from section B into sections A or C; there is a good reason for that. Actually, at least three.
I'll confirm the numbers later, but roughly:
__ IRA contributions this year: $7,000 per individual = $14,000 per couple
__ Roth IRA and not traditional IRA, we can discuss reasons later
__ 401(k) contribution: $23,000
__
529 contributions; two children; no max; set a goal for each year; as a
starting point, I'll recommend $5,000 per child = $10,000
__ total so far: $47,000 for sections A and C
So, first steps:
__ all new money into sections A and C
__ check your cash status once monthly
__ don't let cash exceed $1,000
__ monthly living expenses, life insurance, emergency funds are not part of the Schwab portfolio
Reminder:
I am inappropriately exuberant about the US economy and the US market, I
am also inappropriately exuberant about all things Apple.
See disclaimer. This is not an investment site.
Disclaimer: this is not an
investment site. Do not make any investment, financial, job, career,
travel, or relationship decisions based on what you read here or think
you may have read here.
All my posts are done quickly:
there will be content and typographical errors. If anything on any of
my posts is important to you, go to the source. If/when I find
typographical / content errors, I will correct them.
Reminder:
I am inappropriately exuberant about the US economy and the US market, I
am also inappropriately exuberant about all things Apple.
