Investing 102

[dylanCamaro582]

So, i have been following the thread for a while. Investing 102 seems to be for the guy who have some money in the market.

I have one bigger question: what should the beginner investor(like one or two deposits in to their 401K) do?

I currently have a small amount(less $100 in to my 401k),but i put 10% of my pretax income in 401K and my company matches up to 6% in to my 401K. I estimate that in will need at least $1 million at today's current money valve to retire and live comfortably. I currenty have my small amount in to Fidelity's LifePath® Index 2055 Fund Q.

So my secondary question is: How long do I wait and change my investment?

[GregWeld]

Originally Posted by dylanCamaro582

So, i have been following the thread for a while. Investing 102 seems to be for the guy who have some money in the market.

I have one bigger question: what should the beginner investor(like one or two deposits in to their 401K) do?

I currently have a small amount(less $100 in to my 401k),but i put 10% of my pretax income in 401K and my company matches up to 6% in to my 401K. I estimate that in will need at least $1 million at today's current money valve to retire and live comfortably. I currenty have my small amount in to Fidelity's LifePath® Index 2055 Fund Q.

So my secondary question is: How long do I wait and change my investment?

First -- I'm going to ASSume your name is Dylan.... So welcome Dylan!


Let me address one thing first -- this thread is not really so much about guys with any money - some have some - some have a lot - some have very little... and it's not so much about the stock market as it is about saving and INVESTING for retirement. The "stock market" has historically had the highest return - compounded - over time. But that's not all we talk about here. There are rental houses - apartments - commercial buildings - Master limited partnerships etc. BUT --- always the big butt in the room -- for most people INVESTING in the stock market is the easiest way and can use the smallest initial capital and can be added to as money is accumulated. In other words - a guy with a $1000 can buy some stocks and as he gets another $500 saved up - he can buy some more and so on. Other types of investments take larger up front capital. Since this is a thread for BEGINNER investors... we've all tried to stay focused on that aspect. BASIC INFO and ways to look and research and what is and isn't important etc.

Okay -- next up for you -- is your 401K. Good for you for starting early. I'm again going to assume you're young, and perhaps just beginning your career???? The reason I'm assuming that is because your investment in Lifepath 2055. That date has meaning. That date is for people that should be retiring about that year. Correct me if I'm wrong about you being younger.

Fidelity is the investment company your company uses to manage/direct/handle your companies retirement plan. They then give you choices within that plan to invest your contributions in. Some plans have lots of options - some keep it very simple and short. Your actual investment is in BLACKROCK LIFEPATH 2055..... and Blackrock is a very good company which runs about a half a zillion different "funds". I couldn't even find yours specifically in order to look at it. It was the "Q" that threw me off.

What I need from you is the actual TRADING SYMBOL -- such as "LIVIX" or similar.

So -- forgetting all the confusing detail above. You're in the right place as far as contributing to your company plan. Stay with that for now. The matching percentage is a good one... and as soon as you're able - I'd increase your percentage to 15% ASAP. If you read this thread from the beginning - you'll find a recurring theme, i.e., START EARLY in order to reap the benefit of COMPOUNDING over time. The more you save early - the more you'll have at retirement by a LONG SHOT and I mean HUGE.

Just quickly ----- a guy that invests $2000 a year from age 21 until he's 31 and after 31 he never adds another nickel to his pile - will retire with a million bucks at normal rates of return - compounded. If the same guy starts saving the $2000 at 31 and puts that away every year until he/she retires - will have about half that. Which guy would you rather be?? Don't answer that - it's a rhetorical question. LOL


OKAY THEN ---- keep pounding away - and increasing your contribution until you have at least $2500. At that point you're going to need to choose another fund in your plan -- and start putting the new money into that choice until you reach $2500 and so on. When you get $10,000 in your plan total... then you will need to start to look at alternatives if any. BUT -- the NUMBER ONE thing I'd do if I was you --- OPEN A ROTH IRA and start funding it with as much as you can. You're company plan is "PRE TAX" - which is great - but you'll pay taxes on it when you retire and start to withdraw. A ROTH IRA is "after tax" money that you put in on your own - and since you've already paid the taxes on it - it comes out totally tax free when you withdraw. That includes all the gains and income/dividends etc that it earned for all the years. TAX FREE. PERIOD. It's the greatest gift the tax man ever gave the good citizens of the United States. USE IT.

Any discount brokerage will help you understand it - and open the account. Just make a call to the one you choose and set up an appointment to discuss your personal situation. They'll be happy to help you. I'm talking Schwab - Fidelity - etc. Find an office that is convenient to your home or office. You can always move the account later. The key is to get started EARLY and save/invest as much as you can.... 65 years old comes up far faster than you can even imagine! Ask me how I know?!?!?! LOL

[GregWeld]

SO -- Since I'm on a roll this fine Sunday morning... I found a terrific chart to show why I use LIMIT ORDERS to buy or to sell!!!!!!

Not important when buying 25 o5 50 shares... then I'd just do a market order most likely - but it doesn't hurt you to put in a limit order as long as you're going to stay on top of what you're doing!

Here's a ONE DAY chart of a company where the "range" was over $2 a share! On a $16 dollar stock... that's a HUGE percentage. On top of that - it would make you FEEL GOOD if you bought more near the bottom than the top. AND if you sold (using a limit order) nearer the top than the bottom! Just by setting the price you want to buy at or sell at rather than just paying/selling at "market" using a market order.


Check out this chart. You could buy at Market and pay $16 or you could have stuck in a LIMIT ORDER and put the price at $15 or any other number you chose and you'd have gotten a fill. The one day RANGE on this stock was over $2.00 !!! It traded as low as $14.30 and as high as $16.36.... where would you have rather bought the shares? LOL


THIS IS A WILD EXAMPLE.... normally I'm trying to bid a .50 cent or 1.00 range.... but if you're willing to stay on top of your trades and manage them - you can play the game and win.


https://www.google.com/finance?q=arp...BsGZqAHtoYHIBw

[Vegas69]

Greg, I'm confused on what makes a stock dividend or gain short or long term?

[GregWeld]

Originally Posted by Vegas69

Greg, I'm confused on what makes a stock dividend or gain short or long term?

Ah ha!


Okay --- Dividends have some very specific rules - regarding short term holdings like if you're just trading stocks to pick off the dividend.... and that's for an individual to discuss with their accountant BEFORE they start that kind of trading....


For our purposes here -- we're going to ASSume that you're buying stock for long term (at least one year and one day) and that the dividend payouts are just every quarter and so on. At that rate they are just taxed as DIVIDEND INCOME -- 15% for "most people". They can be zero for low income earners - and they can be a MAX of 20% for those high income folks (single is 406K adjusted gross and 457K for married).


So dividends are just going to be taxed at 15% for most everyone.


Long and Short Term gains are when you buy a stock and then sell it.... and those gains (provided you sold higher than were you bought) are taxed at either the LONG TERM RATE of 15% if you held the shares for the one year and one day rule --- or SHORT TERM which is anything less than one year and one day. SHORT TERM CAPITAL GAINS are taxed at ordinary income tax rates.


HERE is where people need to have a very good understanding of what they're doing if they have gains and then want to offset those gains with losses.

Near the end of the year (tax year) --- you may want to look over your accounts (we're talking TAXABLE ACCOUNTS HERE NOT IRA's or ROTHS).... and if you have some gains you want to take advantage off ---- then you'll be smart to also prune your losers and create some offsetting losses to help ease the tax man pain. Pure losses are NOT a 1 for 1 deduction off your income taxes... if you have pure losses - I think the limit is $3K per year... so if you took a 9K loss - it takes you three tax years to recoupe that. I AM NOT an accountant and as such I'm not up on the latest changes if any to these rules. Which is why everyone should discuss this stuff with their tax dude.

But lets say you have a 20K short term gain you want to take.... and you have a 10K loss in another stock you'd like to dump anyway.... then sell the winner and cut the tax bill by 10K by also selling the loser.

Conversely ---- You have a big 20K loser....and you wan to sell it. You're only going to get a 3K write off this year.... so might as well prune some winners for 17K and with the 3K write off... you're just about even.

Where people get screwed is that they concentrate on the possible tax bill --- and forget about the details. Details such as -- maybe taking your gains pushes you into that next higher bracket and now your entire income is moved into the higher bracket by only $100..... and now your tax bill went UP by $1000's. Ask me how I know about this. I've never made that mistake again!

BUT ----- If you buy and hold (again - talking about taxable accounts here) --- there is no taxable event on your PAPER GAINS... regardless of their size. So you could buy a stock at $1 and have it go to 1 million and there's no tax ---- until you sold it! That's the beauty here ---- your net worth is going up without a direct tax consequence. You'll only be paying a small tax on the DIVIDENDS. 15% isn't very much of a tax bite.


If you're in IRA's --- in other words --- retirement accounts... then the questions are mute as there is no taxable event until you withdraw. Thus the beauty there as well.... over 30 years your money could grow 100's of percent and you only withdraw a little at a time thus keeping you in the bottom of the tax brackets. If your IRA is a ROTH there is NEVER ANY TAX EVER.


Many people are confused by these terms --- and they need to fully understand them BEFORE they make any moves!

[Vegas69]

Very interesting to say the least.

Let's say you bought additional shares this year in a stock you have held for over a year and a day. Does it revert back to a short term gain or only on the new shares?

[GregWeld]

Originally Posted by Vegas69

Very interesting to say the least.

Let's say you bought additional shares this year in a stock you have held for over a year and a day. Does it revert back to a short term gain or only on the new shares?

When you go to SELL there is always a check box "choice" for selling "tax advantaged lots" or similar statement ---- meaning --- the brokerage will sell the shares with the dates that are the most tax advantages for you... unless of course you're sell "all".

The shares (brokerages do this for you) all have purchase dates.... per "lot" or per transaction date. So of course you'd only want sell the shares in your account that are LONG TERM rather than short term. Adding to the holdings doesn't change the entire holding -- only the shares that were bought on a/that particular date. They're not "retroactive".


You asked earlier about the dividends and dividends get different treatment because of course - the tax man always wants his pound of flesh --- so they're not going to let you get away with buying a stock a day before "ex-dividend" then scooping up that dividend and selling the shares... and then only letting you get away with paying 15% tax on that dividend portion. They made a rule about it... so that if that's what you were doing -- you're going to get slammed with the income tax rate not the dividend rate.

Now --- I've said this before. Taxes should never be a part of an investors strategy. An investors strategy is to maximize his income or gains or return on investment... and the taxes just are what they are. If you make a million bucks this year and you owe Uncle Sam 390K of it... SO WHAT! You still kept the rest... so in my view it's a choice... and I'd prefer to pay as much tax as humanly possible - because that means I made a fortune! LOL

What NONE OF US WANT TO DO however is to inadvertently cost ourselves a tax if we don't have to. So checking a date on the shares you plan to sell --- if you're just "pruning" or perhaps just want to change your portfolio... then why sell them one month "early" and get hit with a short term gain - when waiting a month would have saved you some tax money. Of course explaining all of this is harder than it looks --- because if a guy has a loss and he thinks he's going to lose MORE -- then there'd be no sense in holding on to the shares and taking a larger loss - just because it didn't work out on the income tax form.... conversely.... if you could sell shares and scoop up 100K gain... and maybe not get that gain if you waited until the exact right date for taxes... well then that might prove to be dumb.

It's more just something that should be "considered" before just hitting the sell button.



NOW -- for investing 102 -- We haven't touched on MANY other details. We've mostly just touched on buying - reaping the dividend - plowing that back into more shares and compounding these returns.


There's things like WASH SALES.... oh boy -- here we go! The WASH SALE rule to a way for the tax man to keep you paying max taxes. The Wash Sale Rule says that you can't sell a stock at a "loss" and then turn right around and buy the shares back. You must wait 30 days to buy them back - or you're DISALLOWED the "loss". But there's ways around this rule as well. Let's say you owned Chevron (CVX) and you have a loss at the end of the year - so on December 10th you sell -- writing off the loss against gains you had taken. Now that tax year is 2014 which ends on December 31st.... A new TAX year starts January 1st - so on the 2nd you buy Chevron shares. OH NO YOU DON'T!!! Not so fast --- the tax man says that's complete BS... and you just wanted to take the loss against 2014... and he's right of course. So they disallow the loss as a WASH SALE -- and the loss you took gets added to the cost of the new shares you just bought... It gets complicated --- so just don't do it. WAIT at least 30 days -- and that means 31 days... before you repurchase the shares of the company you just sold at a loss.

The way to beat this is --- you sell Chevron and buy anything else that is SIMILAR - but not substantially identical - if you need "oil" in your portfolio -- so you take the loss on Chevron and buy Conoco or Exxon... but you can't sell Chevon common and buy their preferred convertibles... that would be considered substantially identical.

If you've figure out a trick --- they've figured out how to counter that.

[dylanCamaro582]

Greg,

The closest trading symbol i could find is LPVIX on Google Finance.And yes, I'm pretty young compared to most of you guys.

I would like to increase in 401 K contributions from 10% 15% as you said, but with paying off student loans and other debts accrued during my schooling and working a barely living wage manufacturing job, and trying to save for my own place, my money can get stretched pretty far.

[GregWeld]

Originally Posted by dylanCamaro582

Greg,

The closest trading symbol i could find is LPVIX on Google Finance.And yes, I'm pretty young compared to most of you guys.

I would like to increase in 401 K contributions from 10% 15% as you said, but with paying off student loans and other debts accrued during my schooling and working a barely living wage manufacturing job, and trying to save for my own place, my money can get stretched pretty far.

It can't be "close" it has to be THE exact symbol of the shares in your account.


We all understand just starting out. Everyone starts somewhere. The fact that you're started is what counts.

[captainofiron]

Originally Posted by GregWeld

SO -- Since I'm on a roll this fine Sunday morning... I found a terrific chart to show why I use LIMIT ORDERS to buy or to sell!!!!!!

Not important when buying 25 o5 50 shares... then I'd just do a market order most likely - but it doesn't hurt you to put in a limit order as long as you're going to stay on top of what you're doing!

Here's a ONE DAY chart of a company where the "range" was over $2 a share! On a $16 dollar stock... that's a HUGE percentage. On top of that - it would make you FEEL GOOD if you bought more near the bottom than the top. AND if you sold (using a limit order) nearer the top than the bottom! Just by setting the price you want to buy at or sell at rather than just paying/selling at "market" using a market order.


Check out this chart. You could buy at Market and pay $16 or you could have stuck in a LIMIT ORDER and put the price at $15 or any other number you chose and you'd have gotten a fill. The one day RANGE on this stock was over $2.00 !!! It traded as low as $14.30 and as high as $16.36.... where would you have rather bought the shares? LOL


THIS IS A WILD EXAMPLE.... normally I'm trying to bid a .50 cent or 1.00 range.... but if you're willing to stay on top of your trades and manage them - you can play the game and win.


https://www.google.com/finance?q=arp...BsGZqAHtoYHIBw

Thanks for explaining this, I never fully understood that or how to use it to my advantage, so I would just do a regular order