rach678

Does anyone know any good advisers? I find this all quite confusing

fld00d

Honestly I've worked with a few financial advisors and the theme seems fairly common,

1) Max out company 401k match and ensure you hvae 100% disability insurance between your employer and what you pay additional.
2) Budget so that you can begin to pay off debt or invest each month.
3) Save up 3-6 mo of bills for emergency fund (I would suggest at least 6 in this profession)
4) Pay off high interest debt (not house, car, etc if they're <3.5-5% or so, talking credit cards or unsecured debt here)
5) Start an appropriate mutual fund for short term goals such as new car, new house down payment, etc. A few hundred a month can go in here on auto draft so you don't notice it.
6) Look into IRA's (I'm not on this step yet)

Some have different views on the order of all that, I simply chose what I was comfortable with.

kingsnake2

I would probably shy away from stocks when saving for relatively short term goals (anything less than 2 years for sure).

Stocks are great on average over long periods of time but are pretty unpredictable on a short term basis.

But, for mutual funds, my advice would be to pick total market funds with a bit of international exposure a total US market fund with a little bit (10-20% maybe) in a well diversified international fund.

The biggest thing is to be well diversified across sectors.

The second biggest thing is to pick a company with low management costs. Vangaurd is one of the cheapest for example.

block30

Yeah, besides TSP, investing with Vanguard is on my list of things to do! I keep reading and "hearing" good things about them.

flap

Whether you are 20 or 60, having an allocation to bonds dampens the volatility without giving up much potential return

Bartender

Contribute the minimum to 401k to get the company match. Then contribute to ROTH IRA. Then after ROTH IRA is maxed, go back to contributing to the 401k.

DAL 88 Driver

The following is an excerpt from one of the best articles I've ever read on investing. The article is from Snider Advisors:

As Family CFO, you are faced with many difficult challenges.
Unfortunately, there are thousands of choices in the realm of investment, and the proliferation of media sales pitches only adds to the confusion. What’s more, different financial advisors will offer different – sometimes contradictory – solutions. Whom to believe? If you are like most people, you find the decision-making process overwhelming – even more so as you near retirement, realizing that one mistake could mean the difference between financial security and financial catastrophe.

So how can you ensure your financial stability is not at the whim of a volatile market or an unscrupulous advisor? Some have found the solution by adjusting their objectives to focus on generating a monthly cash flow from their portfolio, instead of buying and holding for an eventual capital appreciation that may never come.

�� The company pensions, stable home equities and iron-clad Social Security checks your parents and grandparents counted on in retirement are now passé.

�� Life expectancy in the 1930’s when Social Security was first created was 63. Today, there is a high likelihood you may live well into your 90s.

�� A baseline standard of living is more costly than ever to support.

�� We are dependent on our portfolios to support that lifestyle for thirty years in retirement.

�� And to top it off, we know you will experience a serious decline in portfolio values about once every five years, if history is any guide.


THE SHIFT TO PERSONAL INVESTING
Personal investing for retirement is a relatively new concept. The great-grandparents and grandparents of Baby Boomers worked throughout their adult lives. The concept of retirement didn’t exist and life expectancy after age 65 was short. What their great-grandparents passed to their grandparents, who in turn passed to their parents, was – in all likelihood– not money or securities, but possessions: the family home, land, businesses, furniture, jewelry and other personal heirlooms. Any cash savings their parents or grandparents may have had was kept in a passbook savings account.

In 1965, stock market investments were rare. Less than 10 percent of Americans owned common stock. As late as 1983, that figure was still less than 20 percent. Our parents were guaranteed a lifetime income by military and employer pension plans and Social Security. Even as life expectancy lengthened, healthcare was affordable and subsidized by retiree health benefits and Medicare.

The world changed significantly in 1974 when Congress passed the Employee Retirement Income Security Act, better known as ERISA. Contrary to its name, ERISA began the process whereby the burden and risk of providing retirement income shifted away from employers and onto you, the employee. ERISA began the inexorable shift away from a sure, if modest, retirement income toward an uncertain future based on high- risk stock market investments in 401(k) plans and IRAs.

THE CAPITAL APPRECIATION MODEL
Capital appreciation is when you buy something in hopes it will go up in price. When it does, you sell it for more than you paid for it, and the profit is called capital appreciation. This has been the way we invested forever – buy and hope! It is probably the way you are invested right now.

PROBLEMS WITH THE CAPITAL APPRECIATION MODEL
The capital appreciation model ceased to be appropriate for most investors when Congress changed the rules on us. A basic maxim of investment management is you must match your investments up to your objectives, your time horizon and your tolerance for risk. When Congress put the burden of funding your retirement squarely on your shoulders, they quietly changed your objective without asking your permission or telling you they had done it.

Chances are your investment objective is income replacement.
The goal of income replacement is to be able to replace the income from your job with the income from your portfolio when you can’t or don’t want to work. But a traditional portfolio produces very little income. Imagine you have a $1 million dollar portfolio split 60 / 40 between stocks and bonds. That portfolio, on average, probably produces about $20,000 a year in income.

Lesson One: Match your investments to your objective, risk tolerance and time horizon. Just because everyone else is doing it doesn’t mean you should be.


THE NUMBER THAT MATTERS
The goal for many investors is to build and maintain wealth. But what exactly is wealth? If you are a traditional capital appreciation investor, it’s the market value of your portfolio at any given point in time. Your goal is to keep that number growing. The day-to-day and month-to-month fluctuations in your account value translate directly into the amount of wealth you have.

This focus, however, ignores what really matters to the individual investor. Rob Arnott, editor of Financial Analysts Journal and highly respected investment manager, explains:

Wealth, according to this perspective, is your ability to maintain a certain standard of living indefinitely over time. It isn’t measured by your portfolio’s account balance, but by the inflation-indexed income your portfolio can generate. If that income is sufficient to sustain a decent standard of living, and it is growing faster than inflation, then you can say you have achieved financial success.

Unless you’re planning to spend the money right away, what really matters to most people is what kind of spending their portfolio can sustain over their time horizon. If you’re a 50-year- old, it’s how much could you spend annually for 30 or 40 years. If you’re a 20-year-old, your time horizon is longer, and if you’re 70, it’s shorter.... People all too often think of their wealth as the value of their portfolio, which is a very simplistic and incomplete definition.

Lesson Two: The true definition of wealth is the ability to support a given standard of living indefinitely into the future.

THE QUEST FOR DOUBLE DIGITS
The Goal: To build a portfolio that generates an income that paces inflation, sustains growth and enables a reasonable standard of living. It is highly likely the only way to achieve this target is through double-digit yield.

Why double digits? Take the following assumptions:
�� Your retirement will last 30 years, the joint life expectancy of a 65-year-old, non-smoking couple.

�� Inflation will average 3.5 percent annually over that 30 years.

�� You need about 5% of your portfolio to achieve your desired standard of living.

�� Your marginal tax bracket will be 33 percent.

�� Stock market returns average roughly 10% and bond market returns average 5%.


To figure your required rate of return, add your withdrawal rate to the rate of inflation, divided by 1 minus your marginal tax rate. The formula looks like this:

When you plug in the numbers from the assumptions above, you get a gross average annualized return of 12.88 percent ([5 + 3.5] ÷ [1 - 0.33] = 12.88). The traditional retirement portfolio of 60 percent stocks and 40 percent bonds has a targeted rate of return of 8 percent, which means there’s a gap between what we need and what most retirement portfolios are set up to provide.
(w + i) ÷ (1-t)

Lesson Three: For a portfolio to generate enough income to pay you, pay your taxes and keep up with inflation, without running out of money or losing significant purchasing power in retirement, it must produce at least a double-digit yield.

THE MOTHER OF ALL REVERSE COMPOUNDING PROBLEMS
The only proven way to achieve a passive double-digit yield to replace your income is to own businesses – either directly or indirectly through common stock ownership. But this creates a challenge.

The chart below shows each of the bear market declines since the end of World War I. We are in the tenth decade and there have been twenty bear market drops of 20% or more –about one every five years. If you want to get even more specific, it is about sixteen months out of every sixty that we spend in bear markets. Of the twenty bear markets since WWI, eight of them have had a drop of more than 40% in the S&P.


It is absolutely true stocks go up over the long run. But your time horizon isn’t the long run when your objective is income replacement. You have bills to pay each and every month. When you are living off your portfolio, in order to pay those bills each month, you must sell some of the stocks and bonds in the portfolio. Based on historical market data, those sales will be at a loss a large percentage of the time. These regular losses create the mother of all reverse compounding problems.

You know about the power of compounding right? Which would you rather have? A million dollars or a penny doubled every day for thirty days?
Miraculously, a penny doubled thirty times is $5,368,709.12. But the bad news is it works the opposite in reverse. If you sell assets at a loss, you get reverse compounding. If you have a $100K stock portfolio and it loses 50% of its value, how much does it have to go up to get back to $100K? 100%! It has to double. That is reverse compounding.

The challenge is approximately one out every five years in the stock market is a down year. You have to sell off assets every year in order to eat. So, in order to live off the portfolio, you are going to have to sell stuff at a loss on a fairly regular basis. If those losses occur in the wrong order, it dramatically increases the chances of what academics call retirement ruin – a nice euphemism for running out of money before you run out of breath. This is known as the “sequencing of returns problem.”

Take, for example, the 17 year period from 1987 to 2003. The average return was 13.47%. Assume a portfolio of 100,000 taking $10,000 a year adjusted for inflation by 4% over those 17 years. Depending on the sequence of returns which produce the 13.5% average, the ending portfolio balance could be as high as $76K or as low as negative $187K! That is a big swing and obviously meaningful to your situation late in life.
Lesson Four: To avoid the sequencing of returns problem and negative compounding, an investor must avoid permanent losses of capital at all costs.

THE CASH FLOW SOLUTION
Think about this. Most companies don’t go bankrupt because they are not profitable and they don’t go bankrupt because the value of their assets has declined. They go bankrupt because they do not have sufficient cash flow to pay their creditors.

A company can lose money on paper but stay in business indefinitely so long as it has sufficient cash flow to meet its obligations. But without cash flow to pay employees, suppliers and creditors, a business’ days are numbered.

The same is true of your family. Most families that declare bankruptcy do so because the incoming cash flow, from paychecks and other sources, is not sufficient to pay the bills. But as long as cash flow exceeds monthly obligations, a family is fine.

So we know cash flow is the lifeblood of both companies and families. Doesn’t it make sense that your first priority as Family CFO is to create sufficient cash flow to be able to meet your family’s obligations?
If your monthly living expenses are $9000 a month and your portfolio produces $12,000 a month in cash flow, you would be able to live indefinitely on the yield irrespective of what the portfolio balance does. Under this scenario, you can afford to wait out the markets ups and downs because you don’t have to sell anything to pay your bills.

Lesson Five: Portfolios that create enough income to avoid selling assets do not suffer from the sequencing of returns problem like a capital appreciation portfolio does.

CAPITAL APPRECIATION VERSUS CASH FLOW INVESTING
Capital appreciation is when you buy something in hopes it will go up in price. When it does, you sell it for more than you paid for it, and the profit is called capital appreciation.

Cash flow is money that comes to you while you still own the asset. Examples of cash flow would be rent, royalties, interest, dividends, and option premiums. The key characteristic of cash flow is that you do not have to sell the asset in order to make money.

Cash flow comes from owning the asset. Capital appreciation comes from selling it – a problem when assets can and do decline by 50% to 80%.
The bear market that began in October 2007 is the fifth bear market in twenty years. Contrary to public opinion, business cycles have existed since businesses have existed and they will continue to cycle between boom and bust - in spite of government’s best efforts to control or eliminate them. If you accept that as true, then ipso facto, capital appreciation cannot work.

Just to summarize what we have covered so far:
�� You need double digit yields to pay yourself, pay Uncle Sam and keep up with inflation in retirement.
�� Owning businesses, either directly or indirectly through the stock market, is the only proven way to get double digits over long periods of time.
�� About every five years, the business cycle takes the market down with it.
�� If you have to sell in order to realize profits to pay your bills, you will have to sell at a loss. This creates a reverse compounding problem, which creates a high probability you will outlast your money.
�� Even if you are lucky enough to reach the finish line with money to spare, the mere possibility creates unacceptable levels of risk and anxiety.
Lesson Six: Cash flow is the most obvious answer to the problems of investing in markets that can and do decline precipitously on a regular basis.

TRADITIONAL SOLUTIONS FOR INCOME
Investors seeking cash flow, or yield, from their portfolios have traditionally been limited in their investment choices. Some of the most common options for the income portion of a portfolio are bonds and CDs, dividend-paying or preferred stocks, and real estate. Some investors turn to annuities to generate regular income. Here’s a look at these traditional approaches:

1. Bonds and CDs. These investments are typically safer than stocks (lower volatility and less chance -- sometimes zero chance -- of a loss of principal), but they don’t generate the double-digit yield mandated above. Over the last 10 years, the total return of the U.S. bond market has been approximately 5.5 percent. A five-year certificate of deposit paid anywhere from 3.5 percent to 5.1 percent in 20085, and shorter maturities paid less.

2. Dividend-paying stocks. As of August 2008, the dividend yield on the S&P 500 was 2.4 percent.6 Some individual companies around the same period were paying between 3.24 percent and 7 percent.7 Although several such dividend-paying stocks are available, to create a diversified portfolio, you will have to settle for something close to the average – which, again, is nowhere close to double digits.

3. Real estate. Many investors have created passive income through collecting rent on real estate properties they own. Sometimes these yields can be in the double-digits. Real estate investing, however, brings with it a number of challenges, such as maintenance and finding tenants, which may be a turn- off for the average investor. Conventional wisdom contends that real estate investors get the best of both worlds – passive income plus capital appreciation, but the crash of the mortgage market -- and home prices nationwide -- proves that this asset class isn’t immune to downturns, either.

4. Annuities. These often-complicated products are backed by insurance companies and can be quite confusing. Studies show that few annuity customers truly understand the products they’re buying. Annuities are either variable or fixed, and they’re either immediate or deferred. They also come in thousands of varieties, making an apples-to-apples comparison virtually impossible.

Perhaps the simplest annuity to explain is the immediate fixed annuity. The fixed annuity promises the policyholder a predetermined income for as long as they live, no matter how long that may be. (For example, you pay the insurance company a lump sum of $100,000, and they promise you $3,000 to $6,000 per year.)

The advantage is that it provides the policyholder with a guaranteed cash flow indefinitely, provided the insurance company remains solvent. The disadvantages are that the cash flow remains constant so purchasing power is reduced by inflation, and when the policyholder dies, the remainder of the principal belongs to the insurance company. Also, the return on investment is often limited. It’s highly likely that even a conservative investor can get better returns elsewhere.

Lesson Seven: Traditional solutions for income just don’t have a high enough yield and may have other undesirable characteristics as well.


A NEW APPROACH TO INCOME
Fortunately, there is a relatively new approach to income investing that carries the potential for higher yields than the traditional solutions, with a little additional risk. As stated earlier, there is no such thing as increased yields without increased levels of risk. The goal of the new approach to income investing is to successfully manage and optimize the trade-off between risk and reward.

The new approach involves the use of exchange-traded options on common stock. Option premium is passive income received from the sale of options against an asset. Although some investment strategies involving options can introduce high levels of risk, many conservative investors are finding that the options market can provide significant income from their investments without excessive exposure to risk.
A recent survey by Charles Schwab found that 69 percent of its options customers considered option trading “a great way to generate income,” and 56 percent said that option trading was part of their retirement investment strategy.9 Although some investors employ options to make highly leveraged bets on the future direction of price, others use them to hedge their risks while generating income.

Lesson Eight: Options are an important tool in your investor toolbox for managing risk and/or creating cash flow from a portfolio.

WHAT TO LOOK FOR
Strategies using options to generate income can be as simple as selling covered calls, while others add strict rules and processes to manage income, emotion and risk. If you are looking to add an income- producing strategy using options, compare the risk/reward profiles of every strategy and pick one that matches your objectives, risk tolerance, time horizon and temperament.

Some of the things to look for when evaluating options-based income strategies include:

Ease of use. Some strategies require the investor to make detailed charts and issue guesses based on possible trends, while others offer a simpler, systematic approach that leaves no room for interpretation.

Ability to do it yourself. Does the strategy give you the ability to implement yourself, in your own brokerage account, or do you have to let someone manage your account for you? What are the fees involved? Studies show investment success is more closely tied to low recurring investment costs than any other factor. Total transparency, which comes from managing your own portfolio, is the best way to guard against conflict of interest.

Time commitment. Will you need to constantly watch your stock holdings, or can you spend the day away from your computer screen? Do you need to take action or review your account daily, or can you check in just once a month? Taking a more hands-on, time-intensive approach does not necessarily result in better performance. Studies show the opposite is often true.

Focus on risk management. Does the strategy employ tools and techniques to limit your risk exposure? Remember your job is to manage and optimize the tradeoffs between risk and reward – to make certain that every unit of risk produces the maximum benefit, that the risks are those you can most afford to take and the rewards are those that will be most beneficial. Make sure risk is handled with intention.

Full disclosure. You should also remember that all investments have risk – even U.S. Treasuries. Are those risks discussed in an understandable and forthright manner? If an investment is being presented as all upside and no downside, the person presenting it is not being honest. Run!

Verifiable track record. Does the strategy have a reproducible result, or is it just a set of tools and suggestions with theoretical outcomes? Does the strategy’s support team make its performance record available and does that record include every single trade since inception?

Quality customer support. Who do you call when you have a question? Is there a team of dedicated, licensed advisors who can walk you through a process, or are you left to figure things out on your own?

Lesson Nine: There are many claims made. Make sure they are for real. Remember there are no magic bullets or get rich quick schemes – only get poor quick schemes. Do your due diligence.

block30

Just saw this, and thought the article provides some food for thought on the power of saving early. Juxtaposition this avaiations's ultra high cost of entry and low early wages, I think this also highlights some wrongs that need to be righted if the industry is serious about attracting pilots...


Retirement saving: Start early, stop at 30 - Encore - MarketWatch

jonnyjetprop

The biggest single thing is to start saving early. Retirement isn't about something, if or when you get to a major. It's about now.

Don't get paralyzed by finding the best investment. I don't think there is such a thing. You're better off starting now and picking a middle of the road investment.

Keep your first wife and your first house are as valid today as it was 30 years ago.

Last, debt is death. Sure, there are good kinds of debt. Most have debt loads that are crushing your future. The biggest single flaw I and my fellow airmen do is to try to live above our means. We have a vision of the airline captains of the past. The job, while satisfying, doesn't bring the same lifestyle as it did in the past. So, don't try to live like the guy in the past.

f16weav

Dan Solin at a Authors at Google talk. "Big Picture" about investing in index funds.

https://www.youtube.com/watch?v=Y0LSG2omvEg