Monday, February 10, 2014
Diversify Your Diversification
By Keith Bunn Jr.
February 10, 2014
Recent events have made me realize that I've talked about mutual funds, stocks and bonds, 401K's, Roth's, etc... but I haven't really talked about what percentages we do, in our own investing. Whether it is in our 401K's or anything else. It is all the same percentage.
Diversify, Knowledge, and Long Term
Remember, whenever you are going to invest into anything, there are 3 things you need to do every single time without exception.
1) Diversify Your Investments: By diversifying your investments, you help lower your risk. Because if one of your investments go down in value, others maybe going up to counter the drop.
2) Don't Invest into Anything You Don't Understand: If you invest into something you have no clue about, that just leaves the door wide open for you to lose all your money. Don't do something just because I, or anyone else told you to do something. Learn for yourself if it's a good investment or not.
3) Be a Long Term Investor: Don't do any investing, of any kind, unless you are willing to leave the investments alone for 5 years or longer. The people that lose their shirts more often are the ones who are contently pulling their money out of the investments because there was a dip in the market.
Investments and Percentages
With that being said, I'm not going to tell you specific investments we're investing in. You need to learn and decide for yourself what kind of investments are right for you and your family. But I will tell you the types and the percentages we are investing in.
In a blog series I wrote last April, Investing: How to Lower the Risk, part 1-5, I talked about all the different kinds of investments we can invest in, as well as why or why I didn't think, they were good ones to invest in. If you read that series, you already know that we invest only in mutual funds. For the most part, a good portion have a good to great long term track records and in each fund, there are roughly 90 to 200 companies you're investing in, which makes just one fund well diversified. And in the open market, there are hundreds of different types of mutual funds to choose from.
So out of hundreds, which ones do we choose? We only invest into 4 types of mutual funds. 25% into Growth (Mid Cap), 25% into Growth & Income (Large Cap), 25% into Aggressive Growth ( Small Cap), and 25% into International (Global). Now "Cap" means Capital or company. So when I say "Large Cap", that means that you are investing into large companies.
Growth or Growth Stock funds are medium size companies that have had some growth to them and are still expanding. Growth & Income funds are large companies that are more established. Aggressive Growth funds are small companies that are the most volatile. International means exactly what it says, you are investing into companies that are owned overseas. Global, means that not only are you investing in companies that are overseas, but there are some U.S. companies mixed in there also.
With your investments spread out into these 4 types of mutual funds, slow, steady, aggressive, and overseas, you are diversifying your diversification and you can find them in all kinds of retirement programs, from 401k's to Roth IRA's. But remember, investing in the stock market is like a roller coaster ride. There are going to be some ups and downs, as well as some loop-to-loops from time to time. Don't freak out when you start to go down that big hill. It will go back up. They always do! Enjoy the ride!!
This will probably be my last blog posting here on this blogger page. I'm in the process of setting up a NEW website that will now host my blogs from now on.
I have been and will continue to transfer all my old postings over to my new site. I have 8 more posts that I want to transfer over before publishing my website.
My new site address is www.cavusfinancialcoaching.com. I will continue to transfer my old postings over as well as add new ones, so visit often. I'd also appreciate any feed back on my new website in order to make it as useful as possible.
Thank you all for your loyalty over the past 3 years. My goal is to continue to do better in order to help as many people as possible with their finances!
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Monday, February 3, 2014
Traditional IRA vs Roth IRA: part 2
By Keith Bunn Jr
February 3, 2014
Review From Last Week
Let's take a moment and briefly review what an IRA is.
An IRA means Individual Retirement Arrangement according the current tax codes. The IRA itself is NOT the investment. "IRA" tells the IRS how the investments inside the IRA are going to be treated. You have to have an earned income to contribute to an IRA, and are only allowed to have a maximum contribution of $5,500 ($6,500 if you're over 50) per year or up to you yearly income if you make under $5,500 per year.
What is a Roth IRA?
The Roth IRA was named after Senator William Roth, who was a major advocate for IRA reform. So the Roth IRA was established as part of the Taxpayer Relief Act of 1997.
IRA's and Roth IRA's are almost identical with a couple important differences.
1) There are income limits: If you are married Filing jointly, making $188,000 per year or more. Or a single making $127,000 per year or more, you can not contribute to a Roth IRA.
2) Tax free growth: Unlike the traditional IRA, a Roth IRA is not taxed as you start taking the money at retirement. That's because you are taxed as you are putting the money into the Roth. That means the whole time you are contributing into a Roth and the investments start to grow, they are growing TAX FREE! That's a big deal! Because in all investments, it's not what we put into them that makes up the majority of the investment. It's the growth!
How Important is it Really?
Let's just say you couldn't put in the maximum contribution of $5,500 into either a traditional IRA, or a Roth IRA, but you could do half... $2,750. If you contribute that amount each year from the age 18 to 65 at a 10% rate of return, that would be $2,880,304.72. Not too shabby!
Now at current capital gains rates, if this was in a traditional IRA, that $2,880,304.72 would be taxed at 20%. Which means you would have lost over a half a million dollars in taxes, but in the Roth, you would have the whole $2,880,304.72.
Now here's the kicker... That whole time you were putting $2,750 into either the traditional IRA, or a Roth IRA, you only contributed $129,251.88. The rest, ($2,748,302.84) was growth. So this is a big deal. It is important!
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